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Property Tax in Property Tax in Transitional Urban Transitional Urban China: an Institutional China: an Institutional Analysis Analysis

B.S. Tang, S.W. Wong, S.C. LiuB.S. Tang, S.W. Wong, S.C. Liu

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““Certainty? In this Certainty? In this world nothing is world nothing is certain but death certain but death and taxes.” and taxes.”

Benjamin Franklin Benjamin Franklin 

(1706-1790)  (1706-1790)  Photo source:. wikipedia

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““China has no income China has no income tax, no tax, no unemployment and unemployment and not a single soldier not a single soldier outside its borders.”outside its borders.”

Zhou En-Lai Zhou En-Lai 

(1898-1976) (1898-1976) Photo source:http://www.spartacus.schoolnet.co.uk/COLDenlai.htm

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Property Taxation in ChinaProperty Taxation in China

An Overview……An Overview……

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Tax Revenue Tax Revenue -2005-2005(Compared with 1999)(Compared with 1999)

Tax on Real Estate (RMB$4,359,770,000)Tax on Real Estate (RMB$4,359,770,000): : increased by increased by 140% 140% (3% of the total revenue) (3% of the total revenue)

Tax on Use of Urban Land (RMB$13,734,440,00)Tax on Use of Urban Land (RMB$13,734,440,00): : increased by increased by 130% 130% ((1%1% of the total revenue) of the total revenue)

Land Value Added Tax (RMB$14,031,400,000)Land Value Added Tax (RMB$14,031,400,000): : increased by increased by 1900%1900% ( (1%1% of the total revenue) of the total revenue)

Tax on Occupancy of Cultivated Land Tax on Occupancy of Cultivated Land (RMB$14,184,900,000)(RMB$14,184,900,000): increased by : increased by 320320% (% (1%1% of total of total revenue) revenue)

Deed Title Tax (RMB$73,514,000,000)Deed Title Tax (RMB$73,514,000,000): : increased by increased by 660% 660% ((5%5% of the total revenue) of the total revenue)

Source: National Bureau of Statistics of China (Various years)Source: National Bureau of Statistics of China (Various years)

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Institutional FeaturesInstitutional Features

12 tax items directly or indirectly related to 12 tax items directly or indirectly related to real propertyreal property

Taxes on four property activities: Taxes on four property activities: development, transaction, holding and leasingdevelopment, transaction, holding and leasing

Most are local taxes managed and Most are local taxes managed and implemented by various local governmental implemented by various local governmental departments / agenciesdepartments / agencies

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Problems and ChallengesProblems and Challenges

Numerous tax items coupled with higher tax rates Numerous tax items coupled with higher tax rates create incentive for non-compliance behaviorscreate incentive for non-compliance behaviors

Shrinking tax bases resulted from over-generous Shrinking tax bases resulted from over-generous exemption policy exemption policy

Limited revenue generation capacity with the growth Limited revenue generation capacity with the growth of economy as tax assessments are based upon non-of economy as tax assessments are based upon non-value means value means

More emphasis on “transaction” rather than on More emphasis on “transaction” rather than on “holding” and “use” of real estate“holding” and “use” of real estate

Inequities in distribution of tax burden due to Inequities in distribution of tax burden due to favorable tax policy for foreigners favorable tax policy for foreigners

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Property Tax ReformProperty Tax Reform

In 2003, the concept of “market value-based In 2003, the concept of “market value-based tax” was introduced in policy document of tax” was introduced in policy document of the Central Government.the Central Government.

Some major directions of tax reform:Some major directions of tax reform:

– Merge and combine tax items Merge and combine tax items – Reduce tax ratesReduce tax rates– Strengthen regulatory framework Strengthen regulatory framework – Implementation of market value-based taxImplementation of market value-based tax– Uniform tax rates for domestic residents and Uniform tax rates for domestic residents and

foreignersforeigners– Borrow western models and experience Borrow western models and experience

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Research Objectives Research Objectives

Existing Literature tends to address what should Existing Literature tends to address what should be a rational institution for China’s property be a rational institution for China’s property taxation. But ignore how these results can be taxation. But ignore how these results can be achieved. achieved.

This study aims at: This study aims at:

– identifying the key institutions that have identifying the key institutions that have impeded implementation of a market value-impeded implementation of a market value-based approach in taxing real propertybased approach in taxing real property

– exploring what are the most critical inputs exploring what are the most critical inputs that enable institutional changes towards that enable institutional changes towards market value-based tax system in China market value-based tax system in China

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Analytical PerspectiveAnalytical Perspective

– Property tax reform experience in Property tax reform experience in

transitional economicstransitional economics

– New Institutional Economics (NIE) New Institutional Economics (NIE)

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International Tax Reform International Tax Reform Experience from Transitional Experience from Transitional Economies (Economies (e.g. e.g. Poland, Estonia, Poland, Estonia, Czech Republic, Slovak RepublicCzech Republic, Slovak Republic)) …….…….

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Opportunities - 1Opportunities - 1

Improving market institutions by:Improving market institutions by:

– Privatization of state propertyPrivatization of state property

– Creation of transferable ownership rightsCreation of transferable ownership rights

– Promotion of productive and efficient use of landPromotion of productive and efficient use of land

– Openness of property market to foreign Openness of property market to foreign investmentinvestment

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Opportunities - 2Opportunities - 2

Property taxation has taken new importance by Property taxation has taken new importance by national government, serving as an instrument to national government, serving as an instrument to solve a multiplicity of economic and political problems solve a multiplicity of economic and political problems in transitional economies. in transitional economies.

Property taxation is highly appealing to local leaders: Property taxation is highly appealing to local leaders:

– Relatively stable local income Relatively stable local income – Hard to evade legally by taxpayersHard to evade legally by taxpayers– Support local autonomySupport local autonomy– Correlate with benefits of taxpayersCorrelate with benefits of taxpayers

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Constraints/Problems -1Constraints/Problems -1

Complexity in taxing land and buildings due Complexity in taxing land and buildings due to historical treatment of land and property to historical treatment of land and property as separate entitiesas separate entities

Fragmented database of land and buildings Fragmented database of land and buildings

Registered property prices are not true Registered property prices are not true market values market values

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Constraints/Problems -2Constraints/Problems -2

Tax administration are still under central control.Tax administration are still under central control. It is difficult to justify the costs required for the It is difficult to justify the costs required for the

development of ad valorem administrative system.development of ad valorem administrative system.

Assignment of valuation and collection functions is Assignment of valuation and collection functions is politically sensitive among competing government politically sensitive among competing government departments and agencies. departments and agencies.

Value-based tax is less popular than non-value-based Value-based tax is less popular than non-value-based tax which is usually levied on nominal basis. tax which is usually levied on nominal basis.

The taxpaying public is unprepared to pay value-The taxpaying public is unprepared to pay value-based tax.based tax.

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New Institutional New Institutional Economics …..Economics …..

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Why institutional analysis ?Why institutional analysis ?

Institutions are about ‘Rules of the game’ Institutions are about ‘Rules of the game’

Formal and informal rules, norms and practices that Formal and informal rules, norms and practices that influence the perception, opportunity and value of influence the perception, opportunity and value of individualsindividuals

Rational Choice Rational Choice

Institutions provide the systems of incentives and Institutions provide the systems of incentives and constraints which frame their behaviors constraints which frame their behaviors

Govern Govern competitivecompetitive and and cooperativecooperative relationships relationships between individuals, organizations, and state in the between individuals, organizations, and state in the process of economic and social transactionsprocess of economic and social transactions

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Analytical FrameworkAnalytical Framework

Value-based property taxation is viewed much Value-based property taxation is viewed much more than a simple task of property value more than a simple task of property value assessment.assessment.

It should be conceived of as comprising a series It should be conceived of as comprising a series of complementary institutional systems:of complementary institutional systems:

– Land and Property databaseLand and Property database– Mass Property Appraisal Mass Property Appraisal – Collection and Enforcement Collection and Enforcement – Dispute Resolution Dispute Resolution

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Case Study: Case Study:

Guangzhou, ChinaGuangzhou, China

2020

Guangzhou’s Location

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Guangzhou Property Guangzhou Property MarketMarket

0

1000

2000

3000

4000

5000

6000

7000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Year

1000 sq.m.

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Housing transaction in primary market(1000 sq.m.)

Housing transaction in secondary market(1000 sq.m.)

Ratio (secondary market vs. total)

Data source: Tan et al., 2005.

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Guangzhou’s Property Guangzhou’s Property

TaxationTaxation Like many Chinese cities, Guangzhou Like many Chinese cities, Guangzhou

City’s property taxation is confronted City’s property taxation is confronted with: with:

– Numerous tax items coupled with higher tax Numerous tax items coupled with higher tax rates and narrow tax bases rates and narrow tax bases

– Limited revenue generation capacity with Limited revenue generation capacity with the growth of economy the growth of economy

– Put much emphasis on “transaction” but Put much emphasis on “transaction” but less emphasis on “holding” and “use”less emphasis on “holding” and “use”

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Taxing Property Taxing Property

TransactionsTransactions Deed Title TaxDeed Title Tax (1.5%)(1.5%)

Stamp TaxStamp Tax (0.05%)(0.05%)

Land Value Added TaxLand Value Added Tax (30%-50% on valued added)(30%-50% on valued added)

Personal Income taxPersonal Income tax (20% on net income from property (20% on net income from property sale)sale)

Business TaxBusiness Tax (5%-5.5%)(5%-5.5%)

City Maintenance & Construction TaxCity Maintenance & Construction Tax (7% on business (7% on business tax)tax)

Education TaxEducation Tax (3% on business tax)(3% on business tax) River Banking-Up Fee River Banking-Up Fee (0.13% on business tax)(0.13% on business tax)

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Why emphasis on Why emphasis on transactions?transactions?

The existing non-valued based real estate tax The existing non-valued based real estate tax for property holding has very limited revenue for property holding has very limited revenue generation capacity with the appreciation of generation capacity with the appreciation of property market.property market.

Taxes on transaction are difficult to be Taxes on transaction are difficult to be evaded as the Authorities will refuse to issue evaded as the Authorities will refuse to issue property titles certificates if taxes are not property titles certificates if taxes are not paid.paid.

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Why non-value based taxes Why non-value based taxes for property holding for property holding persist?persist?

Inefficient gaps in the following institutions:Inefficient gaps in the following institutions:

– Land Registry Land Registry – Property Appraisal systems Property Appraisal systems – Public Welfare SystemPublic Welfare System– Court System Court System

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Land Registry: Land Registry: ConstraintsConstraints Low geographical coverage Low geographical coverage Fragmented data about land and buildingsFragmented data about land and buildings Ambiguous title problems Ambiguous title problems Limited access to the public Limited access to the public Registered property prices do not reflect true Registered property prices do not reflect true

market value market value Lack of rental transaction data as many Lack of rental transaction data as many

renting activities go “underground”renting activities go “underground”

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Property Appraisal: Property Appraisal:

Constraints Constraints Separation of qualification systems for land appraisers Separation of qualification systems for land appraisers

and property appraisersand property appraisers

Independence of professional practice is questionable Independence of professional practice is questionable due to:due to:

– Heavy reliance on data from government departmentsHeavy reliance on data from government departments– Government interventions through Grading System Government interventions through Grading System

Low level of privatization of property appraisal services Low level of privatization of property appraisal services

Low credibility of the profession to the publicLow credibility of the profession to the public

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Public Welfare: Public Welfare: ConstraintsConstraints

No. of taxpayers will increase dramatically with the No. of taxpayers will increase dramatically with the introduction Value-based property tax.introduction Value-based property tax.

Value-based property tax has no direct relation with Value-based property tax has no direct relation with ability to pay. Taxpayers may be “asset rich” but ability to pay. Taxpayers may be “asset rich” but “cash poor”. “cash poor”.

Lacking the back-up of a well-established social Lacking the back-up of a well-established social welfare system for those in genuine needs, high rate welfare system for those in genuine needs, high rate of arrears will be expected.of arrears will be expected.

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Court System: Court System: ConstraintsConstraints

Court system is not ready to take up the role in:Court system is not ready to take up the role in:– Making final judgment on tax value determination and Making final judgment on tax value determination and

penalties against arrearspenalties against arrears– Building up the taxpayer’s confidence in the new taxation Building up the taxpayer’s confidence in the new taxation

through promoting fairness in judicial decisionsthrough promoting fairness in judicial decisions

due to the reasons:due to the reasons:– Priority was given to cases of complex nature involving Priority was given to cases of complex nature involving

serious social impactsserious social impacts– Lacking technicality and rationality in dealing with land Lacking technicality and rationality in dealing with land

and housing mattersand housing matters– Limited judiciary independence as they are Limited judiciary independence as they are

administratively led by local government administratively led by local government

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Computer Assisted Mass Computer Assisted Mass

AppraisalAppraisal

Benchmark Property Values Information System (BPVIS)

External Internet System

Real Estate Appraisal Administration of Guangzhou

External User 2External User 1 External User 3

Benchmark Land Value Revision System

Benchmark Property Price Information System

Land Surveying Office

GIS Publicity System

Property Transaction Centres

Information Centre

Government Revenue Bureau

Local Offices of Land Resources & Housing Management Bureau

Unified Managem

ent Platform

Unified Information Publicity Platform

Transaction Management System

Deed Taxation System GIS

Management System

Property Market Management System

Internet

GIS information

Publish Text and Graphic Data

Send GIS Data (Second Phase Implementation)

Tax Assessment & Application

Send Text & Graphic Data

Read Base Spatial Data

Read Transaction

DataManually Collect Transaction Records

Data Exchange

Unified URL Registration System

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Institutional Changes?Institutional Changes?

““Best practice”: uniformity, consistency, objectivity, Best practice”: uniformity, consistency, objectivity, efficiency, accuracy, public acceptance, data efficiency, accuracy, public acceptance, data minimization and effective reportingminimization and effective reporting

““Operational efficiency”: property data Operational efficiency”: property data sstandardization, data entry requirements, integrated tandardization, data entry requirements, integrated computer system, market effects of sample selectioncomputer system, market effects of sample selection

Avoid possible political and social resistance with its Avoid possible political and social resistance with its focus on technological aspect in tax reformfocus on technological aspect in tax reform

Trust in market transactions: data reliability and Trust in market transactions: data reliability and stakeholder participation stakeholder participation

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Final RemarksFinal Remarks

Property taxation system in China is heavily Property taxation system in China is heavily influenced by its existing institutions. influenced by its existing institutions.

The current taxation system appears to be The current taxation system appears to be ineffective, complex and costly in itself, but is indeed ineffective, complex and costly in itself, but is indeed providing an alternative solution given the providing an alternative solution given the institutional constraints in land registry, property institutional constraints in land registry, property appraisal system and court system. appraisal system and court system.

Institutional reforms require Institutional reforms require a a careful analysis of the careful analysis of the incentives and constraints faced by the various incentives and constraints faced by the various stakeholders associated with the current tax system stakeholders associated with the current tax system and its subsequent cost-benefits redistribution. and its subsequent cost-benefits redistribution.

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The EndThe End