Real estate is tangible.\u00a0It consists of land, land improvements, buildings, and\u00a0building improvements. It is highly durable, so its services may be consumed\u00a0over a long period. In contrast, real property represents the individual legal\u00a0rights associated with ownership of the tangible real estate. Since all legal\u00a0rights are intangible, real property is intangible.<\/p>\n
<\/p>\n
Services associated with real property include construction and\u00a0renovations. All aspects of this complex set of goods and services need to be\u00a0considered carefully in setting up a VAT.<\/p>\n
In principle, there is no reason to treat durable consumption goods such\u00a0as housing differently than non-durable consumption goods or services.<\/p>\n
In practice, however, the appropriate and equitable treatment of housing\u00a0and housing services remains one of the more difficult areas in VAT. The\u00a0politically most difficult aspect one that, unsurprisingly, as yet no country\u00a0in the world has dared to tackle \u20ac\u201c is the taxation of the imputed consumption\u00a0services provided by owner-occupied housing.<\/p>\n
How is real property treated under VAT?<\/p>\n
OECD lists supply\u00a0of land and buildings and letting of immovable property as standard\u2019\u00a0VAT exemptions.<\/p>\n
However, there are many exceptions to this rule:
– \u00a0Australia taxes supplies of land (except certain farmland), commercial\u00a0property, and new residential property.<\/p>\n
– \u00a0Austria imposes tax on letting (renting or leasing) of private housing.<\/p>\n
– \u00a0Canada taxes both the supply and the leasing of commercial land and\u00a0buildings.<\/p>\n
– \u00a0Finland and Sweden have an optional system for taxing the letting of\u00a0commercial building in certain cases.<\/p>\n
–\u00a0 France has a similar optional provision in some cases (letting land and\u00a0buildings for agricultural use, and certain cases of letting of undeveloped\u00a0immovable property for professional use), although its general\u00a0rule is to tax the letting not only of immovable property but also of\u00a0developed land for professional use.<\/p>\n
– Hungary normally taxes the supply of buildings and land not used for\u00a0housing purposes and taxes non- housing letting of immovable property.<\/p>\n
– \u00a0Ireland, for variety, taxes only long-term letting of commercial property,\u00a0along with the supply of land and buildings.<\/p>\n
– Italy taxes the supply and letting of commercial property at the standard\u00a0rate but only taxes residential housing when let by enterprises (and at\u00a0a favorable rate of 10%).<\/p>\n
–\u00a0\u00a0 Japan taxes only the supply of land.<\/p>\n
– \u00a0\u00a0Korea goes the other way and taxes only the rental and supply of commercial\u00a0buildings.<\/p>\n
– \u00a0Mexico, however, taxes only the letting of commercial buildings.<\/p>\n
– \u00a0The Netherlands does the same, although it will tax the supply of\u00a0immovable property if such taxation is requested by both buyer and\u00a0seller.<\/p>\n
– New Zealand taxes the letting of nonresidential immovable property\u00a0as well as the supply of land and buildings (unless they have been used\u00a0for residential accommodation for five years or more).
– Poland taxes the rental or tenancy of immovable property used for\u00a0commercial purposes.
– Turkey appears to tax all letting but only the sale of commercial buildings.
– The United Kingdom taxes freehold sales of new commercial buildings\u00a0beginning three years from completion date and, as do a number of\u00a0other countries already mentioned, provides an option to tax other\u00a0supplies of commercial buildings.<\/p>\n
When 17 of 29 OECD countries follow another path, one wonders how\u00a0standard the real property exemption really is.<\/p>\n
But, with\u00a0respect to tax issues the devil is in the details. As the preceding list makes\u00a0clear, when it comes to VAT and real property, there are many details.
The dominant VAT treatment of real estate around the world is to exempt\u00a0not only services from owner occupation but also commercial leasing or\u00a0letting of residential property, presumably in order to prevent distorting\u00a0the choice between house ownership and renting. Exemption of residential\u00a0rentals may be justified on distributional grounds as home ownership is\u00a0correlated with income.<\/p>\n
More surprisingly, however, in much of the world\u00a0even most nonresidential property escapes VAT.\u00a0Under the Directive applicable in the European Union, although\u00a0both sales and rentals of real estate are exempt, newly constructed buildings\u00a0as well as improvements are taxable.<\/p>\n
Applying tax to new buildings amounts\u00a0to charging a prepaid VAT on future services (whether use or subsequent\u00a0sale) at the time of purchase the treatment generally applied to durable goods.<\/p>\n
The result of applying this treatment to commercial (as well as\u00a0residential) property is obviously that increases in the value of and hence\u00a0the services provided by such property are not included in the tax base, thus\u00a0violating productive efficiency. In addition, if new buildings\u00a0are taxed but land and old buildings are not, owners of the latter reap windfall\u00a0gains. More complexity arises when, for example, an old\u00a0building on a site is replaced by a new one, since the value of the property\u00a0must then be divided into land value and building value.<\/p>\n
The original exemption of all but new real property in France and other\u00a0EU countries was probably due to the fact that existing property was already\u00a0subject to special taxes such as the registration tax in France. Most countries\u00a0around the world subject land and real property to many taxes other than VAT.<\/p>\n
Property transfers in particular are subject to\u00a0various taxes and charges land transfer taxes, stamp duties, notarial fees, registry charges, in some instances succession and gift taxes. Transfers of\u00a0land and real property are treated quite differently under VAT in different\u00a0countries.<\/p>\n
In Japan, for example, new construction is taxed at the standard VAT rate, while in Canada such construction is taxed at a lower rate.<\/p>\n
In\u00a0Germany it is exempt but subject to an alternative tax and in the United\u00a0Kingdom, while residential construction is zero-rated, commercial buildings\u00a0are taxed at the standard rate.<\/p>\n
Taxes on the transfer of land and real property discourage the development\u00a0and formalization of land markets. The fact that such taxes exist\u00a0often at surprisingly high rates in so many countries around the world\u00a0is presumably attributable primarily to the administrative ease of imposing\u00a0them. The taxable event (the recorded exchange of title) is readily visible,\u00a0even if the true value of the transaction usually is not.<\/p>\n
Nonetheless, countries\u00a0that wish to develop efficient markets would be well advised to consider\u00a0lowering specific taxes on land transfers and perhaps making up revenue\u00a0losses by, for instance, strengthening basic property taxes.<\/p>\n
In contrast to the EU approach, Canada and New Zealand treat both\u00a0the sale and the rental of real estate as taxable under VAT and, in addition\u00a0to owner-occupation, exempt only residential rents and rental values.<\/p>\n
Construction, alteration, and maintenance of all buildings are taxable, as is\u00a0the rental of business accommodation. The sale of existing nonresidential\u00a0buildings is also taxable. This approach has the virtue of keeping the VAT\u00a0chain intact for more transactions.<\/p>\n
When property rights are not\u00a0clearly established, it is difficult to impose a sensible real property tax even\u00a0though the immovable nature of the tax base in principle makes it easier to\u00a0enforce payment. Given the weak fiscal administration in most developing
countries, in practice the only way to tax real property is likely to be some\u00a0form of tax on sales, for\u00a0example, on nonresidential sales. Some consider even this approach to be\u00a0either unworkable or undesirable because of the inadequate financial market and the liquidity problems buyers would face in meeting large up-front\u00a0tax demands.<\/p>\n
Of course, if VAT is applied to (some) property transfers, presumably the other special taxes so often imposed on such transfers should\u00a0be correspondingly reduced; however, we are not aware that this has actually\u00a0been done in many countries. As a minimum, countries should subject the\u00a0value of such intermediation services as real estate commissions to VAT.<\/p>\n","protected":false},"excerpt":{"rendered":"
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