Vedomosti (Moscow): "New Tax for Local Residents"
Prime Minister Vladimir Putin has resurrected the idea of a single tax on real estate, which may help municipal governments financially through the financial crisis and reduce prices for high-end housing.
According to Prime TASS news agency, at the end of last week Mr Putin stated that a decision to introduce a local tax on real estate was made at the most recent meeting of the Budget Projections Commission. According to the Prime Minister, the new tax is to replace taxes on property and land, and will substantially increase local governments' tax revenues. Nevertheless, this will occur not because of higher tax rates, but due to rate differentiation. Mr Putin promised that while owners of expensive real estate and large plots of land will pay more, the changes will benefit owners of "modest property".
At present, the tax on land is separate from the tax on buildings located on it, with both taxes going to municipal or regional governments. According to the Guidelines of the Tax Policy, these two taxes will be combined into a single tax based on the property's market value. As Duma Budget Committee member Natalia Burykina recalls that the previous Duma passed the bill introducing the tax on housing in the first reading.
The financial crisis may now prompt the completion of this reform. Originally the single tax was to be introduced no earlier than 2011, says Sergei Belyakov, assistant to the Minister of Economic Development, Elvira Nabiullina.
Mr Putin, however, wants the legal framework for the new tax to be completed by 2010. The Finance Ministry sees the new tax as one of the main sources for replenishing local governments' budgets hit hard by the financial crisis. As Mr Putin said, in the first quarter of this year, local government revenues dropped by 11% compared to the same period of 2008. In 2009, transfers from other budgets accounted for more than 31% of local governments' revenues.
Federal budget spending is likely to be cut; as both Mr Putin and President Medvedev have repeatedly promised, the deficit of 8% of GDP projected for this year will be cut to 3% by 2011. As a Finance Ministry official has said, sources for replenishing local governments' budgets must be found.
"The tax may first be introduced on housing, and later perhaps on industrial real estate as well," says Mr Belyakov.
Because the value of residential real estate has not been assessed, it is impossible to project how much the local budget revenues will increase, says another official from the Ministry of Economic Development. Nevertheless, they will increase, "perhaps insignificantly for poor municipalities, and by several times for rich ones."
The tax will boost municipal governments' revenues, say Sergei Sidnev, the Mayor of Troitsk, a satellite city of Moscow, and Irina Pereverzeva, the former Mayor of Kostroma.
According to lawyer Mikhail Orlov, naturally the tax will not solve all municipal governments' problems, because there is significant variation in the size of their revenues.
A great deal of preparatory work has yet to be done. Before introducing the single tax, it is necessary to create an official registry of real estate and to assess the market value of all properties on it, says Mr Belyakov.
As a Ministry of Economic Development official warns, assessing the market value of real estate will be the main obstacle. And because there is no agreed-upon methodology for assessing market value, such a procedure will be expensive. "While there is at least some basis for evaluating the value of land for the purposes of the official registry, the Technical Inventory Office's assessments of the value of apartments have nothing to do with reality," he complains.
Indeed, the President of the Urban Economics Institute, Nadezhda Kosareva, points out that a large apartment in an old building in downtown Moscow is taxed less that a new flat in Konkovo. According to Ms Kosareva, Mr Putin's idea of differentiated tax rates may be implemented by introducing a tax rebate whose size would depend on where the apartment is located: less for those located in the centre and more for those in outlying neighbourhoods. Mr Sidnev belives that because of the financial crisis, some residents will pay even less than today. The reason? Real estate prices are falling.
The new tax may also affect the prices of real estate. A tax based on market value will stimulate rational behaviour in buying apartments, believes Mr Belyakov. For example, it will make the purchase of apartments as an investment less attractive, which may force their prices down. Apartments in the city centre will become too expensive to maintain, agrees Artyom Tsogoyev, managing partner of the Moscow Real Estate Exchange.
An apartment in the centre may cost $1 million while its assessment by the Technical Inventory Office is up to 1 million roubles, Mr Tsogoyev says. This means that even at current rates (0.5% for apartments costing more than 500,000 roubles) one would have to pay $5,000 instead of 5,000 roubles. "As a result apartments kept as an investment may start being dumped and the rent will grow," he concludes.
Mikhail Gorokhovsky, Vice-President of Best Nedvizhimost, agrees that the new tax will hit the owners of apartments in prestigious neighbourhoods hard: "Unless benefits and discounts are introduced, many people will have to move out.... My apartment, which has a market value of 16 million roubles, has been evaluated at 300,000 roubles by the Technical Inventory Office," he says.
However, as soon as the tax is raised, many will try to evade it, says a tax official. Owning an expensive apartment will become unattractive. Schemes to avoid paying taxes may become more common, warns Mr Orlov. For example, if the property is contributed to a mutual investment fund, it is unclear who must pay the tax.
In this situation inspectors may accuse the apartment owner of enjoying an unreasonable tax benefit, warns Dmitry Kostalgin, a partner with Taxadvisor.
Many owners will challenge the results of the assessment, Mr Tsogoyev and Mr Orlov point out. The concept of "market value" is very vague, says Nikita Belykh, Governor of the Kirov Region.
By Dmitry Sterkin, Filipp Kholmogorov
