SUBJECT: The Rule on ‘The Internal Revenue Allotment’ (National Tax Allotment)

I. Introduction

This memorandum provides an exhaustive analysis of the rule on the Internal Revenue Allotment (IRA), now formally designated as the National Tax Allotment (NTA) pursuant to Republic Act No. 11976 , or the Automatic Income Classification Act for Local Government Units. The IRA/NTA is a constitutionally mandated fiscal transfer from the national government to local government units (LGUs). It represents a cornerstone of local fiscal autonomy and is a primary mechanism for operationalizing the policy of decentralization. This research will trace its constitutional and statutory foundations, detail its computation and distribution, examine pertinent jurisprudence, and analyze its impact on local governance.

II. Constitutional Foundation

The 1987 Constitution establishes the bedrock for the IRA. Article X, Section 6 provides that LGUs shall have a just share in national taxes, which shall be automatically released to them. This provision enshrines two critical principles: first, the entitlement of LGUs to an equitable portion of national revenues, and second, the automatic release of such share, insulating it from executive discretion. The just share is intended to enable LGUs to carry out their constitutionally guaranteed functions and services. The mandate for automatic release is a safeguard to ensure that the funds are distributed without delay or political interference, thereby strengthening local fiscal autonomy.

III. Statutory Framework: The Local Government Code of 1991

Republic Act No. 7160 , the Local Government Code (LGC) of 1991, operationalizes the constitutional mandate. Its key provisions are found in Title Five, Chapter One.

Section 284 defines the bases for the allotment. The IRA is comprised of forty percent (40%) of the national internal revenue taxes collected by the Bureau of Internal Revenue (BIR) during the third fiscal year preceding the current fiscal year. The law specifies which taxes are included (e.g., income tax, value-added tax, excise taxes, customs duties) and which are excluded (e.g., tariffs and fees).

Section 285 prescribes the formula for the distribution of the IRA among the different levels of LGUs: provinces – 23%; cities – 23%; municipalities – 34%; and barangays – 20%. The code further details the allocation among individual LGUs within each level based on population (50%), land area (25%), and equal sharing (25%).

Section 286 mandates the automatic release of the IRA on a quarterly basis, directly to the LGU treasury. This section explicitly states that the share of each LGU shall be released, without need of any further action, directly to the provincial, city, municipal or barangay treasurer.

Section 287 authorizes the President to suspend the release of the IRA in cases of an unmanageable public sector deficit, subject to congressional consultation and specific conditions.

Section 290 provides for a hold-harmless clause, guaranteeing that no LGU shall receive an IRA less than its allocation for the fiscal year 1991.

IV. The National Tax Allotment under R.A. 11976

Republic Act No. 11976 (2024) amended the LGC by renaming the IRA as the National Tax Allotment (NTA) and expanding its revenue base. The key change is that the forty percent (40%) share of LGUs is now based on all national taxes, not just national internal revenue taxes. This expansion explicitly includes collections from the Bureau of Customs (BOC), thereby incorporating customs duties into the base. The computation period remains the third fiscal year preceding the current year. The distribution formula under Section 285 of the LGC remains unchanged. This legislative development aims to provide LGUs with a larger and more equitable fiscal resource base aligned with overall national tax effort.

V. Key Jurisprudence and Supreme Court Doctrines

The Supreme Court has issued several landmark decisions interpreting the IRA provisions.

In Pimentel, Jr. v. Aguirre ( G.R. No. 132988 , July 19, 2000), the Court ruled that the President cannot unilaterally reduce the IRA as a deficit-control measure without complying with the strict conditions in Section 287 of the LGC. The automatic release is mandatory, and any suspension requires an unmanageable public sector deficit and consultation with Congress.

In Batongbacal v. Secretary of Finance ( G.R. No. 230502 , July 31, 2018), the Court upheld the exclusion of certain taxes (like the Philippine Amusement and Gaming Corporation (PAGCOR) income) from the IRA base, clarifying that only internal revenue taxes collected by the BIR under the National Internal Revenue Code (NIRC) are included under the old IRA framework.

The doctrine of local fiscal autonomy was strongly affirmed in Province of Batangas v. Romulo ( G.R. No. 152774 , May 27, 2004), where the Court held that the IRA is a vested right of LGUs, not a mere budgetary appropriation subject to executive whim. The release must be direct and automatic.

The case of Aquino v. Commission on Audit (G.R. No. 237777, December 4, 2018) reiterated that LGUs have wide latitude in the utilization of their IRA, provided it is for public purposes and in accordance with law, underscoring the decentralization principle.

VI. Computation and Distribution Mechanics

The computation is a two-step process. First, the total base is determined: forty percent (40%) of all national taxes collected three fiscal years prior (e.g., the NTA for Fiscal Year 2025 is based on national tax collections in FY 2022). Second, this total pool is distributed according to the fixed percentages in Section 285 of the LGC (Province: 23%, City: 23%, Municipality: 34%, Barangay: 20%). For allocation to individual LGUs, the following formula applies: (Population Share 0.50) + (Land Area Share 0.25) + (Equal Share 0.25). The Department of Budget and Management (DBM) issues the Local Budget Memorandum each year containing the specific NTA figures for each LGU*.

VII. Comparative Analysis: IRA vs. NTA

The transition from IRA to NTA represents a significant fiscal reform. The following table compares the key features of the two regimes.

Feature	Internal Revenue Allotment (IRA)	National Tax Allotment (NTA)
Governing Law	Republic Act No. 7160 (Local Government Code of 1991)	Republic Act No. 7160 as amended by Republic Act No. 11976 (2024)
Legal Basis	Article X, Section 6 of the 1987 Constitution	Article X, Section 6 of the 1987 Constitution
Revenue Base	40% of national internal revenue taxes collected by the BIR.	40% of all national taxes, including BIR collections and Bureau of Customs (BOC) collections.
Included Taxes	Taxes under the National Internal Revenue Code (NIRC) (e.g., income tax, VAT, excise tax).	All taxes under the NIRC plus customs duties, tariffs, and other national taxes collected by the BOC.
Primary Objective	Provide a just share to LGUs from internal revenue.	Provide a just share to LGUs from the totality of national tax effort, leading to a larger resource base.
Impact on LGU Income	Limited to growth in BIR-collected taxes.	Tied to overall national tax performance, including international trade taxes.

VIII. Legal and Administrative Issues

Persistent issues surround the IRA/NTA. First, the time lag in computation (based on collections from three years prior) means allocations do not reflect current economic conditions or LGU needs. Second, the mandatory appropriations (e.g., salaries for mandatory positions) consume a significant portion of the IRA, limiting discretionary spending for development projects. Third, the hold-harmless clause can create inequities, as some LGUs receive allocations disproportionate to their current population or needs. Fourth, while the automatic release is constitutionally guaranteed, delays in the issuance of treasury warrants or the Local Budget Memorandum can de facto impede the timely flow of funds. Lastly, the expansion to national taxes under the NTA may introduce new complexities in verifying the total base, especially with customs collections.

IX. Impact on Local Autonomy and Development

The IRA/NTA is the financial lifeblood of most LGUs, particularly lower-income municipalities. It is critical for local fiscal autonomy, allowing LGUs to plan and execute programs based on their own priorities without constant reliance on national agencies. A predictable and automatically released allotment enables meaningful local development planning. However, critiques argue that the heavy dependence on the IRA/NTA has made some LGUs complacent in generating their own local source revenue through taxes, fees, and charges. The challenge remains to use the IRA/NTA as a platform for enhancing local service delivery while simultaneously strengthening local revenue generation.

X. Conclusion

The rule on the Internal Revenue Allotment, now the National Tax Allotment, is a dynamic legal construct central to Philippine decentralization. Rooted in the Constitution and detailed in the Local Government Code, it embodies the principle of local fiscal autonomy. The evolution from IRA to NTA through R.A. 11976 marks a substantial effort to increase the financial capacity of LGUs. While jurisprudence has fortified its automatic and mandatory nature, operational challenges regarding computation lag, utilization constraints, and equitable distribution persist. The effectiveness of the NTA in fostering genuine local development will depend on both its faithful implementation and the complementary efforts of LGUs to maximize their own revenue-generating capabilities.