GENERAL DIRECTORATE OF LAND REGISTRY AND CADASTRE - PowerPoint Presentation

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GENERAL DIRECTORATE OF LAND REGISTRY AND CADASTREProperty Valuation WorkshopIzmir27 February – 3 March 2017

Property Taxation Systems - World Bank Projects Richard Groverrgrover@brookes.ac.ukSlide2

The World Bank and Property Valuation and TaxationThe World Bank has funded 42 land projects in 24 countries in the Europe and Central Asia (ECA) Region since the 1990sGrowing interest in property valuation and taxation, not just in ECA Region but worldwide eg Lebanon, VietnamTypes of World Bank involvement:Technical adviceLoansFocus in this presentation on three countries:SerbiaMoldovaBelarusSlide3

Serbia1st Real Estate Management Project financed by World Bank (2004-12) put in place land registration and cadastre – 2004 only 20% covered registration (land books) – mismatch between RGA records and the land books – project reduced registration time, made registration more comprehensive, built geodetic infrastructure – but little work on valuationWB Technical Advice April 20142nd Real Estate Management Project 2016-21 $44 million

Population: 7.1million; 77,474 square kilometresSlide4

Serbia issuesFiscal deficit 6% Gross Domestic Product - economy moved into recession 2014 - unemployment 17 % Borrowed from International Monetary Fund – set conditions on improving valuation to stabilise the banking systemNeed for improved sources of taxation, especially for municipalities – dependent on inter-governmental fiscal transfers – recurrent property taxes only 0.6% GDPWeaknesses in cadastre – 30% country covered by analogue maps - no buildings registerNeed for improvements in valuation – lack of transparency in market data –

deficiencies in regulation of valuers eg mortgage valuations regulated but court experts do not have to be qualified in valuationProblems with construction permits – rapid urbanisation, influx of refugees and weak town planning system resulted in large numbers of “illegal” constructions Slide5

Property tax issuesMunicipalities responsible for assessment – many very small and lack capacityLack of transparency in assessments for annual property tax and in property transfer taxProperty tax area-based for persons, book value for businesses, 1994 cadastre value for agricultural land and forestryPast dependence on land use charge

– now abolished but replaced by higher annual property taxReliance of municipalities on development fees – unrelated to infrastructure costsIncomplete tax rolls due to unregistered properties – 20–40% properties unregisteredRelatively low collection rates – 85% legal entities, 75% personsSlide6

Objectives of 2nd REMPEstablish a buildings register so that comprehensive tax rolls can be drawn upImprove market transparency and quality of transaction price information through Sales Price Register – includes rentals from leasing – has involved overcoming privacy issues and solving identification of properties Creation of one-stop communication of transactions – notaries enter data in Sales Price Register through on-line system

Mass valuation pilot studies as proof of concept – by law RGA responsible for mass valuationSupport improvements in valuation infrastructure – adoption of internationally-recognised valuation standards and reform of valuer educationSlide7

Sales Price Register Slide8

Sales Price Register: public accessSlide9

Moldova1st Cadastre Project 1999–2004 $18.9 million WB loan – systematic 1st registration to secure property rights and open up property market but no fiscal cadastre – financial return 24%Reform of property tax system 2000-11 – mass valuation using market values – made use of systematic 1st registration – State Enterprise Cadastre responsible for valuationWB Technical Advice December 2015Loan agreement currently under preparation – expected start of project mid 2018 – completion of systematic 1st registration, improvements in cadastre data quality , completion of mass valuation, support valuation infrastructure

Population: 3.5 million; 33,851 square kilometresSlide10

Moldova issuesPoorest country in Europe – mass emigration to Russia and EU of working age populationGovernment in severe financial difficulties due to 2008 recession and bankruptcy of 3 state banks in 2014 through fraudNeed for improved sources of taxation, especially for municipalities – dependent on inter-governmental fiscal transfers – recurrent property taxes only 0.16%

GDP Tax system heavily dependent on sales taxes – VAT and excise duties 50% revenueIncomplete systematic 1st registration – covered urban areas but not all rural areas or delineation of public sector property – issues of data quality in some areasSlide11

Property tax issuesHigh rates of property tax collection so no prospect of increasing yield from better collection rates – 90 – 99% according to type of propertyLittle evidence of property tax evasion as unregistered properties pay – little revenue gain from increasing properties in tax rollsHigh administrative costs of property tax collection due to very low sums paid by each taxpayerWidespread exemptions and discounts for early paymentIncomplete mass valuation – did not cover rural housing, agricultural land or special purpose properties (utilities) – rural housing assessed on historic replacement cost, agricultural land by area

No revaluations of mass valuation – supposed to be every 3 yearsPoor quality of price data due to tax evasion of 18% capital gains taxSlide12

The way aheadGovernment reforming capital gains tax to exempt prime dwellings where resident has lived for 5 yearsProposed WB loan to extend mass valuation to rural housing, agricultural and forestry land, special purpose properties, and public sector propertiesProposed WB loan to finance revaluation of urban housing and business properties – some have risen significantly in price since initial valuation eg housing in Chisinau; others have fallen eg warehouses

Support for valuation infrastructure – updating valuation standards and education programmesSlide13

What Moldova got rightStalled reforms but mass valuation at market prices covered the most valuable properties – business property and urban housingPut in place valuation infrastructure based on internationally-recognised valuation standardsValuation by State Enterprise Cadastre rather than small municipalities which lack capacity - centre staff supported by valuers in each cadastre officeUse of alternative price data than declared prices in mass valuation models due to inaccuracy of declared pricesReform of capital gains tax

before extending mass valuation Slide14

BelarusWB Technical Review November 2016Recurrent property taxes 0.4% GDPPilot studies of mass valuation in Minsk and KobrynTwo taxes: land tax – area-based using cadastral values; buildings tax – book value for legal entities and depreciated value for individualsLegal entities pay 95% of tax yield30% land and buildings unregisteredValuations undertaken by single central bodyNo appeals system but taxation can be contestedPotential for increasing revenue significantly

Population: 9.6 million; 207,600 square kilometresSlide15

RecommendationsReplace land and buildings taxes by unified property taxImplement mass valuation nationally using international standardsInvest in education and training of valuers – ethical standards as well a technical onesSimplify mass valuation models from those used in pilots so that fewer variables are requiredRegular revaluationsIntroduce transition reliefs and targeted exemptions to mitigate impact of higher taxesGreater transparency of system and ability to appeal assessmentsExpected cost of automated valuation $35 million over 6-8 yearsSlide16

Economic and Social Impact A major element of all World Bank projectsEconomic impact: Will the project generate sufficient financial benefits so as to enable the borrower to repay the loan out of these?Improved valuation benefits include:Higher tax revenues from change to value-based taxesGreater stability of banking system through more accurate valuation of collateralPotential for multiple uses of tax valuations eg other taxes, social security entitlement, revaluation of bank collateralGreater property market transparency leading to higher activity

Reduced risk premiums on investments through greater investor/ lender confidence in collateralGreater use of (neutral) property taxes and less use of (distorting) sales, income and profits taxesRelease of “dead” capital tied up in real estate through development of collateral-based loans eg mortgages Slide17

Social impact of improved valuationValue-based property taxes reflect ability to pay – other bases may not Improved horizontal equity amongst taxpayers – those with equal value property pay the same amount in tax – fairer taxesReduced opportunities for tax evasion potential to reduce tax rates and increase social exemptionsPotential for

shifting some of tax burden away from regressive sales taxes and social security contributions on to property taxes (a wealth tax)Greater access to capital markets by small businesses, farmers and households for house purchase or improvementAccurate assessment of losses when property is expropriated