Riël Franzsen SA Research Chair in Tax Policy & Governance African Tax Institute MVV182K/01: PROPERTY-RELATED TAXES – ISSUES & TRENDS INTRODUCTION TO PROPERTY-RELATED TAXES This course (1) §After this course you should – § •have a fair understanding of the key international policy, legal and administrative issues and trends in relation to real estate transfer taxes and recurrent property taxes; and •be able to evaluate how property-related taxes in the Czech Republic relate to international policy trends and practices. • §A detailed discussion of property-related taxes in the Czech Republic falls outside the scope of this course This course (2) Tuesday 2 May 2023 Time Lecturer Topic 10:00 – 11:40 Franzsen Introduction to property-related taxes Real estate transfer taxes 12:00 – 13:40 Radvan Real estate transfer taxes in Europe Czech Republic property tax system 14:00 – 15:40 Franzsen McCluskey Recurrent property tax – international overview Property tax base options – issues and trends Wednesday 3 May 2023 12:00 – 13:40 McCluskey Valuation, assessment and tax administration 14:00 – 15:40 Franzsen McCluskey and Franzsen Property tax rates and tax relief Workshop and overall conclusions This course (3) §Instructors: § §Prof Riël Franzsen, Director: African Tax Institute, University of Pretoria (South Africa) § §Prof Michal Radvan, Faculty of Law, Masaryk University (Czech Republic) § §Prof William McCluskey, Extraordinary Professor, African Tax Institute, University of Pretoria (Northern Ireland, UK) Introduction §An enabling tax environment §Constitutional and legal environment §Political environment §Institutional environment §Real-world environment § §Property-related taxation §History §Concepts and definitions §Key policy and administrative features §Revenue importance §Challenges Property tax and other own-source revenue §Implementation of (sub-national) taxes: § §Constitutional and legal framework §Political environment §Fiscal environment §Institutional environment §Specific legislation §Realities within which the law and administration function § Constitutional & legal environment §What does the Constitution and/or other enabling legislation dictate or allow? §Does it provide mere principles or guidelines, or an actual framework? §Is a provision descriptive or is it prescriptive? §Fiscal capacity and/or tax effort? § §Does legislation allow for – §Tax (base) sharing? §Revenue sharing? §Options or alternatives (e.g. regarding tax base)? § §Which level or tier of government – §Determines the tax base? §Levies the tax? §Sets the tax rate or rates? §Grants exemptions and other tax relief? §Is responsible for collection and enforcement? §Is entitled to the revenue? Political environment §Decentralization versus centralization §National fiscal policy versus local fiscal policy §Local government reform §Land use policies versus fiscal policies §Equity versus revenue §Equity versus efficiency §Ministerial discretion §Vested interests §Election politics Institutional framework §Which level or tier of government – § §Decides on the tax base? §Is responsible for collecting relevant data? §Is responsible for valuation or assessment? §Is responsible for setting tax rates? §Is responsible for collecting the tax? §Has oversight functions regarding any of the above functions? § §Avoid duplication, overlapping or fragmentation of functions The law and taxation §“Law” (its relevance for purposes of taxation) §Constitution §Specific laws (e.g. Revenue Code; Income Tax Act; Tax Administration Act) §General laws §Regulations and rulings §Common law (e.g. family law, law of succession) §E.g. definition of “spouse” for tax law purposes Country realities §Availability of relevant data §Property-related data §E.g. a deeds registry, sales records §Fragmented data collection and maintenance responsibilities §E.g. different ministries or levels of government; private sector § §Availability of necessary capacity, skills and resources to administer the property tax §E.g. numbers of valuation professionals §E.g. budgeted funds to maintain system “Immovable property” as a taxable object §Property-related taxes – § §Income produced (e.g. Ancient China) § §Ownership or occupation (e.g. property taxes) § §Acquisition and/or alienation (i.e. transfer) History of property taxation §Antiquity §China (2,697 BC) §Mesopotamia §Egypt §Macedonia §Rome § §England – “Poor Relief Act” (1601) § §Europe and her colonies Property-related taxes, fees & charghes §Real Property Transfer Tax §Stamp Duty § §Estate/Succession Tax §Donations/Gift Tax § §Capital Gains Tax §Land-value Increment Tax §Land Tax, Unimproved Value Tax, Site Value Tax §Building Tax §Property Tax (= Land & Buildings) §Land Value Capture & Land-based Finance Instruments: E.g. Development Charges, Betterment Levies § §Registration Fees or Publication Fees § §Land Rent Relevant defenitions §“Property-related tax” §A tax on the ownership, occupation, or transfer of “property” § §“Property transfer tax” §A tax on the acquisition or alienation (or both) of “property” § §“Property tax” §A recurrent tax imposed by government on the ownership or occupation of (immovable) property § §“Rates” §A term used in many countries (with a British colonial heritage) for a property tax levied at the local government level Why property tax? Advantages § §Property is fixed in location § §Property is highly visible § §Land has an inherent value § §Taxpayers are (usually) readily identifiable § §Relationship between revenue and public services § §Low compliance cost § §If well administered, may yield significant revenues in a sustainable and predictable manner Disadvantages § §Highly political § §Taxes unrealised income § §Cumbersome to maintain § §High administration cost § § § § § § § Revenue = Tax base Tax rate x Important political challenges… Ultimate benefit… Revenue – the basics … § § § § § Policy variables Administration variables § § CR: Coverage ratio § VR: Valuation ratio § Col R: Collection ratio § § §Source: Kelly (2000) Revenue = Tax base Tax rate CR VR Col R x x x x Further key challenges… Revenue mobilization model Municipal service Usual funding mechanism Water supply User charges and surcharges Electricity supply User charges and surcharges Sewage collection and disposal User charges and surcharges Refuse removal User charges and surcharges Municipal health services User charges, grants Municipal roads Property tax and other local taxes Storm water drainage Property tax and other local taxes Street lighting Property tax and other local taxes Municipal parks and recreation Property tax and other local taxes Parking User charge Municipal libraries User charge Cemeteries Property tax and other local taxes Infrastructure Grants, borrowing (i.e. loans) Maintenance of infrastructure Property tax and other local taxes What services does the recurrent property tax typically fund? Revenue importance Levels of and Trends in Property Tax Revenues (Percent of GDP) Region (# Countries) 2010 2014 2015 2016 2017 2018 2019 2020 EU (27) 1.9 2.3 2.3 2.3 2.3 2.4 2.2 2.3 OECD (38) 1.6 1.9 1.9 2.3 1.9 1.9 1.8 1.9 Africa (31) 0.4 0.4 0.4 0.4 0.3 0.3 0.4 0.3 Asia-Pacific (28) 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 Latin America (26) 0.8 0.9 0.9 0.8 0.9 0.8 0.9 0.8 Sources: OECD Global Revenue Statistics Database (2022); European Commission 2020 (2020). The number of countries in each grouping as of 2022 is shown in brackets. European Union: Property taxes’ per capita revenue importance (2015) Sources: Brzeski, Romanova & Franzsen 2019; Eurostat 2017; United Nations Department of Economic & Social Affairs 2015. 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Ranking 2020 Revenue 2020 (million EUR) EU-27 1.9 2.0 2.1 2.2 2.3 2.3 2.3 2.3 2.2 2.2 2.3 302 724 Belgium 3.1 3.3 3.5 3.6 3.6 3.6 3.6 3.5 3.5 3.5 3.5 2 16 054 Bulgaria 0.5 0.5 0.8 0.9 0.9 0.9 0.9 0.8 0.8 0.8 0.7 20 444 Czechia 0.5 0.5 0.5 0.6 0.6 0.6 0.6 0.6 0.6 0.5 0.3 26 661 Denmark 2.5 2.6 2.5 2.6 2.6 2.7 2.5 2.5 2.5 2.7 2.6 5 8 263 Germany 0.8 0.9 0.9 0.9 1.0 1.1 1.1 1.1 1.1 1.2 1.3 12 44 657 Estonia 0.4 0.4 0.4 0.4 0.4 0.4 0.3 0.3 0.3 0.3 0.3 27 81 Ireland 1.4 1.6 1.7 1.8 1.9 1.3 1.2 1.2 1.2 1.1 1.1 15 3 928 Greece 2.0 2.8 3.3 3.6 3.2 3.5 3.5 3.5 3.3 3.3 3.4 3 5 544 Spain 2.1 2.0 2.4 2.6 2.7 2.8 2.8 2.7 2.7 2.6 2.7 4 30 026 France 4.0 4.3 4.3 4.3 4.5 4.6 4.7 4.8 4.6 4.5 4.6 1 106 013 Croatia 1.0 1.1 1.1 1.1 1.1 1.1 1.1 1.0 1.1 1.1 1.1 14 535 Italy 1.8 2.0 2.5 2.6 2.8 2.7 2.4 2.4 2.4 2.4 2.4 7 40 130 Cyprus 1.2 1.0 1.0 1.3 1.3 1.5 1.1 1.1 0.9 0.9 0.8 19 165 Latvia 1.0 1.1 1.2 1.1 1.2 1.2 1.2 1.1 1.0 1.0 1.0 17 303 Lithuania 0.7 0.6 0.6 0.4 0.5 0.5 0.4 0.4 0.3 0.3 0.3 25 165 Luxembourg 1.0 1.1 1.2 1.2 1.2 1.5 2.0 2.1 2.5 2.4 2.5 6 1 615 Hungary 1.1 1.1 1.2 1.3 1.3 1.3 1.1 1.1 1.0 1.0 1.1 13 1 517 Malta 1.0 1.0 0.9 0.9 0.9 1.0 1.1 1.1 1.3 1.1 0.7 21 93 Netherlands 1.3 1.1 1.1 1.2 1.6 1.5 1.6 1.7 1.7 1.6 1.8 9 14 667 Austria 0.7 0.8 0.9 0.8 0.8 0.9 0.8 0.8 0.8 0.8 0.9 18 3 339 Poland 1.4 1.4 1.5 1.6 1.6 1.7 1.8 1.8 1.7 1.7 1.7 10 9 019 Portugal 1.7 1.8 1.8 1.9 2.0 2.1 2.1 2.2 2.2 2.2 2.3 8 4 565 Romania 0.8 0.8 0.9 0.9 0.9 0.9 0.8 0.7 0.6 0.7 0.6 23 1 342 Slovenia 0.6 0.6 0.6 0.7 0.7 0.6 0.6 0.6 0.6 0.6 0.6 22 295 Slovakia 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.5 24 438 Finland 1.1 1.1 1.2 1.3 1.4 1.4 1.4 1.6 1.5 1.6 1.6 11 3 866 Sweden 1.0 1.0 1.1 1.2 1.1 1.1 1.2 1.1 1.2 1.1 1.1 16 4 999 Iceland 2.0 1.9 1.9 1.9 1.8 1.8 17.3 2.1 2.1 2.1 2.3 445 Norway 1.1 1.0 1.0 1.1 1.1 1.1 1.1 1.2 1.1 1.2 1.2 3 953 Taxes on property as % of GDP Source: European Commission, DG Taxation and Customs Union, based on Eurostat data §Property tax is a challenging tax to administer § §Data intensive (property discovery, assessment) §Important role for information & communication technology (ICT) § §High administration costs (unpopular with officials and administrators) § §High political costs (unpopular with politicians) § §Seldom properly understood (unpopular with taxpayers) § Property tax challenges §“Tax administration = tax policy” §Study: §Norregaard, 2013 § §It must be possible and practicable to implement tax policies in the short term and these must be sustainable in the long term § §The recurrent property tax is a difficult and costly tax to administer Conclusions Riël Franzsen SA Research Chair in Tax Policy & Governance African Tax Institute MVV182K/01: PROPERTY-RELATED TAXES – ISSUES & TRENDS PROPERTY TRANSFER TAXES – AN OVERVIEW § §10 May 1529 § §What is the significance of this date? Property as a taxable object §Property transfer has been a taxable event since ancient times §Egypt §Rome § §Charles V – 10 May 1529 § §Spain – Alva and the 5% tax (1571) § §Holland §Transfer duty (40th penny – i.e. 2.5%) in 1598 §Stamp duties in 1624 Historic overview §Property is fixed in location § §Property is highly visible § §Property has an inherent value § §Taxpayers are usually readily identifiable § §Transfers are often “public” and require official input § §Administrative provisions §No legal transfer of (property) rights before payment of tax § (i.e. before tenure rights are acknowledged and protected in terms of law) Property transfers a taxable events §Taxes on the transfer of real estate §Transaction-type taxes §Focuses on the underlying transaction (e.g. contract of sale) §Typical in Civil Law-countries with a European legal tradition §E.g. Belgium, Germany, Luxembourg, Spain §High tax rates (often above 5%) – e.g. Belgium, Spain §South Africa: 0% to 13%, Zambia: 5% (was 10% from 2014 to 2016) § §Stamp duties §Focuses on documents (e.g. deed of sale/registration) §Typical in Common Law-countries with an English legal tradition §E.g. UK, US, Canada, Australia, India §Low tax rates (generally below 2%), but: §UK: 0% to 12% §Grenada: 10% and St Vincent & The Grenadines: 10% § §Both stamp duty and transfer tax(es) §Some Caribbean countries, Thailand, Lesotho § §Registration fees §Focuses on registration, but constitutes a user charge rather than a tax Comparative overview §Tax base §Possible “overlap” with other taxes §Value-added tax (VAT) §Capital wealth taxes (death duties and gift taxes) §Capital gains tax (CGT) §Taxation at more than one government level §Scope of “acquisition” §Scope of “property” § §Taxpayer §Seller, or buyer, or both? §Caribbean countries §Higher rates on acquisition by non-citizens §Caribbean, Seychelles, Botswana Some policy issues §‘Consideration’ §Additions §Exclusions § §and/or § §‘Declared value’ §The contracting parties provide values § §and/or § §‘Market value’ §Responsibility? §Capacity? § Taxable value Real Property Transfer Tax Rates: Europe Western Europe Transfer Tax (%) CEE & SEE Countries Transfer Tax (%) Minimum Maximum Minimum Maximum Austria 3.5 Bosnia & Herzegovina 5.0 Belgium 10.0 12.5 Bulgaria 2.0 4.0 Cyprus 3.0 8.0 Croatia 5.0 Denmark 0.6 1.5 Czech Republic 0.0 Finland 4.0 Estonia 0.27 0.4 France 0.7 5.1 Hungary 10.0 Germany 3.5 6.0 Kosovo 0.0 Greece 3.0 Latvia 2.5 Ireland 1.0 2.0 Lithuania 0.2 1.0 Italy 2.0 9.0 Moldova 0.2 0.5 Luxembourg 10.0 Montenegro 2.0 Malta 5.0 North Macedonia 2.0 4.0 Netherlands 2.0 Poland 2.0 Norway 2.5 Romania 1.0 3.0 Portugal 6.5 Russia Fixed fees Spain 6.0 10.0 Serbia 2.5 Sweden 3.0 Srpska (B&H) 0.0 Switzerland 0.0 3.3 Slovakia 0.0 United Kingdom 0.0 12.0 Slovenia 2.0 Sources: UN Habitat, Land and Property Tax-A Policy Guide (2011); World Bank's Doing Business (2020); McCluskey et al (forthcoming). Country Tax Rate Country Tax Rate Algeria 5% + 1% Kenya 2% (rural) and 4% (urban) Angola 2% + 0.3% Lesotho 3% to 4% (TT) + 1% to 3% (SD) Benin 8% Liberia A fixed fee of LRD100 Botswana 5% and 30% Libya 5%, 8% and 10% Burundi 3% Malawi 1.5% Cameroon From 5% to 15% Mali 7% + XOF26,500 + 1.5% Cape Verde 3% + 1% Mauritania From 0.25% to 15% Central African Rep 7.5% + 1% + XAF5,000 Mauritius 0.1% to 12% + 5% Chad 10% + XAF1,000 Morocco 6% + 1% Comoros 2% to 9% (on selling price) + 2% Mozambique 2% + 0.2% Congo 15% + 0.5% + 0.2% Namibia 0% - 8% (individuals); 12% (other) Côte d’Ivoire 7.5% (juristic persons), 4% (other) Niger 3% DRC Ranges from 5% to 10% Nigeria 0.75% Djibouti 3% Rwanda A fixed fee of RWF20,000 Egypt 2.5% STP 8% Eritrea 4% + ERN340 (maximum) Senegal 10% Eswatini 2% to 6% South Africa 0% to 13% sliding scale Ethiopia 2% + small ETB fixed amount Sudan 2.5% to 6% Gabon 6% Tanzania 1% Ghana 0.25% to 1% Togo 6% + XOF1,000 p/page Guinea 5% + 0.25% to 1% Tunisia 5% + 1% Guinea-Bissau 10% + 0.5% + XOF2,000 Zambia 5% Source: Adapted and updated from Franzsen & McCluskey (2017); Franzsen (2020). Real Property Transfer Taxes in 44 African Countries Property transfer taxes – tax rate design §Single flat rate §E.g. Zambia, Croatia § §Multiple flat rates – depending on who acquires §Citizens vs. non-citizens (e.g. Botswana, also Grenada, Saint Lucia) §Natural persons vs. companies (e.g. Namibia, also Armenia) § §Progressive tax rates – with reference to value §Possible zero-rating (e.g. South Africa) § §Multiple taxes, e.g. transfer tax and stamp duty §E.g. Eswatini, Lesotho, Thailand § §Transfer tax and tax rate trends §Abolition – Kosovo, Slovakia, Srpska (in Bosnia & Herzegovina), most recently Czech Republic (2020) §Reductions in tax rates – some African & Caribbean countries, Indian states §Recent increases in tax rates – South Africa, United Kingdom §Nature of ‘property’ §Is ‘property’ properly defined in the law? § §Separate properties for a lump-sum price § §Property includes other items §e.g. goodwill and/or movables § §Valuation of limited real rights (e.g. usufruct) and/or bare dominium § §‘Indirect acquisitions’ - through companies, corporations, or trusts § §Multiplicity of similar taxes – e.g. Caribbean and Thailand Typical problem area Issues - property transfer taxes §Co-existence with a VAT, capital gains tax (CGT) and property tax §Should transfer taxes be replaced by CGT? § §Impact on - §Overall fiscal policies §Property markets (e.g. Caribbean countries) §Cost of housing (e.g. Croatia, Hungary) §Credible property values (e.g. Kenya, Thailand, Zambia) §Recurrent property tax base § §Papers/book chapters on property transfer tax issues: §Bahl, R.W. 2004. ‘Property Transfer Tax and Stamp Duty’. ISP Working Paper 04-27, Andrew Young School of Policy Studies, Georgia State University §Franzsen, R. 2020. ‘A Review of Property Transfer Taxes in Africa’ in Land Reform in Africa New Ideas Opportunities and Challenges, African Development Bank: Abidjan, 112-131 Riël Franzsen SA Research Chair in Tax Policy & Governance African Tax Institute MVV182K/01: PROPERTY-RELATED TAXES – ISSUES & TRENDS RECURRENT PROPERTY TAXES – AN OVERVIEW §Comparative reviews and terminology §Tax bases §Options and trends §Valuation §Options and trends §Tax rates §Options and trends §Tax administration §Reform Introduction §International best practice §Lessons §Regional or international trends §Dangers §Terminology §Law versus reality §Historic development (e.g. colonial heritage) §Political, social, economic and institutional issues §Country/region-specific realities §Land tenure §Property markets §Reliable data Comparative reviews §Simple per-unit “flat tax” systems § §Area-based systems §Simple area (unadjusted) §“Calibrated” area systems (e.g., adjusted for location and/or use) § §Capital value systems §Land only §Land and buildings collectively §Land and buildings separately §Buildings only §Value-banding § §Rental value systems §Land and buildings collectively §Buildings only Recurrent property tax base options File:BlankMap-World6.svg Land Value Only Improved Value Land & Buildings Buildings Only Banded Values Annual Value Area Calibrated Area No Property Tax Franzsen and McCluskey, 2005; UN-Habitat, 2011; Fjeldstad and Heggstad, 2012; Franzsen and McCluskey, 2013; McCluskey and Franzsen, 2013; Norregaard, 2013; Franzsen and McCluskey 2017. Map image: http://commons.wikimedia.org/wiki/File:BlankMap-World-v2.png Property tax systems File:BlankMap-World6.svg No recurrent property tax system File:BlankMap-World6.svg Per unit (‘flat’) tax system Advantages: •Simple to administer Disadvantages: •Inequitable •Lack of buoyancy •Regressive File:BlankMap-World6.svg Calibrated Area Area Advantages: •Simple to administer •Some relationship between size and value •Self-assessment; no objections and appeals •Could be combined with locational factors – Disadvantages: •Lack of buoyancy •Regressive Area-based tax system File:BlankMap-World6.svg Land value tax system Advantages: •Requires little data to set up •Cheap to administer •Easy to maintain •Does not deter improvement – Disadvantages: •Lack of buoyancy •Narrow base = high nominal tax rates File:BlankMap-World6.svg Capital improved value system Advantages: •Buoyancy •Buildings constitute visible wealth •Broad base = low nominal rates – Disadvantages: •Constantly changing •Costly to maintain •Could stifle development File:BlankMap-World6.svg Banded capital value system In Practice Statutory Option Advantages: •Few objections and appeals •Easy to administer – Disadvantages: •Regressive File:BlankMap-World6.svg Land and buildings separately Advantages: •Some buoyancy •Buildings constitute visible wealth •Broad base = low nominal rates – Disadvantages: •Development unlikely to be stifled •Constantly changing •Costly to maintain (require various values) • File:BlankMap-World6.svg Annual (i.e., rental) value system Advantages: •Buoyancy •Buildings constitute visible wealth •Broad base – Disadvantages: •High nominal rates •Costly to maintain File:BlankMap-World6.svg Building value systems Rental Value Capital Value Advantages: •More buoyant than land only •Provides a base where land cannot be taxed – e.g. Ghana and Tanzania – Disadvantages: •Costly to maintain •Could stifle development Europe BlankMap-Europe Land Value Improved Value; Cadastral Value Land & Buildings Annual Value Area No tax §Single, uniform tax base determined nationally (or at state/provincial level in federal countries) §Brazil, Canada, Egypt, South Africa, Uganda § §Multiple tax bases determined nationally (or at state/provincial level in federal countries), local government can choose preferred base §Australia: South Australia, Victoria §Malaysia, New Zealand, South Africa (before 2005), United Kingdom § §Move to capital (improved) value as preferred tax base §Anguila, Cameroon, Kosovo, Lithuania, Mauritius, Mozambique, Nigeria (Lagos State), Northern Ireland, Rwanda, Saint Lucia, Slovenia, South Africa § §Move to simplified calibrated area-based or value zonal systems §Afghanistan, India, Malawi, Sierra Leone, Somalia Discernable trends – tax base §Valuation service providers §Government or government agency: Australia, Botswana, Canada, Hong Kong, Latvia, Lithuania, Malawi, New Zealand, Slovenia, Uganda, United Kingdom, Zambia §In-house (i.e. municipality itself): Kenya, Lesotho, Namibia, South Africa, United States §Committees: Egypt, Jordan, Yemen §Private sector: Malawi, Namibia, New Zealand, South Africa §Self-assessment: Cabo Verde; India (some cities), Liberia, Rwanda § §Recent changes in respect of valuation services §Government to private sector: Botswana, Malawi, Uganda § §Increased utilisation of computer-assisted mass appraisal (CAMA): Cameroon, Malaysia, Netherlands, Slovenia, South Africa § Trends - valuation §Uniform versus differential tax rates §Many countries allow for differential rates (mostly on basis of use): Armenia, Canada, South Africa, Zambia § §Setting of tax rates §Tax rates determined nationally: Armenia, Cameroon, Egypt, Jamaica, Rwanda §Limited scope to set rates locally within nationally-determined parameters: Romania, Uganda §Tax rates determined locally and usually annually: Australia, Botswana, Canada, New Zealand, South Africa, Zambia § §Oversight or control §Many countries provide for central/state approval or some oversight over locally-determined tax rates: Botswana, Namibia, Zambia §Possible rate-capping: South Africa Trends – tax rates §Billing §Problematic in many countries due to poor taxpayer data and/or poor postal services and lack of street addresses: Malawi, Philippines, Sierra Leone, South Africa, St Kitts & Nevis § §Collection §Low or declining compliance due to poor or complete lack of service delivery: Philippines, Nigeria, South Africa §Low due to poor enforcement: Tanzania, Uganda §Political interference: Gabon, Senegal, Tanzania § §Enforcement §Despite mechanisms in the law, generally weak due to lack of political and institutional support: Rwanda, Thailand, Uganda §Proper enforcement: Australia, Canada, Hong Kong, New Zealand, Singapore, South Africa…, United States Status of tax administration File:BlankMap-World6.svg Recent or current property tax reforms Developed countries Developing/transition countries Map image: http://commons.wikimedia.org/wiki/File:BlankMap-World-v2.png Franzsen, 2014 §“No one size fits all…” – diversity is the name of the game § § §The “best” system is the one that generates sufficient revenue in an as equitable manner as possible § § §Despite of (or because of) its political visibility, the property tax is an increasingly popular source of revenue at especially the local level of government Conclusions Riël Franzsen SA Research Chair in Tax Policy & Governance African Tax Institute MVV182K/01: PROPERTY-RELATED TAXES – ISSUES & TRENDS TAX RATES & TAX RELIEF C:\Users\u02353539\Downloads\1908 Tax simplification book cover.jpg §Tax base §Property discovery §Valuation §Assessment §Tax rates §Tax relief §Billing §Collection §Enforcement §System Management § Introduction (1) §Tax rate = converting assessment (i.e. assessed value) into a tax bill § §Determining an appropriate tax rate constitutes a critically important step in the context of any property tax system § §The tax rate depends primarily on §the revenue requirements of the taxing authority §the nature and extent of the tax base § §A further important policy issue: How often should tax rates be determined? § Introduction (2) § § § § § § Policy variables Administration variables § § CR: Coverage ratio § VR: Valuation ratio § Col R: Collection ratio § § § Source: Kelly (2000) Revenue = Tax base Tax rate VR Col R x x x x CR Revenue Mobilisation Model 1 4 2 3 5 6 7 Years Valuation Cycles Tax Rate 8 9 10 VR Values Revenue !!!! Values vs. tax rates (1) 1 4 2 3 5 6 7 Years Valuation Cycles 8 9 10 VR Values Revenue !!!! Tax Rate Values vs. tax rates (2) 1 4 2 3 5 6 7 Years Valuation Cycles 8 9 10 VR Values Revenue Tax Rate Values vs. tax rates (3) €100,000 = x x x Base Coverage Valuation Collection Tax rate 1,000 20% 40% 60% 80% 100% €10,000 pp 100% 1.0% Tax Effort €60,000 = x x x Base Coverage Valuation Collection Tax rate 1,000 20% 40% 60% 80% 100% €10,000 pp 60% 1.0% Tax Effort €100,000 = x x x Base Coverage Valuation Collection Tax rate 1,000 20% 40% 60% 80% 100% €10,000 pp 60% 1.667% Tax Effort €4,800 = x x x Base Coverage Valuation Collection Tax rate Tax Effort 200 20% 40% 60% 80% 100% €4,000 pp 60% 1.0% §Revenue needs and tax base are the most important determinants for the tax rate § §The approach to tax base: §Narrow base = High nominal rate or rates §Broad base = Low nominal rate or rates § §The approach to revenue: §“How much can we get?” – primary source of revenue §“How much do we need?” = residual source of revenue § § §What should the tax rate be? § § Base vs. rate vs. revenue §Kingstown, Saint Vincent (2014): 0.08% § § §Dar es Salaam, Tanzania (2012): 0.1% § § §Cape Town, South Africa (2014): 0.45% § § §Toronto, Canada (2015): 0.7056037% § § §Nairobi, Kenya (2016): 17% § § §Mumbai, India (2011): 276% § §What do these tax rates tell us? Examples of tax rates §Kingstown, Saint Vincent (2014): 0.08% §Revenue neutral tax reform §Dar es Salaam, Tanzania (2012): 0.1% §Tax base – capital value of buildings only; very poor community §Cape Town, South Africa (2014): 0.45% §Market value, first year of new valuation roll §Toronto, Canada (2015): 0.7056037% §Market value; affluent community; tax also funds education §Nairobi, Kenya (2016): 17% §Land value only; last valuation done in 1982 §Mumbai, India (2011): 276% §Annual rental value; rent control enforces an artificial ceiling value § §So, do not compare apples with pears! § Examples of tax rates §Rate comparisons are difficult because – §Tax bases differ (nature) §Narrow base versus broad base (i.e. extent) §Valuation assessment levels may differ §Ages of valuation rolls may differ §Importance of property tax as a source of revenue differ §Expenditure responsibilities differ §Expenditure needs differ § §Tax administration may also be a determinant – §Weak collection may necessitate higher rates §Improved base coverage may result in lower rates §Regular revaluations may result in lower nominal rates Tax rate comparison § §Land (€200,000) + Building (€800,000) = €1,000,000 §Annual yield is 10% = € 100,000 § §Base = Total Value = €1,000,000 § Tax @ 1% = € 10,000 § § Base = Land Value = € 200,000 § Tax @ 5% = € 10,000 § § Base = Building value = € 800,000 § Tax @ 1,25% = € 10,000 § § Base = Annual value = € 100,000 § Tax @ 10% = € 10,000 Relationship – Tax rate & tax base §Flat rate or progressive rates (i.e., sliding scale)? § § and § §Uniform rate or differential rates? Tax rate design §Basis for progressive rates: §Usually value, but could be area (m2) § §Why use progressive property tax rates? §What is the objective with the tax? §Perceived ability to pay §Land reform? § §Administration §Single versus multiple-ownership §Linking multiple properties to a single owner §Billing and collection §Complexity (cost and opportunities for corruption) § §Examples: §Armenia; Morocco § § Progressive rates §Basis for differential rates: §Property use categories §Actual use §Zoned use §Land versus improvements §Size §Value § §Reasons for differentiation? § §Issues? § § Differential rates City of Perth, Western Australia Rates for 2015/2016 Land use category Rate (c/$ of gross rental value) Ratio in relation to residential Residential 4.4107 1:1 Hotel 5.0032 1:1.13 Commercial 5.0032 1:1.13 Retail 5.0032 1:1.13 Office 2.9079 1:0.66 Vacant land 5.8157 1:1.32 Source: www.perth.wa.gov.wa (2015) * * City of Toronto, Ontario, Canada – 2015 Property Tax Rates Description City Tax Rate % Education Tax Rate % Transit Tax Rate % Total Tax Rate % Residential 0.5081190% 0.1950000% 0.0024847% 0.7056037% Multi-Residential 1.5290188% 0.1950000% 0.0025294% 1.7265482% New Multi-Residential 0.5081190% 0.1950000% 0.0024847% 0.7056037% Commercial General 1.5361843% 1.2278260% 0.0025294% 2.7665397% Residual Commercial - Band 1 1.2811685% 1.2278260% 0.0021095% 2.5111040% Residual Commercial - Band 2 1.5361843% 1.2278260% 0.0025294% 2.7665397% Industrial 1.5301969% 1.2946100% 0.0025294% 2.8273363% Pipelines 0.9773995% 1.5065730% 0.0047794% 2.4887519% Farmlands 0.1270297% 0.0487500% 0.0006212% 0.1764009% Managed Forests 0.1270297% 0.0487500% 0.0006212% 0.1764009% Tax Rates and Ratios for 2015/2016: 4 Metropolitan Municipalities in South Africa Source: Metropolitan Municipalities Property categories Cape Town eThekwini Johannesburg Tshwane c/R Ratio c/R Ratio c/R Ratio c/R Ratio Residential 0.6931 1.00 1,115 1.000 0.6531 1.00 1,013 1.00 Com & Bus 1.2508 1,80 2.528 2.267 1.8287 2,80 3,056 3.02 Industrial 1.2508 1,80 3,262 2.926 1.8287 2,80 3,056 3.02 Vacant land 1.2508 1,80 4.998 4.483 2.6124 4.00 6,573 6.49 Agricultural 0.1251 0.18 0.279 0.250 0.1632 0.25 0.253 0.25 State-owned - - - - 0.9796 1.50 3,056 3.02 PSI 0.2234 0.18 0.279 0.250 0.1632 0.25 - - Split-Rate Tax Rates: Example Mbabane, Swaziland Tax Rates for 2014/2015 Category Land Value Improvements Developed Residential 1.29% 0.21% Undeveloped Residential 1.51% - Developed Commercial 2.53% 0.7% Undeveloped Commercial 2.22% - Public Open Spaces 1.82% - Source: City of Mbabane §Central government §Rate fixed in law (e.g. Cameroon, Egypt, Kosovo) §Issues? § §Shared tax versus shared revenue § §Local government: §Direct oversight and/or central government approval (e.g. Botswana, Namibia) § §Indirect oversight §Standard rate (e.g. Japan) §Ratios pertaining to differential rates (e.g. South Africa) §Compliance with constitutional guidelines (e.g. South Africa) § §Statutory limitations (maximum and/or minimum rates) (e.g. Uganda) § §Citizen oversight (e.g. California) § § §Advantages and disadvantages? Who determines the tax rate(s)? How are tax rates set? § “Budget residual option” § § § § § § § § § § Tax rate = (Expenditure – other revenues) Total assessed value Tax rate = (€50,000,000 – €20,000,000) €2,000,000,000 = 0.015 = 1.5% = 1.5c in the € Nominal versus Effective Rates § §Whether set locally or centrally, and whether fixed or set annually, nominal tax rates tend to be higher than effective tax rates § §Effective rate = Tax amount/Property value § §Reasons: §Value reductions §Assessment ratios §Rebates §Exemptions Example Property value €100,000 Value reduction €15,000 Assessment ratio 0.8 Nominal tax rate 1.5% Rebate 10% Tax Amount €918 Effective tax rate €918/€100,000 = 0.918% §Multiplicity of differential tax rates §Many countries allow for differential rates §Armenia; Poland § §Static tax rates §Armenia § §Centrally- or locally-determined tax rates §Central: Armenia § §Local: Some central (or provincial/state) oversight or control over locally-set tax rates Tax rate issues §What is “tax relief”? § §Why grant it? § §What are the dangers? § §How much relief? § §How should it be granted? § §Mandatory or discretionary? § §Automatic or on application? Tax relief §“Tax relief” implies that some taxpayers, or properties, or property categories receive preferential treatment and should be justified in a rates policy as some are paying more if other are paying less… § §Relief is an expenditure – and should ideally be quantified and reflected as such in the budget § §The relief could be granted – §to persons (e.g. pensioners, the aged) – usually “means tested” §on the basis of use (e.g. properties used for bona fide farming; sports facilities) §on the basis of location (e.g. rural) § §Mandatory and/or discretionary relief § What is tax relief? § § § Policy variables Administration variables § § CR: Coverage ratio § VR: Valuation ratio § Col R: Collection ratio § §Source: Kelly (2000) Revenue = Tax base Tax rate CR VR Col R x x x x Revenue Mobilisatio Model: Tax relief §Base: §Exclusions § §Assessment: §Value reductions §Preferential valuation (e.g. “current use” value) § §Tax rate: §Rebate §Partial exemption §Full exemption §Differential rates §Rate capping §Phase-in §Tax holiday § §Payment: §Deferral §Income tax deductible §Tax amnesty Relief mechanisms – How? §Poor and indigent §Pensioners §Unemployed taxpayers §Farmers §Religious, charitable & educational institutions §Sports clubs §Foreign embassies §Conservation land §Monuments and national heritage sites §Properties damaged by natural disasters (e.g. flooding) §National and/or provincial/state government §Residential properties §Vacant/unoccupied properties Candidates for relief – Who? §To alleviate financial hardship §Actual (e.g. unemployed) § §Perceived (e.g. pensioners or the aged) § §Social or political “merit” §E.g. sports clubs, political parties § §Environmental protection § §Counter shifts in incidence § §Achieve “equity” Purpose of relief – Why? §Erosion of the tax base § §Temporary relief measures tend to become permanent § §Understatement of fiscal capacity § §Loss of transparency § §Loss of accountability (if granted by different levels) § §Pressures to extend relief to other “deserving” groups/entities § §Administrative complexity § §Administrative discretion and corruption § §Unintended consequences or missing the target Dangers of tax relief §Distinguish exemption (assessed, but not (fully) taxed) from exclusion (excluded from the base or assessment) § §Based on ownership – e.g. government § §Based on ownership and use – e.g. religious, charitable, conservation purposes § §Based on use – e.g. bona fide farming § §Based on value – e.g. below a value threshold § §Problems: §Unless accounted for, conceals fiscal capacity §Political pressure by similar ‘pressure’ groupings Exemptions §Protection of taxpayers § §Protection of national interests and national (fiscal) policies § §Prevents or limits (unhealthy) tax competition between municipalities § §Loss of local autonomy § §Statutory overrides? Rate capping §Deferment §Administration §Interest rate §On application §E.g. British Columbia, Canada §As long as existing use is maintained §E.g. New Zealand § §Deductibility from income tax §Tax exporting Relief associated with payment §Relief mechanisms should be restricted to an absolute minimum § §Preferably not be related to the tax base (i.e. an exclusion) or assessment (i.e. preferential valuation) § §Must be quantifiable and justifiable § §Cost should ideally be reflected in annual budget Relief - Recommendations §Recommendations for tax rate and tax relief policies §Keep it simple - equity comes with a price tag § §Differential rates: §Limit the number of classifications §Quantify and justify the differentiation § §Tax rates: Revenue should at least (re)cover the costs related to all of the steps in the comprehensive property tax model § §Keep tax relief to the absolute minimum – as it erodes the tax base § §Review relief policies/programmes regularly § § Conclusions