Update on Property Tax Issues in Europe: 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. The reports cover Italy, Spain, Germany, Ukraine, Greece, Cyprus, Croatia, United Kingdom, the United States and New York.
Italy: IMF Looks for ‘Modern Real Estate Tax’
International Monetary Fund (IMF) staff, at the conclusion of their 2016 Article IV mission to Italy, suggested that the Government should look for additional revenue from property taxation. The IMF noted that the Government, in its efforts to promote Italian economic growth, has recently been looking to balance medium-term fiscal consolidation with pro-growth tax cuts.
The introduction in 2014 of the EUR80 (USD89) per month income tax deduction and the inclusion of labor costs in the calculation of the regional tax on production in 2015 were followed this year by the elimination of local taxes on primary residences.
The Italian Government is now committed to cutting the corporate income tax rate from 27.5 percent to 24 percent in 2017, and to lowering individual income tax burdens in 2018.
However, the IMF commented that keeping Italy’s fiscal deficit reduction program within the targets set out by the European Commission (EC), while also “creating space to notably lower the still high labor tax wedge, may require difficult political choices … [and] should be supported by policies that give greater priority to less distortive taxation.”
In particular, it recommends that a “modern real estate tax,” together with a broadening of the tax base by rationalizing tax expenditures, “would be a move in the right direction.”
The IMF’s conclusion concurred with recent comments from the European Commission on the removal of property taxation from primary residences. The EC has previously stated that “recent decisions on housing taxation do not appear in line with achieving a more efficient tax structure by shifting the tax burden away from productive factors onto other revenue bases.”
Spain – Government finds tax cheats… using spy in the sky.
The Spanish treasury is clamping down on property owners in the Balearic Islands who haven’t declared building work using aerial photographs. Authorities announced that they had used a light aircraft to fly low over the islands and photograph properties to look out for unregistered extensions and swimming pools that would increase the value of the property. So far in the Balearic Islands alone some 21,652 properties have been discovered to owe taxes including 2,382 swimming pools that had been built without being taken into consideration on the valuation of the property.
Spanish property owners must pay the annual IBI tax to the town hall, a payment that is calculated on the perceived value of the property. Many property owners had in fact updated their homes, adding outbuildings, swimming pools or renovations that would increase the value of their properties and yet had not declared the improvements to the authorities. According to a report in the Mallorcan newspaper Ultima Hora, the average IBI bill had risen by €309 netting the 28 town halls across the islands some €6million.
The Spanish Cadastre (Treasury Department) has put in place a programme to update the property values all over Spain. This is a 4-year project (to be finished in 2017) aimed at improving tax revenue and they have decided to fly over some provinces to find undeclared improvements. If differences appear between the current status and the cadastral information, it initiates an administrative inquiry to regularize the situation, by updating the cadastral value and paying the arrears.
Germany – A new property tax.
The reform of land tax in Germany could gain momentum. Finance ministers propose new legal regulation and, with the exception of Bavaria and Hamburg, had agreed on a model. The goal was stated be a “revenue-neutral” reform. To what extent it will impact on the individual citizen it was too early to say. The land tax is the second most important revenue of the municipalities. According to the Municipal Finance Report 2015, the revenue was 11.3 billion euros in 2014. The tax burden will continue to be determined in three stages: a basic value is first determined; this is then multiplied by the tax rate before the municipalities determine a further multiplier to increase the tax bill. Currently, the tax bills are based on values from 1964; in parts of the country, the values go back to 1935. It is clear that the values used no longer have much to do with reality. Now it is planned to use only the area (size) for the value of land. For buildings, the values are to be determined by a fixed price based on age, type and use.
Ukrainians with “extra” space will receive bills for property tax before the end of this month. The money will be charged for each square meter in excess of the normal (normal is determined by the local authorities). According to the tax code, most will have to pay into the Treasury for apartments that are rented. On the 24th of December last year, MPs introduced changes to the Tax code (law No. 909), according to which the tax is levied not only for residential apartments and houses, but all outbuildings (sheds, garages, cellars, summer kitchen, etc.). Bills will come before the end of next month for 2015, and then next year, Ukrainians will pay according to the new rules. Local councils have the right to determine the interest tax rate (from 0 to 3% of the minimum wage) and the area of the property that is not taxed (60 square meters per apartment, 120 for the house and 180 square meters in total area (houses and apartments).
For example, the city council took the decision for each “extra” square meter to collect 1% of the minimum wage (12,18 hryvnia for 2015). Residents of Kiev, who own two apartments in a total area of 140 square meters will have to pay tax for 80 squares (the norm for apartments in the capital is 60 square metres) – 974 UAH.
At the same time, the city council in Sumy decided for every “extra” square to collect 2% of the minimum wage (24.3 UAH). That is, the owner of two apartments with a total area of 140 square meters in Sumy will have to pay UAH 1948. And the owner of the same estate in Odessa will only pay for 20 square meters (local authority established “norm” for apartments and 120 square meters) to 486 UAH.
Kiev, Lvov, Chernivtsi, Ternopil, Lutsk, Uzhgorod, Cherkasy, Khmelnytsky, Poltava, Kherson, Chernihiv, and Mykolaiv will charge 1% of minimum wage for each meter. Odessa, Dnepropetrovsk, Kharkov, Zaporozhye, and Sumy will charge 2% of minimum wage.
If the apartment is for rent, the preferential rate of taxation for such property will not be used. According to the data published on the website of the fiscal service, the majority of local councils have decided to charge non-residential property (barns, garages, cellars, etc.) 0% of the minimum wage.
According to the law, living areas are:
- Residential house
- The extension to the house
- A room in a communal apartment
- A house in the country
A list of the properties that do not need to pay taxes:
- Property owned by the state or territorial communities.
- Property in the zones of foreign and unconditional resettlement.
- Family-type orphanages.
- Residential properties that belong to orphans, children deprived of parental care, disabled children who are brought up by single parents.
- The building industry, in particular production buildings, workshops, warehouses of industrial enterprises.
- Buildings, structures of agricultural manufacturers intended for use directly in agricultural activities.
- Residential and non-residential property, owned by public organizations of invalids and their enterprises.
In each locality, local governments have the right to expand the list of objects from which tax is not charged. For example, in Kiev, housing owned by the disabled, members of families of heroes of Heavenly Hundred, participants of the ATO, and family members of the killed participants of the ATO (but not more than one object) are exempt. Ternopil City Council made exempt from taxation all religious organizations, except the Orthodox Church of the Moscow Patriarchate.
The tax is levied once a year. In addition, owners of large homes (over 300 square metres for apartments and 500 houses) will have to pay 25,000 hryvnia. For example, the owner of the apartment with an area of 310 square meters in Kiev, before July 1st, must pay 28,000 hryvnias.
The state fiscal service claims that this property tax exists in all countries of Europe. “This tax exists in all the countries of Europe and the majority of countries in the world, and its citizens pay it. In Ukraine it is paid to the local budget (i.e. the budget, where citizens own real estate). In decentralization, local government reform, the local authorities are granted more powers,” said the press service, quoting the head of the tax division of the Department of Taxes and Fees.
Greece – Property rate system reform to be postponed
The change in the way property values are calculated for tax purposes – known as “objective values” – is to be postponed until the second half of next year. The government had promised that objective values would be replaced by a new system that would be based on the market value of properties as of January 2017, when the Single Property Tax (ENFIA) was to be abolished. However, the government’s inability to create an automatic system for the adjustment of the values, combined with the difficulty in creating a new tax that would fetch some 3.5 billion euros per year into state coffers, has forced the government to ask its creditors for more time before it can fulfill that commitment stemming from the bailout agreement.
The plan is for the new system to track the course of market rates through the prices on contracts and allow for the automatic adjustment of values used for tax purposes. In 2015, Alternate Finance Minister Tryfon Alexiadis had announced that the new property tax to replace ENFIA would be based on market prices and not objective values, adding that the government wanted to lighten the burden of small property owners, transferring most of it to larger owners.
Cyprus – Government announces cuts in immovable property tax.The Minister of Finance, Harris Georgiades, said that another important step towards tax reform was made, in announcing what is essentially a tax cut in immovable property taxes for households and businesses.Speaking after the recent Minister’s Council, Georgiades said that EU regulations stipulate that a 19% VAT for sales and purchases of land plots for development will be put in place, something which will generate revenue of €24 million for the government.The Minister’s Council decided to offset this tax increase and ease the tax burden on citizens by reducing the Immovable Property Tax to half per mille from 1 per mille as was originally suggested in a proposal that was sent to the House of Representatives. The Minister’s council has also decided the cancellation of town and community taxes on immovable property.This, said Georgiades, cuts tax revenue from immovable property taxes for the government down from €103 million to €45 million, while the VAT taxes on land plots will generate revenue worth €24 million.
In total, the tax reforms will cost the government 0.2% of its GDP, or €34 million.
A generous discount of 20% for those who pay their immovable property taxes in time will stay in place. In addition, those who owe taxes up to €25 will be exempt from paying their taxes, which means 19% of property owners will pay no taxes.
As an additional tax cut measure, transfer dues will be cut to 50% for all sales of property.
Georgiades specified that the VAT tax in sales of land plots is not in place for sales conducted by physical persons, except in cases of a purely commercial activity.
“If a citizen sells a plot, there is no obligation for VAT, however there is an obligation for VAT if e.g. a land development company conducts such a sale. In any case, the tax cut that we propose, which we refund to the citizens, is double the cost of complying with European regulations”, said Georgiades.
Croatia – Government Working on Tax Reform.
New tax laws could be adopted by the end of the year.
A working group for tax reform has been founded with about twenty members and is made up of experts, tax advisers, representatives of the Croatian Chamber of Economy, Croatian Employers Association and the Finance Ministry.
They are due to prepare an analysis of the current tax system. The comprehensive tax reform should be ready by the summer so that a public debate can start and that the legislation can be submitted to parliament. “There have been many speculations lately, which sends a bad message. We are not even close to specific proposals. The focus will be on the sustainability of the tax system. We do not intend to devote ourselves to separate taxes, but to look at the system as a whole. It needs to be simplified and be more competitive”, said Finance Minister Zdravko Marić, who did not want to reveal the names of members of the working group so they could avoid additional pressure.
In addition to this working group, another team will be formed which will look at the possible changes to the so-called communal utility fee, which is a Croatian version of property taxes. The law has been amended about thirty times, so the Ministry concluded it would be best to prepare a new law. The final version of the law will depend on the political decision whether to introduce property taxes. Prime Minister Orešković reportedly supports such a tax, but since its implementation would take a lot of time, it is possible that in the first phase utility fee law will be changed. Under current law, the fees and numerous exemptions are determined at a local government unit level. However, now the idea is to equalize criteria with a new law.
Ante Žigman, a counsellor at the Croatian National Bank and a member of the tax council, said that tax system reform should be focused on principles of equality and efficiency. “The law must be simple and focused on consumption”, said Žigman, who is not a member of the working group. He added that Croatia should have no more than two VAT rates (now there are three rates – 5, 13 and 25 percent), and he would also reduce the pressure of the income tax on employees whom Croatia needs most, and these are people who pay 40 percent payroll taxes on earnings above 13,200 kuna a month.
The Finance Minister also recently said that there is room for change in that area, either through the elimination of the top income tax rate or through increasing the threshold for the top tax bracket. “I would be very careful with property tax because it is a sensitive social issue”, said Žigman.
United Kingdom – the government has failed to deliver the promised business rates revolution.
Intense competition and a rush for expansion have sent property prices soaring in many parts of the UK. Rents and rates now account for more than a fifth of turnover and high street businesses are struggling with local business rates.
While the recent budget had some good news, it did little to chase the rain away in the short term. Corporation tax cuts and business rates reforms – such as changes to the frequency of revaluations and the use of the consumer price index over the retail price index to measure inflation – don’t kick in until 2020. In the meantime, the introduction of the national living wage, stakeholder pensions and apprenticeship levies will see substantial year on year increases in operating costs. All of this eats into businesses’ margins for investment.
At the general election, the government promised “the most wide-ranging review of national business rates in a generation”. While the budget was welcome in extending business rate relief to more start-up firms and the smallest businesses, it was a huge missed opportunity to bring the local business tax regime into the 21st century.
It avoids the “elephant in the room” of internet sellers not being subject to the same business rates as more traditional models. Local business rates are the most effective means of ensuring a fair and consistent contribution; the VAT change will not deliver the same effect. What many were calling for was a rapid and radical rebalancing of rates as a general business tax – as opposed to a property tax – to spread the burden more proportionately. All earnings from a businesses’ premises need to be taken into account, including online sales.
For the new 2017 rating list, businesses will have to endure a process of up to 34 months to ‘check’ and ‘challenge’ their premises’ rateable value with a detailed evidence-based case. This will result in fewer appeals and less revenue slippage, which will be welcome news to local authorities, which will increasingly rely on business rates income. However, it will come at the cost of a less transparent rates system, with businesses denied the information used to assess their premises’ rateable value and subjected to a prolonged gateway to a refund of overpaid rates.
The government has also announced that it will allow the local government sector in England to keep all of the money it collectively raises through business rates. The intention is to give local authorities a stronger incentive to support economic growth. The big question remaining is how the total pot of business rates collected nationally will be distributed between different local authorities. The government has not yet formally consulted on this question, but it has said two important things. First, the amount of funding that every local authority will get in the first year of the new scheme will be determined by its need for funding (‘funding need’). Second, in subsequent years, every local authority will be able to keep every extra pound of business rates that it collects. However, concern remains over how effective this support will be.
New York City
- Tax Incentives: A very popular tax incentive program (although as much criticized as it had been lauded) known as “421-a” expired in 2015, and its potential renewal is at a stalemate. The 421-a program had been intended to incentivize the creation of affordable housing via tax exemptions for the new construction of residential apartment buildings. The program proved immensely popular and spurred a great deal of high-rise apartment construction, although its detractors argued that it resulted chiefly in luxury housing receiving undeserved tax breaks. Filling the void since the expiration of the program have been various proposals for retooling 421-a to require that more affordable units be created in order for developers to obtain the tax exemption. Complicating the potential renewal of 421-a is the condition that the real estate industry and the construction trades must reach some kind of consensus regarding wage levels for construction industry workers. Although there have been sporadic talks throughout this year, including a proposed bill floated just before last week’s close of the current NYS legislative session, the fate of the 421-a program remains unresolved.
- Tax Fairness: Recently, there has been a renewed push for tax equity between the burdens imposed on coop and condominium units (a significant presence in New York City) and those tax burdens imposed on 1-3 family homes. Legislation enacted thirty-five years ago split the coops/condos and the “private homes” into separate tax classes employing separate criteria, and in the decades since the “private homes” (as they are called here) have become very modestly taxed, while the coop/condo taxes for the most part have risen quite steadily. Resolving the problem is politically and economically fraught, and it remains uncertain just how feasible it is to achieve equity without impacting the municipal fisc.
- Unjust Enrichment: The taxing authorities in New York City (as opposed to the rest of New York State) for many years arguably had very broad—or at a minimum unspecified latitude in the correction of assessment and taxation “errors”—meaning clerical, as contrasted with the intentional creation of a certain tax value subject to dispute via a grievance mechanism. Consequently, the City has at times been accused of being arbitrary, subjective or inconsistent in its resolution of errors of its own making. In Spring 2016, the City proposed a detailed set of rules for error correction. These proposals were met with tremendous criticism for, among other things, the fact that they would enable the City to profit from its own mistakes by making it legal for it to retain improperly collected taxes despite a City error having led to their imposition in the first place. The City went back to the drawing board, and recently a much-revised version of error correction rules was enacted. It is too early to predict how they will work in practice and whether taxpayers will be adequately protected from over-taxation by government error.
Around the U.S.
- Big Box Stores: The proliferation of big-box retail properties throughout the United States in recent decades had in many cases been a tremendous boon to the local economy, generating much-need local employment, sales taxes, property taxes, and even infrastructure improvements paid for privately. The municipalities, for their part, often welcomed these developments with open arms, paving the way with tax and other financial incentives or with assistance with zoning and other development issues. In more recent times, however, the explosive growth in online shopping has eroded the continued viability—and hence the value—of these ubiquitous and massive brick-and-mortar properties. In fact, a number of them have gone completely dark. The big-box retail companies for their part have consequently been very vigorous in their prosecution of tax appeals. The municpalites have been equally vigorous in defense of their tax assessments, understandable given the billions of dollars that the big-box tax base has generated over the years, and upon which certain localities have grown very dependent. Many states and cities have augmented their efforts to combat these appeals beyond the courtroom, by seeking to limit through legislation how big-boxes should be taxed or how they can argue their tax appeals. A recent example from the state of Michigan involves legislation that might preclude still-going-concern big-boxes from arguing that their taxes should be based on the sale prices of big-boxes that have already gone dark.
- Hospital Exemptions: The State of New Jersey revoked the non-profit property tax exemption of the Morristown Medical venter. Litigation ensued, with the hospital seeking to have its exemption restored, and the municipality arguing that the for-profit and non-profit operations of the hospital were quite interwoven. In June 2015, the New Jersey Tax Court ruled that the hospital was not entitled to property tax exemption on virtually of its Morristown property. Later in the year, a settlement was reached in which the hospital’s parent company agreed to pay $15.5 million in back taxes and annual property taxes on a percentage of its property going forward. Since then, several legislative proposals have emerged in New Jersey aimed at the issues surrounding non-profit tax exemptions, and the debate continues. New Jersey is not the only jurisdiction to be revisiting how it treats non-profits for property tax purposes, and this series of events could very well reverberate in the future treatment of non-profits—be they hospitals or otherwise—throughout the U.S.
Compliments of the International Property Tax Institute – A member of the EACC NY