Update on Property Tax Issues: IPTI
The EACC in partnership with the International Property Tax Institute (IPTI) wants to keep our members up to date with the latest developments in property taxes both in the USA and Europe.
IPTI has put together a selection of reports from articles contained in IPTI Xtracts. This report covers Denmark, Greece, Ukraine, the United Kingdom, and the United States with a focus on New York.
New York City and State –
- NOT-FOR-PROFIT EXEMPTIONS: For over two centuries, the State of New York and its localities have exempted the property of religious institutions from property taxes. Similar treatment has been granted throughout the United States, variously covering the actual houses of worship, religious schools, clergy residences and charitable program facilities run by the religious institutions.
Many are now looking at the situation in New York State, where recent estimates place the value on the real property receiving religious-based tax exemption at around $26 billion, up from around $14 billion in 1999. Patterns vary around the state, but in some municipalities not only has the value of exempted property increased, but so has the number of properties receiving those exemptions. The Town of Ramapo, located in Rockland County, a New York City metropolitan area suburb, has shown tremendous growth in the number of properties receiving religious-based tax exemption. In Ramapo, the value of tax-exempt property belonging to religious institutions was reportedly $678 million as of 2015, with the number of exempt properties doubling from 1999-2015.
Arguments in favour of such exemptions have ranged from encouraging the many vital services they provide—which might otherwise have to be provided by government, to protection of their freedom of religion under the First Amendment of the United States Constitution.
Arguments against such broad exemption include the questioning of whether these institutions provide a net economic benefit, given that the exemption afforded them takes away from revenue for schools, for example, which are a benefit to society, or the fact that property taxes pay for such essential services as police and firefighting, to which the religious institutions have the same access as do private companies and private citizens. A particular area of concern is that when property is exempted, it shifts the tax burden onto the other taxpayers in the jurisdiction.
Tax exemptions, whether they be for religious purposes, or for entities such as universities and hospitals (aspects of which we have reported on in prior issues), represent yet one more pressure point for local governments and policy makers around the U.S. and beyond as they grapple with having to provide services and infrastructure, while simultaneously not placing undue burdens on taxpayers or a drag on the activity of the real estate markets.
Around the U.S.-
- CONNECTICUT: Recent events in the City if Bridgeport, Connecticut prove the adage that the taxing authority must get their levy “no matter what”. As the NY Times recently reported, there was a record property tax increase on some properties in Bridgeport this past year, amounting to between 20-to-25%. This has occurred despite the fact that after a reassessment, the value of taxable property in Bridgeport descended from $7 billion to $6 billion. Bridgeport has been described as a poor city in a rich state, and one whose historically strong industrial sector began declining around the 1950s. Nevertheless, government services must still be delivered, and despite the massive drop in market value, some property taxes had to be increased.
- PENNSYLVANIA: Owners of the Mohegan Sun casino have filed a property tax appeal on the casino and recently-added convention center and hotel in Wilkes-Barre. There had been a revaluation of the facilities following the expiration of an agreement to pay a flat rate each year in lieu of tax. While the dispute may not necessarily result in a battle royale in the courts, it underscores the difficulties faced by governments and taxpayers alike when negotiated property tax deals—known generally as PILOTs (payments-in-lieu-of-tax)—or other development-based tax incentives expire and the “true’ assessed value of the property becomes the basis for taxation.
- NEW JERSEY: The township of Manchester, New Jersey has initiated the “Shop Manchester” program. Participating merchants and business owners have agreed to offer rebates to Manchester residents who shop locally. The resident pays regular price for goods and services, and the rebate is then applied directly to the residents’ property tax bills. Local businesses benefit and there is no cost to the government.
Denmark: Danish government wants to use aerial photos to assess housing taxes
Government wants to see properties “from every angle”
The Danish government plans to add aerial photographs to the tools it uses to assess housing and property taxes. Around 350,000 Danish homes will be assessed using the high-flying snapshots, according to Jyllands-Posten.
Those in favour say it will give the assessors a chance to see properties from every angle and also allow a comparison with neighbouring properties.
Not accurate enough
Konservative tax spokesperson Brian Mikkelsen disagreed, saying that aerial photos give “a false picture”.
“The home’s interior could be in bad shape, or there could be a bad smell coming from a nearby factory,” he told Jyllands-Posten. “You cannot see that from an aerial photograph.”
Karsten Lauritzen, the tax minster, said that it will take many years and perhaps cost billions of kroner for assessments to be done by on-site visits.
“If I had millions or billions of kroner, I would rather use them to reduce taxes on labour than to make sure that manual assessments are accurate down to the last comma,” he said.
Lauritzen also stressed that homeowners would have the opportunity to challenge the aerial assessments.
“I think that is more fair than waiting several years for an assessment,” he said.
Greece: Greek government gives way on property tax
Greece’s new government has bowed to public pressure and announced that people on low-incomes who struggle to pay a new property tax levied via electricity bills will not have their power cut.
The state-run Public Power Corporation (Dei) was due to start disconnecting on Monday those who failed to pay the tax, one of numerous revenue-raising measures demanded in return for European Union and International Monetary Fund loans.
But after furious opposition by the unions, the environment and energy ministry said in a statement: “The government is in discussions with the management of Dei so that vulnerable groups are not cut off from the grid.”
A finance ministry source told AFP a decision was due “in the next couple of days” about providing a formal exemption for the worst-off, including the poorest pensioners, the unemployed and the disabled.
The decision came as Lucas Papademos, the prime minister installed 10 days ago to save Greece from financial ruin, visited Brussels for talks on releasing desperately needed aid from the European Union and International Monetary Fund.
The tax, the first property levy for ordinary Greek homeowners, was introduced by the previous government in September and would charge residents between 0.5 and 16 euros (A68 cents and $A21.75) per square metre, depending on their circumstances.
People living on less than 3000 euros a year would pay the lowest amount, while the long-term unemployed are already exempt.
The tax is administered through electricity bills to make it difficult to evade and this also provides the government with an automatic sanction – if no payment has been received 40 days after the bill is sent, the power is cut off.
Members of the powerful Genop-Dei union, which has led public opposition to the tax, occupied the Dei offices in Athens overnight and through Monday, holding up banners reading “We will resist” and “The tax should be paid by the rich”.
Union secretary Nikos Katsaros told AFP they wanted “the abolition of the tax, or at least as a first step, an exemption for the poorest”. He confirmed that energy company staff had been told not to cut anyone off on Monday, the 41st day after the first bills containing the new tax were sent out.
The energy ministry denounced the union’s sit-in as “irresponsible” and said the activists were acting “like Robin Hood, when it is clear that the government is reviewing the sanctions for vulnerable groups”. Katsaros said 50 per cent of households had so far failed to pay the tax, although Greek newspapers put this figure at 25 per cent.
UK: No relief for soaring business rates burden
British businesses claim they have been “short-changed” by another missed opportunity to overhaul the burdensome business rates tax system which will leave them facing crippling increases next April.
Philip Hammond was accused of “tinkering around the edges” by critics, despite the Chancellor announcing that rural businesses would be excused from business rates. The proposal is expected to provide a welcome fillip for small village shops and pubs.
However, the rural boost will not help the majority of British companies which have properties with a rateable value of more than £15,000 and face soaring rent bills next year. In an effort to appease lobby groups, Mr Hammond said rate rises would be capped next year to just 43pc rather than 45pc.
The Chancellor said “it’s complicated but it’s good news”, provoking laughter from the back benches. However, critics leapt on the revelation that the rates cap will actually be 42pc, and said that the measure was still “pathetically inadequate”.
“Business rates are a far more significant tax for our members than corporation tax”, said Carolyn Fairbairn of the CBI.
“We would have liked to see exemptions for plant and machinery. That might be something the Chancellor keeps in his back pocket for the next Budget.” Jerry Schurder, head of business rates at Gerald Eve, highlighted that at the last business rates revaluation, rises were capped at 12.5pc compared with the huge jump companies faced next year.
Meanwhile, Treasury documents revealed that those businesses which are due to have a rates reduction, as a result of their property values falling, will be limited to only having their rates decrease by around 5pc.
Mr Hammond also re-announced a move to reduce business rates by £6.7bn by excluding smaller properties from the system.
However, the Treasury will still reap more money from the tax over the next five years as business rates will rise from £29bn next year to £32.3bn by 2020.
The Treasury’s “Green Book” also reveals that it has raised its forecasts for business rates revenue by £7.5bn over the next five years in the eight months since the Budget in March.
UK: Telecoms sector receives five-year rates relief to grow fibre networks
Announcement in Autumn Statement intended to make UK ‘a world leader in 5G’
A five-year exemption from business rates for companies installing new fibre-optic cables has handed the telecoms sector a welcome boost in the Autumn Statement.
The UK telecoms sector was in uproar in September over a proposed fourfold rise in business rates applicable to existing and planned networks at a time when it was being asked to devote more resources to laying expensive fibre-optic cables.
However, the government’s attempt to stimulate more investment in “full fibre” networks — as opposed to hybrid fibre-copper networks — has resulted in a move to apply 100 per cent relief to spending on new fibre cables for five years from April 2017.
That will initially benefit both Virgin Media and BT, who are investing £9bn between on network upgrades, but also a host of smaller companies such as CityFibre. Philip Hammond, the chancellor, said the move was part of efforts to stimulate “economically productive infrastructure”.
The measure was revealed alongside a plan to establish a £400m fund to stimulate more “full fibre” network investment by smaller players in the telecoms market, as well as a £740m pot to fund a further extension of telecoms networks and the establishment of 5G trials, proposals that had already been announced. “My ambition is to be a world leader in 5G,” said the chancellor.
Britain was late to 4G networks and Mr Hammond’s vision comes after the EU published a “5G Action Plan” to try to keep up with markets including South Korea and the US. However, the standards for the next generation of networks are still being argued over by equipment makers, telecoms networks and governments and a full commercial launch of 5G is unlikely in Britain until 2020 at the earliest.
The emphasis on boosting connectivity through fibre and 5G was welcomed. Stuart Orr, advisory partner at EY, said the additional funds came “at an important time”. While the UK compared well to other markets in the introduction of “entry level” fibre broadband, he added, other countries were already benefiting from extensive coverage of “full fibre”.
The chancellor also revealed a plan to stop Britain’s fastest-growing start-up companies from “being snapped up by bigger companies rather than growing to scale-up [status]”, with £400m of finance made available from the British Business Bank to unlock funds of £1bn.
Patrick Imbach, co-head of KPMG’s Tech Growth practice, said the funds would make little difference in boosting UK start-ups. “Do we think it’s a game-changer? No, we don’t. The reality is £400m is a drop in the ocean when you look at historic levels of investment into the UK start-up community,” he said.
Greg Mesch, chief executive of CityFibre, praised the government for taking away the uncertainty over rates related to fibre investment and said his company would take advantage of the new fund.
UK: Town halls warned against taking investment risks to raise income
MPs fear lack of expertise in property ventures could leave taxpayers with big bill
Britain’s local authorities are engaging in increasingly risky commercial ventures that could threaten public services and leave taxpayers with hefty bills if they go wrong, MPs have warned.
The Commons Public Accounts committee is concerned that Britain’s 352 municipal bodies are seeking to compensate for sharp cuts in government funding by borrowing to invest in commercial ventures — principally involving developing houses, offices and shopping centres.
The MPs warn that council officers might lack the requisite commercial skills and that taxpayers could suffer if money is diverted from crucial services.
Local authorities have a chequered history when it comes to investing taxpayers’ money. Several councils had a total of £1bn tied up in Icelandic banks when that country’s financial system collapsed in 2008, although most of the money was eventually returned. This year it emerged that Newham borough council in London was exposed to rising costs on complex loan instruments that defy convention by becoming more expensive as interest rates fall, dating from 2009.
The cross-party committee said the Department for Communities and Local Government, which is responsible for local authority finances, expected councils to become more entrepreneurial as it encouraged them to become largely self-financing. But in a report they warned the department appeared “complacent about the risks to local authority finances, council taxpayers and local service users arising from the increasing scale and changing character of commercial activities across the sector”.
Local authority income from government grants and council tax fell 25.2 per cent between 2010-11 and 2015-16 and is expected to fall by a further 7.8 per cent in real terms by 2019-20, the report said.
Funding cuts have led local councils to rethink the way they use public money. In recent years they have increasingly sought to invest capital in projects to generate revenue while reducing spending on assets such as museums and parks
Although councils are financing capital spending by borrowing, they are using this money increasingly to pay for investments, such as commercial property portfolios, that may generate future income rather than spending it on facilities such as leisure and youth centres, libraries, roads, museums and parks.
Local authority investments on deposit with commercial banks and other institutions, which are not risk-free, grew from £18.5bn in 2010-11 to £26.1bn in 2015-16 — higher than the previous peak of £25bn just before the financial crisis.
More than a quarter of metropolitan councils are using more than 10 per cent of their revenue to service their debts, the report said, eroding their capacity to pay for “statutory service obligations” such as care for children and the elderly.
The MPs urged the department to do more to understand the scale and nature of the investments because if “commercial decisions go wrong, council taxpayers will end up footing the bill and other services will be under threat”.
The risks have been exacerbated by Britain’s decision to leave the EU and the move towards further devolution. These add to the uncertainty for local authorities, could raise complications and raise “new questions about transparency and accountability”, the committee said.
It urged the department to work with the Chartered Institute of Public Finance and Accountancy to ensure local government capital finance “remains current and continues to reflect developments”.
Meg Hillier, who chairs the committee, said: “Funding cuts have led local councils to rethink the way they use public money. In recent years they have increasingly sought to invest capital in projects to generate revenue while reducing spending on assets such as museums and parks.
“It is therefore alarming that the Department for Communities and Local Government does not have a firm grasp of the changes happening locally and their implications for taxpayers. Poor investment decisions cost money — money that might otherwise be spent on public services. Local authorities must have confidence central government has got their backs.”
Ukraine: The Private Wealth and Private Client Review 2016
Following Ukraine’s 2014 announcement of its intention to create a single economic and social space with the European Union, Ukrainian legislation is undergoing fundamental changes aimed at its harmonisation with EU Law. Following simultaneous ratification of the Association Agreement with the EU by the Verkhovna Rada (the parliament of Ukraine) and the European Parliament, on 16 September 2014, the government of Ukraine commenced substantial reforms of the law, with new taxation, corporate and banking law bills being passed into law on an almost monthly basis. Implementation of the Association
Agreement is designed to create new opportunities both for Ukrainian businesses in Europe and for foreign investors in Ukraine. In 2015, the EU decided to open a formal process that will result in the introduction of a visa-free regime for Ukrainian citizens. The EU has set a number of strict criteria, including substantial changes in the regulation of border control passport rules and exchange of information, which will create a regulatory framework for visa liberalisation with the EU. The introduction in 2016 of a new electronic declaration system for politically exposed persons is aimed at fighting corruption, which is one of the key targets in the EU’s path before the visa liberalisation decision is taken.
On 18 December 2015, the EU Commission in its Sixth Progress Report on the Implementation by Ukraine of the Action Plan on Visa Liberalisation confirmed that Ukraine has fulfilled all of its obligations on the path to visa liberalisation with the EU.
Ukraine is also seeking to increase transparency of its business and ownership in line with the recent global trend to increase transparency and accountability of business. As part of this process, Ukraine has recently introduced a public register of ultimate beneficial owners of bodies corporate.
In April 2016, in line with the global de-offshorisation trend, the president of Ukraine created the Special Working Group on de-offshorisation. The group aims to develop a de-offshorisation law by the end of 2016.
Another substantial international instrument that influences Ukrainian legislative reforms is the Extended Fund Facility (EFF) between Ukraine and the International Monetary Fund (IMF), approved on 11 March 2015 by the IMF Executive Board, which superseded the previous stand-by arrangements. In accordance with the EFF, Ukraine is obliged to implement a number of fiscal, economic and legislative measures under the IMF’s supervision.
In compliance with the EFF, significant changes were introduced to the regulation of banking and energy sectors, anti-money laundering, anti-corruption and investor protection regimes. The general drive of these reforms is aimed towards the introduction of recognised international standards (including those of the IMF, the EU and the FATF) in these areas. However, practical achievements of these reforms remain modest.
In recent years, Ukrainian business people were primarily focused on effective wealth protection and management mechanisms. The armed conflict in the eastern Ukrainian region of Donbas and the still substantial level of corruption continues to make wealth preservation and protection a number one priority.
Taxation of individuals in Ukraine depends on the tax residence, source and type of income.
i Tax residency
The Tax Code of Ukraine (the Tax Code) provides the following residency tests to determine the individual’s tax residency: (1) residence (permanent residence in Ukraine for a period exceeding 183 days); (2) centre of vital interests (close economic and personal ties); and (3) citizenship.
Registration of an individual as an entrepreneur in Ukraine is also sufficient to recognise this individual as a Ukrainian tax resident. In addition, an individual may voluntarily accept to become a tax resident in Ukraine in accordance with the procedures set out in the Tax Code.
Despite the above tests, in practice the main test to determine the tax residency regularly applied by the Ukrainian tax authorities is the number of days spent by an individual in Ukraine in a calendar year.
For the purposes of the Tax Code any person who fails to qualify as a Ukrainian tax resident is considered to be a non-resident of Ukraine for tax purposes.
ii Source of income
Tax residents of Ukraine pay tax on their aggregate worldwide income. Non-residents pay tax on Ukrainian-sourced income only. Non-resident individuals are not eligible for certain deductions and exemptions available to residents for personal taxation purposes.
iii Types of taxable personal income
The Tax Code recognises both monetary and non-monetary personal income.
The Tax Code provides for the following taxable types of personal income (irrespective of residency): employment income, interest and dividends income, gifts, inheritance, investment income, insurance payments, rental income, fringe benefits, amounts of punitive damages paid and written-off payment obligations to third parties, etc.
The Tax Code specifically excludes certain types of income from the taxable basis of both residents and non-residents.
In addition, certain categories of low-income taxpayers are entitled to reduce their respective incomes by an amount of the ‘social tax benefit’.
The Tax Code prescribes that if so provided by the respective international tax treaties, amount of taxes paid by a tax resident outside Ukraine may be used as credit against the amount of taxes to be paid in Ukraine, provided that the taxpayer submits a written confirmation from the foreign tax authority acknowledging that such foreign taxes have in fact been paid. However, the total amount of such foreign tax credit may not exceed the total amount of the personal income tax (PIT) due in Ukraine.
In 2016, a flat rate of 18 per cent personal income tax was introduced for most types of income for both residents and non-residents.
Passive income, such as dividends, interest and royalties, is generally taxable at the rate of 18 per cent, except for dividends distributed (accrued) by corporations that are subject to corporate income tax at the 5 per cent rate. Notwithstanding, the 18 per cent rate applies if the dividends are distributed (accrued) by collective investment schemes.
Income derived from disposal of real estate is taxed at the rate of either zero per cent or 5 per cent depending on (1) the type of property, (2) the frequency of disposals, and (3) the duration of the seller’s title to such property. However, disposal of real estate made by a non-resident is taxed at the rate of 18 per cent.
Standard rate for disposal of moveable property (such as vehicles) is 5 per cent. A single disposal of a car or a motorcycle within a year is non-taxable. An 18 per cent tax rate applies to the non-resident’s income from a disposal of moveable property in Ukraine.
v Gift and succession taxes
Gifts and inheritance are taxable income and both are subject to the PIT at the rate of zero per cent, 5 per cent or 18 per cent. The exact applicable rate depends on the residency status of the donator or the testator and on the degree of relation between the donator or the testator and the recipient or the heir (varying from zero per cent for spouses and children to 18 per cent for inheritance or gifts received from or by non-residents).
Tax residents shall pay income tax on inheritance and gifts irrespective of the location of the acquired assets
vi Assets tax
Currently, the Tax Code has a consolidated assets tax that consists of land tax, non-land real estate tax and transport tax.
The land tax is payable by individuals holding title to or right of permanent use of land plots in Ukraine, irrespective of their tax residency. Particular land tax rates are determined by the municipal authorities and shall not exceed 12 per cent of the cadastral value of a land plot, depending on the type of land plot and the particular rights of its holder (i.e., either title or right to permanent use). The Tax Code provides for a number of tax exemptions regarding land tax depending, inter alia, on the status of an individual, the type of land plot, its size and the purpose of its use.
Residual and non-residual real estate owned by an individual is subject to a non-land real estate tax. The tax rates are set forth by the municipal authorities but shall not exceed 3 per cent of the minimum wage as of 1 January of the reporting (calendar) year per square metre. At the same time, the Tax Code sets forth certain exemptions for the real estate tax (e.g., the minimum size of a real estate, which is exempt from the real estate tax).
The first 60 square metres (for an apartment), 120 square metres (for a house) or 180 square metres (where an apartment and house are under the same ownership) are exempt from taxation. This exemption applies only once, irrespective of the number of properties in ownership.
If the taxpayer owns an apartment of more than 300 square metres or a house of more than 500 square metres, the amount of tax due increases by 25,000 hryvnas. Owners of vehicles registered in Ukraine, irrespective of their residency, are subject to transport tax in the amount of 25,000 hryvnas per vehicle that is less than five years old and has an average market value exceeding 750 minimum wages. The average market value for each type of vehicle is determined by the Ministry of Economic Development and Trade of Ukraine.
vii Military duty
To provide the Ukrainian armed forces with additional funding in view of the current political situation in Ukraine, the Verkhovna Rada has introduced a military duty. Military duty is levied on Ukrainian-sourced income of non-residents and on the worldwide income of the tax residents of Ukraine at the rate of 1.5 per cent.
viii Issues relating to cross-border structuring
Ukraine has a wide network of the double taxation treaties with approximately 70 countries. However, the double taxation treaties with such jurisdictions as Malta and Luxembourg are still pending ratification. The majority of the double taxation treaties entered into by Ukraine is based on the OECD model convention.
Currently while considering trans-border structuring options Ukrainian private business is focused on such jurisdictions as the Netherlands, Estonia, Hungary, Slovakia, Latvia and the UAE due to the favourable provisions of the respective double taxation treaties between Ukraine and these countries. While Cyprus remains to be one of the most popular and attractive cross-border structuring option for the majority of Ukrainian businessmen in tax planning and private wealth protection and preservation, the interest in structuring through the Netherlands, Estonia, Hungary, Malta, Luxembourg, the UAE and other jurisdictions with favourable tax regimes for holding, financial and operational companies will continue to grow for the observable future.
As a part of the tax reform the transfer pricing rules set in the Tax Code were significantly amended, in particular with regard to the list of transactions that are subject to the transfer pricing regulation (the TP Rules). The TP Rules are based on the OECD Transfer Pricing Guidelines. These regulations require that prices for goods and services in certain transactions shall be set on an arm’s length principle.
Compliments of IPTI – a member of the EACCNY