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International Real Estate


By Tax-News.com Editorial
January 15, 2013


There has been no shortage of events in the area of real estate taxation across the world since our last news round-up on this subject, and, as before, two distinct trends continue: while Western governments are turning to property taxes to boost their coffers, certain Asian governments are using them to apply the brakes to surging property markets.

Europe

Predictably, given the ongoing debt crisis and governments’ need to rake in more cash, property taxes are on the rise in Europe.

Italy

In Italy, the local property tax, IMU, which had been scrapped under Silvio Berlusconi’s administration, has been reintroduced to much consternation from property owners and those politicians opposed to Mario Monti’s government. The tax has in fact been providing a major part of the increased revenue in the Monti government’s "Save Italy" budget, which was approved at the end of 2011 and is designed to enable the country to reach fiscal balance by the end of 2013.

The tax is applied (with local variations and an allowance for family dependants) at a standard rate of 0.40% to first residences, with all other residences being subject to a rate of 0.76%. The first payments of IMU in June and September last year were said to have reached expectations, and the final payment which was due on December 17, 2012, is expected to have also lived up to revenue expectations.

Nevertheless, there have been continual rumblings against IMU as public attention has been drawn to the extent of local tax increases. Silvio Berlusconi had already, last year, confirmed that the tax would be repealed on first residences if his center-right coalition was returned to power in a parliamentary election.

Since the announcement of the election, he has refined that position by specifying that only that part of the tax applying to first residences would be abolished, at an estimated cost of around EUR4bn (USD5.2bn). To compensate for the lost revenue, a proposal is being studied to increase excise duties on alcohol and tobacco products, and on gaming.

In addition, Berlusconi has accused Pier Luigi Bersani, General Secretary of the Democratic Party, newly-elected leader of the Italian center-left and front-runner to win the election, of looking to replace IMU by means of a wealth tax. That possibility had caused a political controversy when it appeared, mistakenly, to have been raised by Monti in November last year.

In fact, as long as the additional funds were allocated to reduce the incidence of IMU on first residences, Bersani has previously indicated that he would favor a tax imposed on the value of real estate held by individuals above a threshold of EUR1m, adding that he would be willing to negotiate on where that threshold should be. He has stressed that he is not advocating a general wealth tax.

Having put himself forward in the election, Monti himself has also said that IMU should be restructured and modified. According to his present thoughts, the way forward would be firstly to act in the new parliament to make further reductions to government spending before providing spare funds for tax cuts.

Ireland

The long anticipated details of Ireland’s new property tax regime were finally unveiled by Finance Minister Michael Noonan in the 2012 Budget in December. Ireland is committed under the terms of its European Union (EU)/International Monetary Fund (IMF) bailout to the implementation of a comprehensive property tax regime. The government introduced an interim household charge of EUR100 (USD131) in January this year, causing immediate controversy which led to protest marches and calls for a boycott from members of parliament. Noonan will however press on with the scheme, announcing that collection of a Local Property Tax (LPT) will commence on July 1, 2013.

The LPT will be charged at 0.18% of the market value of properties worth up to EUR1m, and at 0.25% on any excess value over EUR1m. The 0.18% rate is fixed for the lifetime of the current government, but a "local decision factor", allowing local authorities to vary the rate by up to 15%, will apply from 2015. The household charge will cease to operate with effect from January 1, 2013, and a half-year LPT will be payable next year. The Finance Department anticipates a EUR250m revenue boost from the measure in 2013, with a full year figure of EUR500m. The levy will be administered by the Revenue Commissioners.

The levy will not be universal in its application, however. Noonan said in his Budget speech that the residential market is showing signs of increased activity, and, in order to maintain momentum, he will provide an exemption from the LPT to the end of 2016 for any new or previously unoccupied homes bought in that period. The exemption will also apply to purchases of any homes in 2013 by first time buyers and to residences in unfinished estates. Further, any property purchased between now and the end of 2013 will be relieved from capital gains tax if held for at least seven years.

Noonan defended the levy in his speech, and said of the LPT that it is "fair and progressive as all property owners make a contribution but those who own the most valuable properties will pay the most." The government will nonetheless take great care to ensure that the measure is diligently implemented, he said. Noonan stressed that the Revenue Commissioners will strictly enforce the LPT and collect any unpaid household charge.

Critics of the proposals nevertheless contend that the tax as designed is unfair on those owning property in certain urban areas, especially Dublin, where property tends to be valued higher.

France

While his predecessor, Nicolas Sarkozy, was forced to dump a controversial proposal to introduce a tax on second homes, French President Francois Hollande has resurrected the idea of a new tax on unoccupied dwellings as part of his wider agenda of “fiscal justice.”

The government aims to impose an annual dwelling tax (taxe d’habitation) surcharge or "super tax" on the owners of under-occupied property located in designated "tense zones," areas of acute housing shortage, including large cities such as Paris, Toulouse, and Lyon.

Intended to target the secondary residences of France’s wealthiest, the super tax would be imposed at a rate of 5% of the rental value of the property in addition to the normal local taxes.

Also, as part of the 2012 year-end supplementary finance bill, approved by the National Assembly towards the end of December, surtaxes will be levied on large capital gains derived from the sale of real estate. The bill provides for a 2% surtax to be levied on capital gains of between EUR50,000 and EUR100,000, a 3% surtax to be imposed on capital gains of between EUR100,000 and EUR150,000, a 4% surtax on gains of between EUR150,000 and EUR200,000, a 5% surtax on gains of between EUR200,000 and EUR250,000, and a 6% surtax on gains in excess of EUR250,000.The proposed taxes are expected to yield in the region of EUR300m for the state. Originally, it was envisaged that the surtax would include gains from the sale of a primary residence, but this was eventually dropped from the version of the bill approved by the Assembly.

Denouncing the government’s latest plans to tax the rich in a bid for social justice, National Assembly Finance Committee President and Union for a Popular Movement party member Gilles Carrez insisted that the measures are merely a new attack on the wealth of French citizens, and a further blow to the property market and to the tourism economy.

UK

Although it has introduced higher rates of stamp duty on high-end property purchases, the UK government has so far resisted calls from junior coalition partner the Liberal Democrats for a so-called “mansion tax” to help close the deficit.

At the Conservative Party annual conference in October, Prime Minister David Cameron revealed in a television interview that "further action to ensure rich people pay their fair share" will be unveiled before the next general election in 2015. However, he confirmed that this would not involve an annual levy on high value property, a favoured policy of the Conservatives' coalition partners, the Liberal Democrats. "That is not going to happen," he remarked when questioned on the subject.

The Lib Dems have long campaigned for a 1% levy on property worth at least GBP2m (USD3.2m). But Chancellor George Osborne thinks that a 'mansion tax' would in reality hit many people with relatively modest incomes because of the rapid appreciation in property prices over the last few decades, especially in places like London.

"I don't think the mansion tax is the right idea because I tell you before the election it'll be sold to you as a mansion tax then after the election a lot of the people in Britain are going to wake up and find their more modest homes have been reclassified as a mansion," he said.

Besides, the government has already introduced a form of 'mansion tax' in the shape of a new Stamp Duty Land Tax (SDLT) rate of 7% for residential properties over GBP2m. Furthermore, SDLT on residential properties over GBP2m bought through a company structure was raised to 15% in the 2012 Budget, and the government has proposed an annual levy on those GBP2m residential properties already purchased in such a way. The government therefore considers that additional property taxes are unnecessary.

Osborne also ruled out the idea of an annual tax on wealth, arguing that such taxes had been tried in other countries, only for enterprise and investment to be driven abroad.

Like Cameron however, Osborne was clear that "the rich will have to make a contribution to closing the budget deficit,” but without going into further detail.

Asia

Governments in the Far East have, however, been raising property taxes for entirely different reasons.

Hong Kong

Hong Kong has gazetted legislation that will impose Buyer's Stamp Duty (BSD) on residential properties acquired by non-Hong Kong permanent residents. The Stamp Duty (Amendment) Bill 2012 was due to be tabled at the Legislative Council on January 9, 2013. Its provisions will be applicable to all residential properties acquired on or after October 27, 2012.

Under the reforms, the Buyer's Stamp Duty will be charged at a flat rate of 15% for all residential properties. It will be levied on top of the existing stamp duty and the Special Stamp Duty, where applicable, on any such property acquired by any person or entity, except a Hong Kong permanent resident.

The legislation also extends the Special Stamp Duty's (SSD) coverage period and adjusts its rates. The duty will have three levels of regressive rates for different holding periods. It will apply at 20% of the amount or value of the consideration if the residential property has been held for six months or less; 15% for properties held for between six and 12 months; and at 10% for those held for more than 12 but less than 36 months.

In his reply to a question in the Legislative Council last November, Secretary for Transport and Housing Anthony Cheung said that the SSD and introduction of the BSD should curb speculation amidst the tight supply and high demand in Hong Kong’s residential property market.

The BSD is not applicable to Hong Kong permanent residents, but other buyers, including local and non-local companies, are required to pay the additional duty of 15% on top of the existing stamp duty.

Cheung added that the measures should help reduce the risk of a property bubble, and maintain the stability of the macro-economy and the financial system, which are of vital importance to the overall business environment.

“In the past few months, we have been taking heed of different views of the community on the property market, including those from experts, academics, think tanks and the trade,” he continued. “In formulating the proposals, we have also fully taken into account the general calls from the public for further measures to... ensure that housing demand from Hong Kong permanent resident-buyers be accorded priority.”

Singapore

Singapore, another city where space for new homes is at a premium, is taking similar steps to deter speculation in its property market.

With effect from January 12, 2013, Singapore’s government has imposed a comprehensive package of measures to cool the residential property market, including, for the first time, the introduction of a Seller’s Stamp Duty (SSD) on industrial properties to discourage speculative activity in the industrial market.

The government has already implemented several rounds of measures to cool demand and expand supply, so as to moderate the increase in housing prices. For example, in December 2011, in addition to the standard buyer’s stamp duty of between 1% and 3%, it placed an Additional Buyer’s Stamp Duty (ABSD) at a rate of 10% on the purchase price or market value of residential property purchased by foreigners and non-individuals.

Permanent residents owning one and buying a second or subsequent residential property in Singapore pay an ABSD of 3%; and Singaporeans owning two and buying a third or subsequent residential property also pay a similar rate of duty.

However, while the government’s measures have dampened speculative buying, the demand for residential property remains firm and prices have continued to rise, reflecting the very low interest rate environment and continued income growth in Singapore.

Those factors, it was said, supported a record level of housing transactions last year, particularly from investors. Housing prices have also shown signs of reaccelerating in recent months, in both the private residential and Housing and Development Board resale apartment markets. It is feared that price increases, if not checked, will run further ahead of economic fundamentals and raise the risk of a major, de-stabilizing correction later on.

The government has therefore decided to implement a further set of measures to cool the private and public housing markets. These measures are calibrated to be tighter on property ownership for investment, as well as on foreign buyers. To discourage over-borrowing, financing conditions for housing have also been tightened.

Deputy Prime Minister and Minister for Finance Tharman Shanmugaratnam said: “The reality we face is that interest rates are extraordinarily low, globally and in Singapore, and continue to add fuel to our property market. We have to take this further round of measures now, to check recent market trends and avoid a more serious correction in prices further down the road.”

Minister for National Development Khaw Boon Wan added that “a large supply of public and private housing – up to 200,000 units in total – will be completed in the coming years. Coupled with the new measures, we will be better placed to ensure that housing remains affordable to Singaporeans.”

Within the new measures, ABSD rates will be raised across the board, with the rate on all purchases by foreigners and non-individuals being hiked to 15%. Permanent residents will now pay an ABSD of 5% on their first property and 10% if buying a second or subsequent residential property in Singapore, while a 7% ABSD will apply to Singaporeans when buying a second property and 10% when buying a third or subsequent residential property.

Furthermore, prices of industrial properties have doubled over the last three years, outpacing the increase in rentals, due to an increase in speculation. In 2011 and the first eleven months of 2012, about 15% and 18% respectively of all transactions of multiple-user factory space were resale transactions carried out within three years of purchase, significantly higher than the average of about 10% from 2006 to 2010.

The government is therefore introducing SSD on industrial properties and land bought and sold within three years of the date of purchase. From January 12, SSD will be at 15% if the property is held for one year or less from the date of purchase; at 10% if the property is sold in the second year of purchase; and at 5% if the property is held for more than two years and up to three years from the date of purchase.

China

News that China’s Chongqing Municipal Government’s Land Bureau has increased the threshold for the city’s property tax by over 5%, with effect from January 1, 2013 may sound insignificant, but this is part of a much wider property experiment by the Chinese government.

The Chinese government approved a property tax pilot scheme in 2011, to be imposed, initially, on luxury residential properties in Shanghai and Chongqing. It is seen as part of the government's effort to try to bring under control the rapid increases that have been seen in the country's real estate prices.

From January 1, 2012, the property value threshold for the tax in Chongqing was RMB12,152 (USD1,950) per square metre, but that has, a year later, been increased to RMB12,779. That remains about twice the average residential property price level in the city over the past two years.

Chongqing's tax, therefore, only targets luxury properties, levying a tax rate of between 0.5% and 1.2%, while Shanghai’s property tax is targeted at all purchasers of their second or more properties, imposed at a rate of 0.4% to 0.6% of the property price.

It is still expected that the Chinese government will approve an increasing role for property taxation this year. However, given the fact that it only applies to a small percentage of the residential property market, the government appears to be continuing its study of the effect of the two property tax pilots before deciding on the appropriate structure to be rolled out in other cities.

Conclusion

Despite the fact that property markets in Europe remain depressed, governments there are continuing to view real estate as an easy way to generate much-needed additional revenue. And while governments in Asia are grappling with a different set of economic circumstances, real estate taxes are also on the up in order to help prevent a much feared property bubble. While it is claimed that many of these measures are temporary, as the saying goes there are few things as permanent as a temporary tax, so only time will tell if these taxes are effective in achieving their aims.

 

Tags: tax | property tax | Singapore | Hong Kong | stamp duty | Finance | individuals | Ireland | speculation | Italy | investment | China | France | environment | interest | legislation | budget | European Union (EU) | trade | International Monetary Fund (IMF) | business

 

 

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