Mon, Mar 07, 2011 page8

• Real reform needed in real estate

  • By Yang Chung-hsien 楊宗憲
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  President Ma Ying-jeou (馬英九) has reportedly given his approval to the Ministry of Finance’s proposal for a “luxury tax” under which, among other things, owners of non-self-use residential properties that change hands more than once within two years would have to pay a tax of 10 percent of the actual transaction price of the property. This would go up to 15 percent when there is less than one year between transactions.

  I can’t help but feel angry about the Ma administration’s continued unwillingness to confront Taiwan’s distorted taxation system, which is the core problem that makes the real-estate market so unsound.

  As far as dealing with high real-estate prices is concerned, the proposed “luxury tax” is no more than a stopgap measure. The key problem behind the unsound market and soaring real-estate prices is that the tax base is not determined according to market prices.

  The tax base for land value increment tax is the rise in the price of land based on the current value of land as announced once a year by the government.

  The deed tax, house tax and taxes levied on income from property transactions are all based on the assessed current prices of housing.

  Land value tax is based on the announced price of land.

  None of these are market prices.

  The process of setting these prices tends to be divorced from reality and influenced by artificial adjustments. They are called “current prices,” but they are quite far removed from the market prices.

  In addition, the fact that these price announcements are made at fixed intervals results in the strange phenomenon of short-term transactions not being subject to land value increment tax. The costs involved in real-estate speculation are therefore very low, so of course house prices keep going up.

  Also, instead of taking real-estate transaction prices as the tax base, housing is subject to tax levied on income from property transactions.

  It is called “income tax,” but in fact it involves a very high rate of tax based on the assessed current price of housing and the assumption that house sellers “must have” gained income from the deal.

  Is that fair and reasonable?

  In Taiwan, land and buildings are taxed separately, and this also leads indirectly to distortions in the tax system. After all, are land and buildings paid for separately in normal real-estate transactions?

  Instead of finding out the transaction price and imposing a unified tax based on the combined price of land and buildings, the government keeps thinking up various ways of assessing the prices of land and buildings.

  In so doing, it not only fails to levy tax on actual income, but also creates a considerable discrepancy between the way the tax base is determined and the reality of the market.

  The government says that it plans to make the announced price closer to the market price, but why not refer directly to the market price, instead of just trying to get close to it? This strange way of doing things makes one wonder whether the government is really determined to fix the tax system’s core problems.

  Is it really that hard to find out the transaction price?

  The ministry’s draft plan for the luxury tax takes market prices as its tax base, implying that the government knows how to ascertain the transaction price.

  That being the case, why not take the transaction price as the base for land value increment tax, too?

  Or why not abolish land value increment tax altogether and just use tax levied on income from property transactions?

  That ought to eliminate unfairness and distortions in the tax system. Maybe tax departments are worried that taking market prices as the tax base would amount to a tax increase, but that is just a technical question of the relation between the tax base and the tax rate.

  Does the government sincerely want to reform the system?

  Reforms are never easy, but right now the public is eager for the government to reform the real-estate taxation system.

  If the Ma administration just tries to fob off the public with this luxury tax, it will have wasted a great opportunity for reform.

  It may be that in the past insufficient information made it hard to ascertain transaction prices, but in recent years, information about real-estate deals has become more transparent.

  Besides, Article 166-1 of the Civil Code gives the government a full legal basis for obtaining transaction prices.

  There is nothing to stop the government from amending land registration regulations, since no legislative amendment is required. In line with the Civil Code, these regulations could demand that when the sale and transfer of real estate is registered, the sale contract must be submitted to and signed by a notary public or real-estate appraiser.

  Of course the authorities would then instantly be able to ascertain the transaction price. So the government should stop limiting itself to technical questions instead of implementing real reforms.

  Reforms should not be held up by electoral considerations, nor do business groups have to be consulted before they go ahead.

  Reform is painful, it’s true, but if we don’t do it today we will regret it tomorrow. Two decades have passed since Wang Chien-shien quit as deputy minister of finance because he wanted the base for land value increment tax to be changed to the market price.

  If the system had been reformed back then, would people be suffering from property speculation the way they are today?

  Ma has a distinct advantage in that his party has a majority in the legislature and it controls the executive. Let us hope his government will have the guts to carry out real reform of the real-estate taxation system.

  Yang Chung-hsien is an assistant professor in the Department of Real Estate Management at the National Pingtung Institute of Commerce.

  TRANSLATED BY JULIAN CLEGG

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