Introducing Value Based Property Taxation in Slovenia Neva ibrik, M. - - PowerPoint PPT Presentation

Introducing Value Based Property Taxation in Slovenia

Neva Žibrik, M. Sc. Ministry of finance Slovenia

Slovenia declared its' independency at 25th of June 1991 and transformed the political system from socialist to social democratic capitalism. Administratively Slovenia has two levels of government: central government and local government (212 municipalities of which 11 are city municipalities). In previous system private ownership was allowed but for some types limited (nationalization at the end of II. World war: agricultural land over 10 ha, building land, business at large scale, etc.)

Slovenia in transition

From the previous system we inherited:

• Complete land book
• Complete land cadastre
• Real estate tax system (both taxes are revenue of

municipalities but collected by TA):

• Property tax
• Charge for the use of building land

In socialist system ownership was neglected and

• discouraged. So databases were not maintained and

updated systematically and there were no records on data about buildings. Tax system was more playing a role of communal duty. The system needed a reform.

In new political system Slovenia carried out some major processes:

• Privatization : Enforced in 1991 law on denationalization (the law

was also the base for privatization of all building land in benefit of holders of the use rights) and new Housing act (enables that in next few years most of the apartments in multi-apartment houses (over 160.000 apartments) in a public ownership were privatized with being bought by their users or tenants under very favorable prices (app. 10 % of the market prices).

• Update the system to protect private property: adopt new Land

Register Act in 1995, Real-Estate Recording Act in 2000 (which established the base for building cadastre) and Law of Property Code in 2002.

• Adopted first Mortgage Bond and Municipal Bond Act in 2005.

Most of this changes based on a results of national projects, supported financially and professionally by the World Bank, International Bank for Reconstruction and Development to Finance, International Monetary Fund and Food and Agriculture Organization of the United Nations:

• (FAO project (1996-1998) for developing a

modern system of agricultural land classification and valuation, and

• two projects of the World bank (ONIX from

1996 to 2000 and Real Estate Registration Modernization Project from 2000 to 2005)

Real estate tax system: Property tax

Annual duty levied on private ownership of buildings and parts of buildings.

• Taxpayer: individual who is the owner or usufructuary of the premises
• Tax object: properties registered in a register at Tax Authority
• Tax base: the value ascertained according to criteria issued by the government

(to set no. of points) and local communities (to set the value of a point)

• Tax rates: for dwellings from 0.10% to 1%, for the premises used for rest and

recreation from 0.20% to 1.50% and for business premises from 0.15% to 1.25% (for not used business premises tax rate is increases by 50%.

• Exemptions:
• Residential buildings of less than 160 square meters
• Buildings used for agricultural purposes;
• Business premises used by the owner or user for business activity
• Cultural or historical monuments
• Temporary exemption for 10 years for newly constructed or renovated

building,

• Tax decreas by 10% for the fourth and every additional family member

Real estate tax system: Charge for the use of building land

Duty on using the building land

• Tax payer: actual user (owner , tenant or user)
• Tax object: builded and unbuilded building land, evidenced in registers of municipalities
• Tax base: for builded land (area of residential or business premises), for unbuilded land

(area of a parcel) – us unbuilded land the law defines only the parcels on which building of residential and business premises is actually possible

• Tax rates: the amount of duty sets every municipality independently by their own criteria

based on pointing system and the value of a point, that can be changed every year

• Exemptions:
• Land and buildings used by army,
• Embassies and international organizations,
• Buildings used for religious purposes,
• Building land, planned for public infrastructure and public buildings
• Developed building land under public infrastructure.
• Municipalities can also grant temporary five year exemption for new residential properties

and partial or full exemption for people with low incomes.

Reasons for the reform of real estate tax system

• Duality of a system for natural persons
• Incomparableness among the systems
• Incomparableness among the level of taxation between the

municipalities

• Arbitrariness of ‘valuation’ in municipalities
• Limitation of the taxation to only certain types of real estate
• The understanding of a system as nontransparent and unfair
• Unconstitutional solutions as determined by Constitutional court
• The most common reason for tax complains (50 % of all tax

complains).

• Relatively low income (0,6 % of GDP, 15,5 % of total tax revenue of

municipalities)

• Obsolescence of both systems according to economic and real

estate market development

Development of new system

The reform started within ONIX project in 1997 (based on municipal registers):

• Proposal for unification of land classification for the valuation purposes

among municipalities

• First analyses of market data and proposal of a system for collecting

market data (data collected at TA through real estate transfer tax from 1997)

• Proposal for the data on real estate to be collected

Actual development of mass appraisal and real estate tax system started within the World Bank supported Real Estate Registration Modernization Project (2000-2005):

• Digitalization of land cadastre
• Establishment of cadastre of buildings and real property register
• Development of mass valuation system
• Proposals for real estate tax system
• Result:
• Real Property Mass Valuation Act, adopted in 2006
• New Real-Estate Recording Act, adopted in 2005
• First proposal on real estate tax act.

Real estate valuation in Slovenia

• Certified Real Estate valuer, Auditing Act: obliged to follow

IVS

• Court valuer, Courts Act: recommended to follow IVS

With Real Property Mass Valuation Act in 2006 valuation service was established at Surveying and mapping authority:

• experts from different field of work (geodets, civil and

agricultural engineers, economists, computer experts etc.) – no expert valuer but obliged to follow IVS and mass valuation methods, obligatory regular training.

Mass valuation system

• Mass valuation act established database for recording market

data (prices, rents).

• Regulation specifies which valuation methods are to be used

according to the market data available:

• Sale comparison approach: for residential properties, shops,
• ffices and all empty land (agricultural, forest, undeveloped

building land etc.).

• Problem with lack of data on detailed planned use of

undeveloped land results in simplified models.

• Combination of sale comparison approach (for evaluating

land) and cost approach (for evaluating buildings): for industrial, agricultural and other building (for the public use).

• Income approach: for special real estates, like buildings and

land for energy (electricity) production, buildings and land for mineral exploitation, ship ports and service stations.

First mass valuation

In January 2010 experimental valuation was completed and approximately 1.2 million notices to property owners of approximately 6.5 million properties were sent out. For about 550,000 properties, owners filed objections, 1/3 on the properties’ values(70% of this on agriculture and forest land, about 10% on houses, 10% on apartments and 10% on other types of properties). Based on these complaints some models were modified or updated. From January 2012 valuation models are approved by the Government. With 2012 Generalized market value (GMV) was annotated to all real estate in real property register (all land and all registered buildings). GMV is considered as the information about real estate and is public. In 2013 first indexation was executed while the market dropped significantly due to the economic crises. Second indexation followed in 2014. The system needs new reassessment (by the law it has to be performed every 4 years).

Enforcement of Real estate tax act in 2014

• In 2009 first realistic attempt of introducing Real estate tax occured. It was

refused in principle by laic and professional public and especially by

• municipalities. Early election interrupted procedure and postponed it for next

four years.

• Next attempt, which ended in constitutional dispute, began in 2013.
• The main goal was to introduce comparable, transparent and controllable

system, which would allow to use tax as an real estate policy instrument at local level (through determining the tax base on market value).

• Due to economic and fiscal crisis the law proposal followed the idea to rise the

revenue for 100 % due to including all real estates in taxation, leaving the tax

• n business real estate at the existing average (0,7 %), raising the tax for

residential properties (twice of average effective tax rate 0,08 %) and redirect half of the revenue to the state budget, leaving to the municipalities same revenue as in a previous system.

• In spite strong and wide opposition Real Property Tax Act was adopted in a

Parliament at the end of 2013 and was introduced with 1. 1. 2014.

Solutions in Real estate tax act

• Tax object: real estate as evidenced in real estate register at 1st of

January

• Tax payer: owner (acquirer) or the actual user (for state an municipal

real estates)

• Tax base: generalized market value GMV)
• Exemptions:
• diplomatic and international institutions
• humanitarian organizations
• religious buildings
• infertile land
• Social corrections:

50 % reduction of tax amount for taxpayers:

• with the right to social benefits
• disabled on wheelchairs.
• Tax rates: Local communities (LC) could change the rates +-50 %
• Tax is assessed by Tax authority

Tax rates

Buildings with belonging land:

• 0,15 % „residential“ housing
• 0,50 % „nonresidential“ housing (empty or in use without an

economic compensation – rent)

• + 0,25 % on basic rate for all housing prop. over 500.000 € 0,75 %

business and industrial buildings

• 0,40 % buildings for energy production
• 0,30 % farm buildings
• 0,50 % other buildings (public, in general use)
• Illegal buildings: basic rate X 3
• Land without buildings:
• 0,15 % agricultural land
• 0,07 % forest land
• 0,75 % business and industrial land
• 0,40 % land for energy production
• 0,50 % other land, except building land for residential use
• 0,15 % building land for residential use

Activities after the law adoption

After the law adoption some preparatory activities were performed:

• Inform (for the third time) the owners about all

the data and the value, attributed to their real estate in real estate register

• Leave some extra time to check and

complement the data in real estate register

• Try to collect some extra data (data on high

value building land, on land under the public engineering infrastructure – public good etc.)

Constitutional dispute initiative

Immediately after the law was adopted, the constitutional dispute was announced. In January and February four proposals for constitutional assessment were submitted to the Constitutional Court of Republic of Slovenia:

• One of opposition parties
• National Council of the Republic of Slovenia with

the Association of local communities

• City Local Community of Koper
• Rural local Community of Rogašovci

Arguments for Constitutional dispute

• 0,5 % rate for „nonresidential“ housing as

disproportionate intervention in owners rights, which is violation of right to private property and right to safe home (rate was marked as confiscational and understood not as policy instrument but punishment

• f the owners with more than one residential

property);

• Lower tax rates for power plants and agricultural land

and unreasonable higher rates for business properties;

• Unreasonable high tax rates for illegal buildings

which in case of business property can result in an nonproportionate burden;

Constitutional court decision:

• n Real estate Property act
• 1. Real Property Tax Act tax is to be abolished due to unconstitutional provisions for major

solutions:

• Article 5 is inconsistent with the Article 147 of Constitution due to setting the tax base
• n general market value, which is determined by unconstitutional solutions in the Real

Property Mass Valuation Act;

• first, second, third and fourth indent of point 1 of Article 6 (which sets different rates

for residential and nonresidential housing and for business real estates and energy plants) is inconsistent with the Article 14 of Constitution, because it differentiate real estates by unfounded criteria;

• Article 14, which arrange the appeal procedure towards the tax base, is inconsistent

with the Article 25 of Constitution, because it does not provide the possibility to complaint towards all elements of valuation;

• Article 9 and fifth paragraph of Article 6, which arrange the division of the tax revenue

between the state and LC in the ratio 50:50, and sets the possibility that LC can change the rates +-50 %, is inconsistent with the Article 140 and 142 of Constitution, because it does not provide enough authority to LC to raise enough income to cover their constitutional rights and legal obligations;

• thirds paragraph of Article 25 and third paragraph of Article 26, which arrange the

provisional solutions for financing LC in transitional period of three years, is inconsistent with the Article 138, 140 and 142 of Constitution, because it not allow LC to influence the income.

Constitutional court decision:

• n Real Property Mass Valuation Act
• 2. Some articles of Real Property Mass Valuation Act

are inconsistent with constitution when they concern mass valuation for tax purposes:

• Article 7, first paragraph of Article 11, Article 8 and

forth paragraph of Article 15, which determine valuation models and valuation methods, are inconsistent with the Article 147 of Constitution, because they don’t provide sufficient legal certainty, while allow essential elements of the system to be determined by the sub laws.

• There is a limited possibility for the owner to argue

and influence the value.

Dilemmas

Although only some articles of the both laws were disputed on the Constitutional Court, the Court decided to abolish the whole Real Property Tax Act and seriously intervene Real Property Mass Valuation Act, when used for tax purposes. Decision opens some dilemmas about:

• the way of using the „constitutive“ presumptive tax

base in connection to possibility of complaining on tax base (how the GMV can be opposed not to compromise equity),

• how to make new real estate tax more transparent

and comparable but yet leave enough flexibility to municipalities.

Present activities

New government, started the mandated at the end of 2014, set as one of their primary projects to reintroduce the real property tax based on following directions:

• new system should modernize the taxation of real

estate;

• it should be exclusive income of municipalities
• include in taxation all types of real estate,
• the total income from the real estates that are presently

included in taxation should remain approximately the same;

• new system should resolve unconstitutional solutions;
• new system should entirely base on public data.
• The goal is to introduce real property tax with 1. of

January of 2016 or 2017 !?

Where are we now?

At the very beginning:

• discus again the proper tax base (value, area, simplified

administrative methods etc.),

• discus again the quality of the models, data and mass

valuation in general,

• discus again the possible solution for the problems (with

data) that need years to be solved systematically but were satisfactory solved with smart simplifications for the abolished tax,

• fight again for encouraging the cooperation among all

involved institutions,

• discus again the solutions for set the tax payer,
• discus the exemptions (pressure for extending the list),
• fight with LC which would like to keep the present system

…

Lessons to be learned

• The development and introduction of a mass valuation system is a long term

process (demands close cooperation of all involved sectors and especially municipalities);

• Development of real estate evidences and mass valuation system must be

considered as state infrastructural project – right decision to develop a multipurpose system;

• Cost for development must be understood in relative terms: in Slovenia 14

million euros, which is 7 % of yearly revenue from PT, but many other benefits: municipalities, statistics, social welfare, expropriation for public purposes, private use (valuers, mortgage system etc.,);

• Slovenia developed and introduced modern, with international

recommendations, standards and good practice consistent system of mass valuation: high quality mass valuation is not the guarantee for successful introduction of real estate tax;

• Introduction of mass valuation system (for tax purposes) and real estate tax is

highly political subject and demands strong support of governmental coalition and consensus with municipalities;

• Important:
• strong involvement of municipalities (in data providing, valuation process, tax

solutions)

• raising the tax burden must be gradual
• extensive PR needed