Question & AnswerQ&A (EXECUTIVE ORDER NO. 249)
Provinces and cities (except Manila and Quezon City which are Special Class cities) are classified into six classes based on their average annual income during the last four calendar years: First Class (≥30 million pesos), Second Class (20M to <30M), Third Class (15M to <20M), Fourth Class (10M to <15M), Fifth Class (5M to <10M), and Sixth Class (<5M).
Municipalities are also classified into six classes: First Class (≥15 million pesos), Second Class (10M to <15M), Third Class (5M to <10M), Fourth Class (3M to <5M), Fifth Class (1M to <3M), and Sixth Class (<1 million pesos).
The first classification takes effect on July 1, 1987, and subsequent general reclassifications shall occur every four consecutive calendar years thereafter based on the average annual income during the preceding four years.
'Annual income' refers to revenues and receipts from regular sources of the local General and Infrastructure funds including internal revenue and specific tax allotments as provided by law, excluding non-recurring receipts such as national aids, grants, loans, and sales of fixed assets.
The classification serves as the basis for fixing maximum local tax ceilings, determining administrative and statutory aids, financial grants, salary scales, allowances, personnel policies, budget formulation, and assessing financial capability for development projects.
For first and second class provinces, cities, and municipalities, the cap is 45% of the total annual income from regular sources. For lower classes, the cap is 55%. Certain appropriations, like salaries for public service employees and emergency allowances, are excluded from this cap.
Section 7 provides that no official or employee shall suffer any diminution of the basic salary rate they are receiving at the effectivity of this Executive Order, even if their local government unit's classification changes.
Yes, local government units may maintain or adjust existing tax rates, but such ordinances must be reviewed and approved by the Secretary of Finance within 60 days to determine their reasonableness and financial impact.
The Secretary of Finance has the authority to review the income ranges at least once every four years and recommend appropriate changes or revisions to the proper authority to ensure classifications align with prevailing economic conditions.