On the Prospective Scenarios for Introducing Tax on Immovable Property
One of the key directions of this country’s budget policy for the years 2011 – 2013 that were outlined in the RF President’s Budget Message published on 29 June 2011 is the necessity to speed up the decision-making process with regard to introducing tax on immovable property in the medium term. In this connection the Head of the State noted that this tax should be introduced depending on the completion of cadastre estimation of capital construction objects in those RF subjects where such an estimation had actually taken place, so that the tax could be levied beginning fr om 20121.
In accordance with the Concept of Interbudgetary Relations and Budgetary Process Organization in RF Subjects and Municipal Formations Until 2013, approved by Regulation No 1123-r issued by the Government of the Russian Federation on 8 August 2009, tax on immovables has been singled out as one of promising sources for generating revenues in the budgets of RF subjects and local budget, the object of taxation being immovable property taken as a single object (a land plot and the immovable property situated thereon).
The idea itself that tax should be levied on property entities owned by physical and legal persons first took shape as early as 1994. A few years later, on 20 July 1997, Federal Law No 110-FZ ‘On Conducting the Experiment Involving Taxation of Immovables in the Cities of Velikiy Novgorod and Tver’ 2. However, the timelines both for implementing the experiment in some cities and for making a conceptual decision at the national level have been changed repeatedly. Some basic steps towards introducing that tax were taken only from 2004 onwards, then the timeline was moved from 2008 to 2010, and then to 2011, and in early 2011 it was moved yet again – to 2013.
The main reason for changing the timelines is the absence of a single cadastre of immovable property (both land plots and the buildings situated thereon), as well as of the owners of such entities. The actual implementation of such a goal would be a complicated and costly affair even for a developed state.
In fact, many countries have had to deal with numerous problems when compiling their cadastres of immovable property; as far as Russia is concerned, we may point out the following specific issues:
1) serious delays in the adoption of relevant laws. Thus, the actual work of compiling a single cadastre of immovable property objects was started only from 1 January 2008 (14 years since the initiative itself had first been put forth), after Federal Law of 24 July 2007, No 221 - FZ, ‘On the State Cadastre of Immovable Property’ was adopted. This Law is designed to regulate the relations arising in connection with the introduction of the state cadastre of immovables, state cadastre registration of immovable property and cadastre-related activity, and the conditions for exchange of information and interaction when keeping a state cadastre register;
2) unresolved issues with regard to the sources of funding for making an inventory of unregistered immovables;
3) lack of clarity as to how to organize proper control over that process.
4) lack of interest on the part of municipal authorities in formalizing the lawful rights of citizens, especially when a given territory becomes a target for commercial development projects.
In different RF subjects the relative prominence of these issues may vary, and so the actual readiness of their cadastres of immovable property may also be different.
In view of the current situation, the authorities are elaborating two scenarios for introducing tax on immovable property, the first one envisaging its simultaneous introduction across the country as soon as a single cadastre of immovable property is completed in all the RF subjects, while the second one envisages that the tax be introduced step by step, alongside the completion of cadastral estimations in each region. On the one hand, if this work is completed throughout the whole country, it will yield more fair estimations with regard to tax rates and potential tax deductions; while on the other the final results for all the regions may not be ready for another few years. Besides, the advantage of a step-by-step introduction of the tax will be the potential for further adjustments in those regions wh ere the cadastres of immovable property will be completed at later stages, because many technical and technological mechanisms will have already been properly developed by the time of introducing the tax in their respective territories.
Thus, as a result of implementing the measures proposed by the authorities it will become possible to depart from the existing system when the tax levied on property of physical persons is calculated on an inventory base, whereas property of legal entities is taxed on the basis of its balance sheet value. Instead, there will be a single tax for physical persons and legal entities alike, based on their property’s cadastre value.
There exist several fundamentally different viewpoints concerning the introduction of a single tax on immovable property. The proponents of the tax (first of all, the bodies of state authority) believe that its introduction will make it possible to optimize the tax load by means of redistributing the tax burden relative to the size of immovable property actually owned by a taxpayer through introducing a progressive system of taxation, i.e. the more expensive a given immovable property entity, the higher the amount of tax to be paid. Similarly to other types of taxation, the authorities are planning to envisage certain tax privileges for the less secure strata of the population3 . Thus, it is intended that the new system will be more compatible with the principle of social justice. However, it is as yet too early to speak of the size of the tax rates and of the possibility of tax deductions (and thus of the justness of the proposed taxation system) while the work of compiling a single cadastre of immovable property is still under way 4.
Another important argument in favor of introducing this tax is the need to increase the share of tax revenues in municipal budgets from local taxes. As calculated by the Gaidar Institute, the share of property taxes (tax on property of physical persons and organizations, land tax) in tax revenues of municipal budgets in 2007 – 2010 did not exceed 18 % (in 2009 the resulting figure was achieved largely due to a declining share of profits tax during the economic crisis, and so the estimation of the share of property taxes should rely on a level of no more than 14 %). At the same time, according to the World Bank’s reports, in some developing countries the taxation of immovable property amounts to between 40 % and 80 % of city budget revenues. At present, tax on immovable property exists in approximately 130 countries, its share varying in the national budgets between 1 and 3 %. However, as the revenues generated by this tax are transferred in full into local budgets, they represents the bulk of municipalities’ revenues. Thus, in some US states its share is as high as 75 %, while in Canada it can reach 80 %5.
Among the other benefits that are also praised by some experts there is an improved tax climate resulting from the introduction of the same principles for levying tax on land plots and building owned by physical persons and legal entities alike6, as well as a decline of the prices of immovable property after the introduction of this tax. Thus, one of the main reasons for the current high value of housing in Moscow is the limited supply of apartments. As noted by experts, a considerable portion of it (about 30 %) is represented by the so-called investment housing, which is purchased at early stages of implementing construction projects and is then sold after its price has grown. As a result, such apartments are not inhabited by their owners, and as practically no taxes are paid on this type of housing, it can be owned for a long period of time, thus limiting supply on the housing market 7.
The opponents of a single tax on immovable property think that the achievement of social justice may be questionable if the quality of administration of this tax is not improved. As soon as the changes concerning the granting of tax privileges to some categories are introduced in tax legislation, certain dishonest taxpayers may begin a hunt for those privileges. As a result, more prosperous individuals will find ways to evade the tax, while the middle class will bear the bulk of the tax burden. Besides, there is a danger that a progressive system of taxation may not be flexible enough to respond to all the possible practical situations. Thus, if the tax is calculated on the basis of its market value, a citizen with a low income who inherits immovable property will be forced to get rid of it because of his or her inability to pay the necessary amount of tax. Furthermore, the opponents of a single tax believe that its introduction will have no noticeable long-term influence on the prices on the immovable property market, because those consumers who will have bought apartments after a drop in prices will then pay back the difference into the budget in the form of tax on immovable property.
In spite of all the evident benefits and shortcomings of the single tax on immovable property, it will nevertheless be introduced – sooner or later, because this decision has already been made and reflected in the main directions of tax policy of the Russian Federation for 2011 and the planning period 2012 and 2013.
A. A. Alayev – Research Fellow, Department of Fiscal Federalism
1http://president.рф/новости/11779 – official website of President of the Russian Federation.
2The tax rate initially introduced in Velikiy Novgorod amounted to 3.5 % of an apartment’s market value. However, very soon the rate was brought down to 0.5 %. As a result, the experiment’s outcome was recognized as successful specifically for Velikiy Novgorod, but the authorities decided to abstain from spreading that practical model across Russia, and the experts recommended that the law-makers should continue the elaboration of the draft of the new chapter ‘Tax on Immovable Property’, to be introduced in the RF Tax Code. In Tver the tax was never introduced. However, the register of immovable property drawn up there helped to improve the efficiency of its utilization and adjust the price for the lease of land plots. One of the main conclusions resulting from the experiment is that the introduction of such a tax must be preceded by all the necessary preparatory procedures.
3http://premier.gov.ru/events/news/15312/ – official website of Chairman of the RF Government.
4http://www.rbc.ru/rbcfreenews/20110518112219.shtml – two scenarios for introducing tax on immovable property.
5http://www.worldbank.org/ – World Bank.
6http://2020strategy.ru/ – Experts’ Groups for upgrading Strategy 2020.
7http://www.itogi.ru/russia/2010/39/156968.html – Politika i ekonomika [Politics and Economics]. No 39 (746).
The idea itself that tax should be levied on property entities owned by physical and legal persons first took shape as early as 1994. A few years later, on 20 July 1997, Federal Law No 110-FZ ‘On Conducting the Experiment Involving Taxation of Immovables in the Cities of Velikiy Novgorod and Tver’ 2. However, the timelines both for implementing the experiment in some cities and for making a conceptual decision at the national level have been changed repeatedly. Some basic steps towards introducing that tax were taken only from 2004 onwards, then the timeline was moved from 2008 to 2010, and then to 2011, and in early 2011 it was moved yet again – to 2013.
The main reason for changing the timelines is the absence of a single cadastre of immovable property (both land plots and the buildings situated thereon), as well as of the owners of such entities. The actual implementation of such a goal would be a complicated and costly affair even for a developed state.
In fact, many countries have had to deal with numerous problems when compiling their cadastres of immovable property; as far as Russia is concerned, we may point out the following specific issues:
1) serious delays in the adoption of relevant laws. Thus, the actual work of compiling a single cadastre of immovable property objects was started only from 1 January 2008 (14 years since the initiative itself had first been put forth), after Federal Law of 24 July 2007, No 221 - FZ, ‘On the State Cadastre of Immovable Property’ was adopted. This Law is designed to regulate the relations arising in connection with the introduction of the state cadastre of immovables, state cadastre registration of immovable property and cadastre-related activity, and the conditions for exchange of information and interaction when keeping a state cadastre register;
2) unresolved issues with regard to the sources of funding for making an inventory of unregistered immovables;
3) lack of clarity as to how to organize proper control over that process.
4) lack of interest on the part of municipal authorities in formalizing the lawful rights of citizens, especially when a given territory becomes a target for commercial development projects.
In different RF subjects the relative prominence of these issues may vary, and so the actual readiness of their cadastres of immovable property may also be different.
In view of the current situation, the authorities are elaborating two scenarios for introducing tax on immovable property, the first one envisaging its simultaneous introduction across the country as soon as a single cadastre of immovable property is completed in all the RF subjects, while the second one envisages that the tax be introduced step by step, alongside the completion of cadastral estimations in each region. On the one hand, if this work is completed throughout the whole country, it will yield more fair estimations with regard to tax rates and potential tax deductions; while on the other the final results for all the regions may not be ready for another few years. Besides, the advantage of a step-by-step introduction of the tax will be the potential for further adjustments in those regions wh ere the cadastres of immovable property will be completed at later stages, because many technical and technological mechanisms will have already been properly developed by the time of introducing the tax in their respective territories.
Thus, as a result of implementing the measures proposed by the authorities it will become possible to depart from the existing system when the tax levied on property of physical persons is calculated on an inventory base, whereas property of legal entities is taxed on the basis of its balance sheet value. Instead, there will be a single tax for physical persons and legal entities alike, based on their property’s cadastre value.
There exist several fundamentally different viewpoints concerning the introduction of a single tax on immovable property. The proponents of the tax (first of all, the bodies of state authority) believe that its introduction will make it possible to optimize the tax load by means of redistributing the tax burden relative to the size of immovable property actually owned by a taxpayer through introducing a progressive system of taxation, i.e. the more expensive a given immovable property entity, the higher the amount of tax to be paid. Similarly to other types of taxation, the authorities are planning to envisage certain tax privileges for the less secure strata of the population3 . Thus, it is intended that the new system will be more compatible with the principle of social justice. However, it is as yet too early to speak of the size of the tax rates and of the possibility of tax deductions (and thus of the justness of the proposed taxation system) while the work of compiling a single cadastre of immovable property is still under way 4.
Another important argument in favor of introducing this tax is the need to increase the share of tax revenues in municipal budgets from local taxes. As calculated by the Gaidar Institute, the share of property taxes (tax on property of physical persons and organizations, land tax) in tax revenues of municipal budgets in 2007 – 2010 did not exceed 18 % (in 2009 the resulting figure was achieved largely due to a declining share of profits tax during the economic crisis, and so the estimation of the share of property taxes should rely on a level of no more than 14 %). At the same time, according to the World Bank’s reports, in some developing countries the taxation of immovable property amounts to between 40 % and 80 % of city budget revenues. At present, tax on immovable property exists in approximately 130 countries, its share varying in the national budgets between 1 and 3 %. However, as the revenues generated by this tax are transferred in full into local budgets, they represents the bulk of municipalities’ revenues. Thus, in some US states its share is as high as 75 %, while in Canada it can reach 80 %5.
Among the other benefits that are also praised by some experts there is an improved tax climate resulting from the introduction of the same principles for levying tax on land plots and building owned by physical persons and legal entities alike6, as well as a decline of the prices of immovable property after the introduction of this tax. Thus, one of the main reasons for the current high value of housing in Moscow is the limited supply of apartments. As noted by experts, a considerable portion of it (about 30 %) is represented by the so-called investment housing, which is purchased at early stages of implementing construction projects and is then sold after its price has grown. As a result, such apartments are not inhabited by their owners, and as practically no taxes are paid on this type of housing, it can be owned for a long period of time, thus limiting supply on the housing market 7.
The opponents of a single tax on immovable property think that the achievement of social justice may be questionable if the quality of administration of this tax is not improved. As soon as the changes concerning the granting of tax privileges to some categories are introduced in tax legislation, certain dishonest taxpayers may begin a hunt for those privileges. As a result, more prosperous individuals will find ways to evade the tax, while the middle class will bear the bulk of the tax burden. Besides, there is a danger that a progressive system of taxation may not be flexible enough to respond to all the possible practical situations. Thus, if the tax is calculated on the basis of its market value, a citizen with a low income who inherits immovable property will be forced to get rid of it because of his or her inability to pay the necessary amount of tax. Furthermore, the opponents of a single tax believe that its introduction will have no noticeable long-term influence on the prices on the immovable property market, because those consumers who will have bought apartments after a drop in prices will then pay back the difference into the budget in the form of tax on immovable property.
In spite of all the evident benefits and shortcomings of the single tax on immovable property, it will nevertheless be introduced – sooner or later, because this decision has already been made and reflected in the main directions of tax policy of the Russian Federation for 2011 and the planning period 2012 and 2013.
A. A. Alayev – Research Fellow, Department of Fiscal Federalism
1http://president.рф/новости/11779 – official website of President of the Russian Federation.
2The tax rate initially introduced in Velikiy Novgorod amounted to 3.5 % of an apartment’s market value. However, very soon the rate was brought down to 0.5 %. As a result, the experiment’s outcome was recognized as successful specifically for Velikiy Novgorod, but the authorities decided to abstain from spreading that practical model across Russia, and the experts recommended that the law-makers should continue the elaboration of the draft of the new chapter ‘Tax on Immovable Property’, to be introduced in the RF Tax Code. In Tver the tax was never introduced. However, the register of immovable property drawn up there helped to improve the efficiency of its utilization and adjust the price for the lease of land plots. One of the main conclusions resulting from the experiment is that the introduction of such a tax must be preceded by all the necessary preparatory procedures.
3http://premier.gov.ru/events/news/15312/ – official website of Chairman of the RF Government.
4http://www.rbc.ru/rbcfreenews/20110518112219.shtml – two scenarios for introducing tax on immovable property.
5http://www.worldbank.org/ – World Bank.
6http://2020strategy.ru/ – Experts’ Groups for upgrading Strategy 2020.
7http://www.itogi.ru/russia/2010/39/156968.html – Politika i ekonomika [Politics and Economics]. No 39 (746).