Member News

Update on Property Tax Issues: January 2018

The EACC, in partnership with the International Property Tax Institute (IPTI), wants to keep members up to date with the latest developments in property taxes both in the USA and Europe.

IPTI has put together a selection of brief reports from articles contained in IPTI Xtracts which can be found on its website (www.ipti.org).

As far as Europe is concerned, this month’s report includes articles on Germany, Greece and parts of the United Kingdom. There is a separate IPTI report on the United States, with a focus on New York.

 

Germany’s convoluted property tax could be illegal

Properties are valued differently in the east than in the west. The country’s highest court is asking whether this is unconstitutional – a decision that will impact 35 million pieces of real estate, billions in state revenues and hundreds of jobs.

It’s been almost 30 years since the wall came down, but Berlin is still a city divided. The old border between east and west Germany may be almost invisible, and buildings may stand on what was once no man’s land, but there is still one significant way in which the German capital is split: Property tax.

German property tax has been criticized for years because of the bizarre, arbitrary and outdated way in which it is calculated. Property taxes in the former West German states are based on unit values from 1964, whereas taxes in former East German states are based on unit values from 1935. Authorities had the option of updating these values every six years, but in practice this never happened. In Berlin, where east meets west, this means that property taxes are higher in western Berlin than in the former east. You can even live on the same street and actually pay a different tax rate.

Margaretha Sudhof, state secretary for the Berlin’s finance senator, says reform is badly needed, “because in one united territory, we have inconsistent values.” This week, Ms. Sudhof may finally get her wish: The country’s highest court is starting deliberations as to whether the tax infringes on the principle of equality as embedded in Germany’s constitution, also known as the Basic Law. A final ruling is not expected for several months.

The court will begin hearing arguments and consulting experts on Tuesday, before deciding whether the country’s property tax is unconstitutional. A win for Berlin (and for equality) could mean a massive bureaucratic headache for everyone else.

If the court says the system needs reforming, German municipalities have suggested that up to 35 million pieces of real estate will need to be revalued. Sector experts have already said that this ambitious project could take up to 10 years. Officials in Germany’s 600 tax offices have added they would need to double their staff. Reforms “could unleash a bureaucratic and administrative avalanche,” a statement from the national association for real estate agents warned back in 2016, when changes were first proposed.

There have been doubts about the constitutionality of the property tax for years. German municipal authorities have long lobbied for changes, but the German government decided it was a federal matter. Proposed reforms in 2016 ended up in the political wilderness after parties like the Christian Social Union, based in the state of Bavaria, opposed them. Under the outdated system, Munich, the Bavarian capital, has the highest property prices in the country but only ranks around the middle of the country when it comes to property tax.

After years of bickering, the matter has been taken out of politicians’ hands and moved to the Federal Constitutional Court, based in Karlsruhe. And it has a big decision to make. “Politicians have abdicated responsibility on this,” argues Matthias Kollatz-Ahnen, Berlin’s senator for finance. “There should not be any difference between east and west in the future.”

Property tax is one of the most important forms of income for German cities and municipalities, adding up to around €14 billion ($17 billion) in revenue per year and making up between 10 and 15 percent of their annual takings. Every resident in Germany pays about €150 a year – property owners can choose to include the tax in rental fees – but the amount you pay varies wildly based on where you live, since it’s basically at the discretion of each municipality.

Calculating the tax is complicated. It involves three criteria: the (outdated) unit value; a federally-mandated rate based on how the property is used (whether an apartment of a single-family home, for example); and then what is known as a “Hebesatz.” The latter translates literally to “clause for an increase.” It is set by every municipal authority separately and used to make up for the unequal and outdated valuation: On average it adds a whopping 500 percent to the base value, and tends to be higher in the east and lower in the west.

The Constitutional Court will examine the legality of the entire construct, including the Hebesatz, which is re-assessed every year by local authorities depending on their annual budgets. The increase has been criticized because it is applied unequally and arbitrarily – and it just keeps going up.

Given the amounts involved, both in financial and logistical terms, it is no wonder that Germany’s municipalities are nervous about Tuesday’s case.

Should the high court judges find the current property tax unconstitutional, they could put municipalities in a predicament by pushing for quick solutions. This is why local authorities are pushing the German government to move forward on the reforms originally proposed in 2016, which suggest simply reassessing land values, rather than every building. Other associations have made similar recommendations: The main thing everybody seems to want is simplification and a unified system.

“I remain convinced that the state authorities made a good suggestion,” says Edith Sitzmann, finance minister of the state of Baden Württemberg. “Whatever the reforms eventually look like, we need to move on them quickly and under no circumstances should we lose any more time.”

Property owners are looking on warily as well, since updating property valuations will almost certainly mean raising the base rate of their home. Landowner associations have suggested the basic rate could be 30 times higher, in some cases. Of course, local authorities could compensate by cutting the other two criteria that make up the tax – the federally-mandated rate and the individual municipal rates – but there are fears that a cash-strapped municipality may see the tax reform as a way of getting more money.

Mr. Kollatz-Ahnen of Berlin insists this is not the intention: “The reform of property tax must remain revenue-neutral,” he says. “It should be no reason for authorities to expect higher revenue.”

 

Greece: Objective values adjustment project turns into a fiasco

The adjustment of the “objective values” (property rates used for tax purposes) is evolving into a fiasco: Not only is the time remaining for the credible completion of the project running out fast, but several areas in Greece won’t get any proposals from the property surveyors who have undertaken to determine the new zone prices around the country.

According to surveyors’ data, up to yesterday afternoon no more than 100 certified surveyors had applied to take part in the project, while the adjustment of the objective values will require at least 400 to 500 such experts, according to Finance Ministry estimates.

It is possible that there will be multiple applications from surveyors in certain areas, such as in the capital. However, Finance Ministry officials say that no applications are anticipated in some prefectures, such as Florina, Serres and Kozani. It remains unknown how the ministry is going to handle this matter.

The new zone rates are supposed to enable the calculation of new objective values for 2018, retroactively from January 1, on which property taxes including ENFIA will be based, but surveyor representatives describe a procedure that is bordering on parody.

The surveyors argue that a central authority should have already been set up to manage and coordinate the project of determining the objective values, along with safeguarding the quality of assessments.

They say that the entire process is haphazard, adding that the consequences will become obvious once the new objective values come into force at the end of March.

What nobody can deny is that the new taxable rates will further burden working-class neighborhoods in Attica such as Keratsini, Perama, Drapetsona and Ilion, where objective values are seen soaring by up to 50 percent, while in the northern suburbs of Athens the rates are expected to be slashed by 30-40 percent.

 

UK – England and Wales: Government consults on abolition of the “staircase tax”

Business occupiers (and particularly small business owners) welcomed the announcement in the Autumn 2017 Budget that the government is putting an end to the so-called “staircase tax”.

The “staircase tax” acquired its name from the 2015 Supreme Court decision on assessment of business rates in Woolway (VO) v Mazars, which held that a tenant who occupies separate floors in a building is only entitled to treat the floors as part of the same rateable occupation for business rates purposes (known as a hereditament) if it is possible to move between those floors without leaving space that exclusively belongs to the tenant. As a result, where a tenant moves between floors using a common parts staircase or lift, the Mazars test is not met.

If there are two separate hereditaments, the tenant is less likely to be able to claim an allowance for size (quantum relief) to reduce its liability for business rates. Whilst the Mazars decision was not new law, it differed from the practice previously applied by the Valuation Office Agency. That practice was to treat two adjoining floors of a building separated by a floor /ceiling only as a single hereditament where in common occupation.

The government has now taken the next step towards abolishing the “staircase tax” by issuing a consultation which seeks views on how to reinstate the pre-Mazars practice of the VOA. The consultation pre-supposes that the staircase tax will be abolished and seeks views on how that should be implemented. The Department for Communities and Local Government has simultaneously issued a draft Bill (called the Non-Domestic Rating (Property in Common Occupation) Bill) for consideration.

The move is good news for business occupiers and forms part of the government’s Budget pledge to increase the fairness of the business rates system in England. Affected businesses will be able to ask the VOA to recalculate valuations so that bills are based on the previous practice of assessment, backdated to April 2010.

The consultation opened on 29 December 2017 and closes on 23 February 2018.

 

UK – Scotland: Annual tax based on land value proposed by Scottish government

A form of taxation based on land value will affect Scottish landowners, developers, forestry businesses and farmers if implemented.

A Scottish National Party decision to explore the potential for a land value tax could “set alarm bells ringing” among farmers, an opposition MSP has argued in parliamentary questions at Holyrood.

The Scottish Land Commission has been instructed by the government to investigate the tax as part of a wider piece of research on land reform issues.

The taxation would raise public revenue through an annual charge based on the rental value of land, typically levied against the unimproved value of that land, not taking into account any buildings, services or infrastructure.

Shadow rural economy secretary Peter Chapman said the prospect of such a level could be “catastrophic” for farm incomes.

Andre Thin, chairman of the Scottish Land Commission, said: “People usually see land value taxes as a potential replacement for some existing taxes or as a way to incentivise particular land use outcomes in both urban and rural contexts.

“The Land Commission has commissioned initial work to investigate international experience in land value taxes to inform policy discussions in Scotland.  The work will also assess the potential of land value taxation to drive increased economic, social and cultural value from our land.  

“Following completion of this initial report in June 2018, we will be engaging widely with stakeholders to discuss the potential role of land value taxation in Scotland.”

Who will it affect?

Sarah-Jane Laing, executive director of Scottish Land and Estates, which represents landowners, said: “We would like to have seen more consideration given in this project tender to the impact of any form of land value taxation on business and will press for more weight to be given to this during any consideration of land value tax.

“The introduction of land value tax could affect a wide range of land-based businesses across Scotland, not simply ‘estates’ or ‘landowners’. This could have an impact on housing developers and providers, forestry businesses and farmers.

“Rural businesses, which invest heavily across Scotland, are already subject to a very well established and complex tax regime. Taxation must be considered in the round rather than looking at just one tax vehicle.”

‘Further disadvantages for Scotland’

Andrew Wood, partner with property consultant Bidwells, said this plan would increase food production costs and put Scotland at a further disadvantage for doing business and securing investment.

He added: “The key industries of food production and tourism will continue to be areas that suffer as a result of this type of tax policy.

“It will clearly have an impact on farming businesses, but it is highly dependent on how the tax would be structured and applied.”

 

UK – Northern Ireland: Councils have missed out on £75m rates since 2014

Rates worth £75m have slipped through the fingers of the agency responsible for collecting them in Northern Ireland over the last three years, new figures show. The value of domestic and non-domestic rates lost in 2016/17 was more than £20.6m, with a further £28.6m and £25.3m lost in the two previous years.

The figures obtained from Land and Property Services (LPS) by the Ulster Unionist Party also show that the Belfast City Council area alone accounted for a third of the overall debt over the period – more than £23m. Belfast’s 2016/17 losses of over £6.5m, however, show a £3m improvement from the previous year. Derry City and Strabane District Council had the second highest losses of more than £7.5m over the three years.

Its 2016/17 losses of more than £2.2m also represented an improvement from the previous year of over £600,000. UUP finance spokesman Steve Aiken MLA said that while he was disappointed at the scale of the problem, he was pleased the situation is improving. He added: “This lost revenue will be deeply annoying for the vast majority of households and businesses across Northern Ireland who reliably pay their rates in full every year. It must also be remembered that this lost money represents lost services to local and central government.

“This is money that should have been used on improving leisure facilities, updating our town centres and, most importantly, used to reduce the rates burden being felt by local households and small businesses – something which successive finance ministers at Stormont have simply failed to do.”

A Derry City and Strabane Council spokesman welcomed the reduction in rates written off in the district but said it supported the exploration of “any more effective means of collecting” by LPS to “ease the burden on local ratepayers and ensure that local councils can continue to function efficiently to meet the needs of the general public”.

A spokesman for the Department of Finance said LPS would only write off debt under strict guidelines based on best practice by the Northern Ireland Civil Service.

 

Compliments of International Property Tax Institute (IPTI), a member of the EACCNY