(A Legal Overview and Practical Guide)
I. Introduction
“Zonal value” is one of the most frequently encountered – and least understood – concepts in Philippine property taxation. For owners of agricultural land, it affects how much tax is due when land is sold, donated, or inherited; it can influence bank lending decisions; and it sometimes appears in agrarian reform valuation and expropriation disputes.
This article explains, in a Philippine legal context, how zonal valuation of agricultural land works: its legal basis, how zonal values are set, how they interact with other notions of value (assessed value, market value, just compensation), and how they affect common transactions involving agricultural land.
II. Legal Basis and Nature of Zonal Valuation
A. Statutory Basis in the National Internal Revenue Code (NIRC)
The main legal foundation is the National Internal Revenue Code (NIRC), as amended, particularly the provision granting the Commissioner of Internal Revenue authority to determine the fair market value (FMV) of real properties in different zones throughout the country.
Key ideas from the statute:
Authority to Divide into Zones
- The Commissioner may divide the Philippines into different zones or areas for purposes of real property valuation.
- Zones are generally based on location and land use (residential, commercial, industrial, agricultural).
Determination of Fair Market Value (FMV)
- For each zone, the Commissioner determines the FMV per square meter (or per hectare, as converted) for different classes of property.
- These values are called “zonal values” and are issued through BIR issuances (commonly Revenue Memorandum Orders, or RMOs).
Use for Internal Revenue Taxes
- The zonal values are meant to be used as basis for internal revenue tax purposes — i.e., for national taxes administered by the BIR (capital gains tax, donor’s tax, estate tax, documentary stamp tax, creditable withholding taxes, and sometimes VAT/income tax base).
Thus, zonal valuation is a tax law concept. It is not, by itself, a system for local real property taxation (which is governed by the Local Government Code), nor is it a comprehensive valuation system for eminent domain or agrarian reform, although it sometimes interacts with those areas.
III. BIR Zonal Valuation vs Other Valuation Concepts
It is crucial to distinguish zonal value from other legally relevant values:
Zonal Value (BIR)
- Issued by BIR per zone and classification (e.g., “Agricultural – irrigated riceland, along barangay road”).
- Used for national internal revenue taxes.
Fair Market Value per Schedule of Market Values (SMV) – LGUs
Prepared by the provincial, city or municipal assessor under the Local Government Code (LGC).
Forms the basis of:
- Real property tax (RPT)
- Local transfer tax
Often referred to as the “assessor’s value” or “market value per tax declaration.”
Assessed Value
- Derived from the SMV by applying an assessment level (a percentage) depending on property classification.
- Used for real property tax computation, not for BIR taxes.
Actual Market Value / Just Compensation
- The price in a free and open market between a willing buyer and willing seller.
- In expropriation and agrarian reform, courts are tasked with determining just compensation, which involves multiple factors (e.g., cost of acquisition, actual use, income, comparable sales).
- Zonal value is not conclusive proof of just compensation; courts treat it only as one reference among many.
Appraised Value (Bank or Private Appraisal)
- Determined by licensed appraisers or banks for collateral or investment purposes.
- Not binding for tax purposes unless adopted by law or regulation.
IV. How Zonal Values for Agricultural Land Are Determined
A. Zoning and Classification
The BIR typically organizes values along these parameters:
Municipality/City and Barangay
Location category (e.g., along national highway, along barangay road, interior)
Classification/Use, which often tracks the tax declaration or zoning classification:
- Agricultural – irrigated riceland
- Agricultural – rainfed riceland
- Agricultural – coconut land
- Agricultural – sugar land
- Agricultural – pasture land, etc.
While BIR looks at classification and actual use, it usually relies on existing records (tax declarations, zoning ordinances, LGU certifications). For agricultural land, whether it has been reclassified (e.g., from agricultural to residential) via appropriate legal processes (local government reclassification and DAR conversion clearance) can significantly affect the zonal value that applies.
B. Factors Considered
By law and implementing regulations, in setting zonal values, the BIR considers:
- Location and accessibility (proximity to roads, markets, urban centers)
- Nature and actual use of the property (e.g., agricultural crop, irrigated vs non-irrigated)
- Improvements (e.g., farm structures, irrigation, permanent plantings – though these may or may not be separately valued)
- Comparable sales and market data in the area
- Income potential (particularly relevant for agricultural land with stable crop yields)
- Neighborhood characteristics (e.g., likelihood of conversion to residential or commercial uses)
In practice, zonal valuation committees convene regionally or at the Revenue District Office (RDO) level, with participation from:
- BIR officials
- Representatives from the LGU (assessor, treasurer, mayor’s office)
- Sometimes banks, the real estate sector, or other stakeholders as resource persons
They gather data, propose zonal values, and forward them for approval by the Commissioner.
C. Issuance and Effectivity
Approved zonal values are published via Revenue Memorandum Orders (RMOs) or similar issuances, which state:
- The region, RDO, city/municipality and barangays covered
- The classification of land and the corresponding zonal values per square meter
- The effectivity date (often 15 days after publication or as specified)
Once effective, these zonal values apply until superseded by a subsequent issuance. It is common for some agricultural areas to have relatively old zonal values, which can create mismatches with current market prices.
V. Application of Zonal Values to Agricultural Land Transactions
Zonal values become critical whenever an agricultural land transaction triggers national internal revenue taxes.
A. Capital Gains Tax (CGT) on Sales of Capital Assets
When Applicable
- CGT (typically 6%) applies to sale, exchange, or disposition of real property classified as capital asset (not used in trade or business) located in the Philippines.
- Agricultural land may be a capital asset (e.g., inherited farmland not used in business) or an ordinary asset (if the taxpayer is in the business of real estate or farming).
Tax Base: Higher of Contract Price or FMV
For agricultural land, if the zonal value is higher than both the contract price and the assessor’s value, the zonal value becomes the tax base.
Practical Impact
- If parties undervalue the land in the deed (e.g., to minimize taxes), BIR still applies the zonal value if it is higher.
- This is particularly significant for prime agricultural lands near urbanized areas, where zonal values may be substantially higher than the declared selling price.
B. Ordinary Income Tax and Creditable Withholding Tax (CWT)
If an agricultural property is held as an ordinary asset, the sale is subject to:
- Regular income tax (for individuals) or corporate income tax (for corporations), plus
- Creditable withholding tax (CWT) on the seller, to be withheld by the buyer.
Even here, the CWT base typically uses the higher of selling price or FMV, and FMV is higher of zonal or assessor’s value.
Thus, the zonal value still acts as a floor for tax computations, even when CGT is not the appropriate tax.
C. Documentary Stamp Tax (DST) on Deeds of Sale
DST is imposed on deeds of sale and other instruments transferring real property. The DST base is generally the consideration or the FMV of the property, whichever is higher.
Again, FMV is taken as the higher of zonal value or assessor’s value. For agricultural land, the same logic applies: zonal value often controls when contract prices are low.
D. Estate Tax: Agricultural Land in the Gross Estate
When an agricultural landowner dies, their properties form part of the gross estate for estate tax purposes.
Valuation Rule
Real property is included at its fair market value at the time of death.
For real property, fair market value is the higher of:
- BIR zonal value, or
- The market value per tax declaration (SMV from local assessor).
Implications
- Heirs cannot simply declare the agricultural land at a low value; the higher of zonal or assessor’s value must be used.
- High zonal values can significantly increase estate tax exposure, especially where heirs intend to retain the land rather than sell it.
E. Donor’s Tax: Donations of Agricultural Land
For donations of agricultural land, donor’s tax is similarly based on the fair market value at the time of donation, using the higher of:
- Zonal value, or
- Assessor’s value.
This makes zonal valuation essential in planning inter vivos transfers of farmlands, especially among family members.
VI. Zonal Valuation and Agrarian Reform / Just Compensation
Agricultural land is often covered by agrarian reform laws, principally:
- Republic Act No. 6657 (Comprehensive Agrarian Reform Law), as amended by RA 9700 and others.
A. Land Valuation Under CARP
Under agrarian reform, just compensation for lands compulsorily acquired is determined based on statutory factors (e.g., cost of acquisition, nature of land, actual use, income, tax declarations, assessments, comparable sales, etc.).
Administrative issuances (DAR Administrative Orders, Land Bank valuation guidelines) have, at various points, incorporated BIR zonal values as one factor or a floor, for example:
- Using a percentage of BIR zonal value in a formula; or
- Treating zonal value as a minimum value to avoid under-compensation.
However, the Supreme Court has consistently held that courts are not bound by a single formula and must consider all statutory factors in determining just compensation. Zonal value:
- Does not automatically determine just compensation;
- May be considered as evidence, but must be weighed against other factors like income data, appraisals, and comparable sales.
B. Zonal Value vs Just Compensation in Expropriation
Outside agrarian reform, in ordinary expropriation cases (e.g., national government projects, local infrastructure), the same principle holds:
- Zonal values are guides or references, not conclusive measures of just compensation.
- Courts may treat zonal values as indicative of market trends, but they cannot simply equate zonal value with just compensation without considering other evidence.
This is important because zonal values may lag behind real market prices (often lower), potentially disadvantaging landowners if taken as the sole basis, or they may be relatively high in some areas, disadvantaging government if strictly followed.
VII. Interaction with Land Reclassification and Conversion
Agricultural land valuation frequently intersects with land reclassification and conversion issues:
Reclassification under the Local Government Code (RA 7160)
- LGUs may reclassify agricultural land to non-agricultural uses under certain conditions and percentages.
- Once properly reclassified and, where required, cleared for conversion by the DAR, the land may become residential, commercial, or industrial in zoning.
Impact on Zonal Valuation
BIR zonal values follow the classification and zoning reality:
- If an area transitions from agricultural to residential or mixed-use, subsequent zonal value issuances may reclassify the land for tax purposes and adjust values upward.
However, until BIR issues a new zonal valuation that reflects the change, the old agricultural zonal value might still apply, causing a temporary mismatch.
Taxpayer’s Position
“Paper” classification matters. A mere private assertion that the land is still agricultural will generally not override official records.
VIII. Practical Issues and Common Pitfalls for Agricultural Landowners
A. Outdated Zonal Values
In many rural areas, zonal values may not have been updated for years. This creates:
- Under-valuation relative to current market prices, which might reduce tax bases (good for taxpayers, bad for revenue).
- Potential disputes when government uses zonal values in contexts like agrarian reform or expropriation and landowners present evidence of much higher market values.
B. Discrepancies Between Zonal and Assessor’s Values
For agricultural land, sometimes the assessor’s SMV is higher; in other cases, the zonal value is higher. Because the rule is to use the higher of the two, parties must:
- Obtain both the latest BIR zonal value for the area, and
- The up-to-date tax declaration or certification of market value from the assessor.
Failing to do so can result in:
- Underpayment of taxes and penalties (if the BIR later discovers a higher legally required base), or
- Overpayment if taxpayers mistakenly use an outdated or lower value that is not actually the controlling one.
C. Undervaluation Practices
Some landowners still attempt to undervalue the selling price of agricultural land in deeds of absolute sale to:
- Reduce documentary stamp tax, CGT or income tax, and local transfer tax.
However, because the tax base is the higher of contract price or FMV (zonal/assessor’s), such practices:
- Often fail to reduce national tax liabilities, and
- Can create legal risk if tax evasion is suspected, especially when there is a big gap between contract price and known market prices.
D. Impact on Estate Planning and Inter Vivos Transfers
For families owning significant agricultural land:
- High zonal values can increase estate and donor’s tax.
- However, the same high zonal value may strengthen the perceived lending value of the land when used as collateral.
Strategic planning often involves:
- Monitoring upcoming zonal revaluations in the area;
- Considering timing of transfers (before or after a known increase);
- Exploring partition, donation, or corporate restructuring in compliance with tax rules.
IX. Procedural Aspects: Protests and Clarifications
Taxpayers sometimes disagree with the application of zonal values to their specific properties. Although there is no typical “appeal” of zonal value per se (it is a quasi-legislative BIR issuance), a taxpayer may:
Seek Clarification or Ruling
Question a Specific Tax Assessment
Judicial Review
X. Zonal Valuation in Banking, Lending, and Private Deals
Though primarily a tax tool, zonal values are widely used in private economic decisions regarding agricultural land:
Bank Lending
- Banks often look at BIR zonal value as a minimum valuation reference when lending against land collateral.
- However, they typically rely more heavily on independent appraisals, especially for productive agricultural estates.
Pricing Benchmarks
- In rural areas with few recorded sales, parties sometimes peg prices to a multiple of zonal value (e.g., 1.5× or 2× the zonal value per square meter).
- This practice, while convenient, can be misleading because zonal values may be outdated or not reflective of true agricultural productivity.
Negotiation Tool
- Buyers may argue that “zonal value is only X,” while sellers insist on prices far above it based on income, location, or development potential.
- Knowing that the tax base will use the higher of the relevant values (price vs zonal/SMV) helps both sides realistically anticipate tax costs.
XI. Compliance Steps for Transactions Involving Agricultural Land
When dealing with agricultural land, parties should systematically:
Identify the Property Properly
- Exact location (barangay, municipality, province)
- Lot and survey numbers, title number
- Tax declaration details (classification, area)
Check Zonal Values
Obtain the Assessor’s Market Value
- Get a tax declaration and/or certification of market value from the LGU assessor.
Determine the Applicable FMV
Compute Taxes
- For sales: CGT or income tax + CWT, DST, local transfer tax.
- For donations: donor’s tax, DST, local transfer tax.
- For estates: estate tax, DST (if applicable later on), etc.
Prepare Documentation
XII. Policy Considerations and Ongoing Issues
From a broader policy standpoint, zonal valuation of agricultural land raises several recurring issues:
Frequency and Accuracy of Updates
- Infrequent updating leads to distorted tax bases (either too low or too high relative to actual market conditions).
Alignment with Agrarian Reform and Land Use Policies
Agricultural land is heavily regulated (CARP coverage, conversion rules).
Zonal values that do not reflect these realities can either:
- Undercut compensation for landowners, or
- Overestimate taxable value where land is heavily restricted in use.
Equity and Administrative Simplicity
- Zonal valuation is intended to simplify tax administration by providing fixed benchmarks.
- At the same time, rigid reliance on zonal values can lead to unjust outcomes in particular cases, especially when land is unique or has special characteristics not captured by the zonal schedule.
Transparency and Participation
- The process by which zonal values are set should ideally be transparent, with stakeholder participation (including agricultural producers), to ensure that values reflect both market reality and social policy objectives.
XIII. Conclusion
Zonal valuation of agricultural land in the Philippines is a cornerstone of national tax administration. It directly influences:
- How much tax is paid when agricultural land is sold, donated, or inherited;
- How estate planning and inter vivos transfers are structured;
- How agricultural land value is perceived in private transactions and sometimes even in agrarian reform and expropriation contexts.
At its core, zonal valuation is a tax benchmark, not a complete or definitive measure of a land’s worth in all legal settings. For agricultural landowners, buyers, heirs, and practitioners, understanding:
- How zonal values are set,
- How they interact with other value concepts (assessor’s value, market value, just compensation), and
- How they affect specific transactions and disputes
is essential to ensuring both legal compliance and fair economic outcomes.
Anyone dealing with agricultural property in the Philippines must treat zonal value as a crucial but context-limited tool—important, powerful, and sometimes decisive for tax purposes, but always to be understood alongside the broader legal and economic landscape in which agricultural land exists.