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President’s Message

President’s Message – January 2022

I hope you were all able to have a relaxing and enjoyable break over the Christmas period, despite the significant spread of the latest variant of COVID (Omicron). May I thank you for your continuing support of IPTI and wish you all a very Happy New Year.

One of many interesting articles I read recently referred to discussions over whether Singapore needs to introduce a new form of wealth tax. Although the article was focussed on Singapore, the issues considered are of relevance to many countries around the world, so it is worth mentioning parts of it.

The article states that, earlier this year, the International Monetary Fund called for a wealth tax to compel the rich to help pay for the huge costs associated with the COVID-19 pandemic. Britain, it states, is now contemplating a one-time wealth tax, while Argentina carried out such a one-off levy last December, raising US$2.4 billion to fund coronavirus-related measures amid controversy over the tax.

In China, there is also much discussion over an upcoming property tax to address social inequality - one that would exclude rural, poorer households - as part of the President’s common prosperity drive.

In Singapore, the article continues, discourse on wealth taxes has gathered steam over the course of the pandemic, especially after an unprecedented 2020 when the Government had to dip into the country’s reserves numerous times.

The reality is that tax revenue collections have also fallen during the pandemic, dropping by 7.3 per cent in the 2020 financial year. At the same time, the wealth gap in Singapore is expected to grow - a trend that is similar to other advanced economies which see growing wealth concentrations.

In its report this year, the Credit Suisse Research Institute found that the top 1 per cent of wealthy people in Singapore held a third of the total wealth as of the end of 2020, and expects the number of millionaires there to grow from 270,000 in 2020 to 437,000 in 2025, a 62 per cent jump.

Politicians are said to support the idea of a wealth tax, but differ on the details. The Prime Minister of Singapore, speaking at a recent “New Economy Forum”, said the Government wants a wealth tax in principle, but implementing such a tax - which would be imposed on a range of assets such as property, stocks, artwork and cryptocurrency - is a challenge. “We need to find a system of taxation which is progressive and which people will accept as fair.  ‘Fair’ means everybody needs to pay some, but if you’re able to pay more, well, you should bear a larger burden,” he said.

The Republic already taxes assets which the wealthy are likely to spend more on, like property and motor vehicles, though it does not have a tax on inheritance, capital gains or net wealth. Nevertheless, as Singapore considers what steps to take, the clamour over how to tax the wealthy has been growing. Recent international headlines have painted a picture that impending wealth taxes could dampen the real estate market there, or drive highly rich individuals to its perennial economic rival, Hong Kong.

Those against a wealth tax argue that taxing capital - wealth that can be used for investing or starting business - is against economic fundamentals and could indeed lead to capital flowing elsewhere. But advocates of a wealth tax say COVID-19 offers an opportunity to rebalance the scales, especially with the possibility of a K-shaped recovery from the pandemic, whereby one part of the economy recovers while another segment suffers, which means that some people will gain additional “unearned” wealth while others will lose out.

The article continued with an outline of ways to impose taxes and duties that target wealthy individuals such as:

• higher income taxes for top earners

• asset taxes on property, motor vehicles or luxury goods

• stamp duties on high value transactions such as property

• inheritance tax or estate duty, which is levied on the estate when a person dies

• tax on capital gains, such as when a person makes a profit from selling their assets

• net wealth tax, in which the total value of their assets minus their debts are taxed periodically

A professor from the National University of Singapore (NUS) Business School is quoted as saying, “Amid the ongoing digital revolution, the disparity between the wealthy and the less well off has taken a more severe turn, and this is worsened by the lingering pandemic crisis.”

The article states that the Organisation for Economic Co-operation and Development (OECD) governments came together in 2009 to establish ways to counteract base erosion and profit shifting, which are essentially tax planning strategies used by multinational companies that exploit gaps and mismatches in tax rules around the world. In October this year, the OECD and G20 countries reached a landmark tax deal for governments to multilaterally impose a minimum corporate tax rate of 15 per cent on these enterprises. Singapore’s current standard corporate tax rate is above this, at 17 per cent.

Now, with the pandemic, the article indicates that the spotlight is on high net worth individuals and a fair tax system. A wealth report by a real estate consultancy earlier this year found that the number of individuals in Singapore with at least US$30 million in net assets rose by 10 per cent last year. The head of a well-known firm of accountants with offices in Singapore said it is no secret that there are parts of society that have done well amid the pandemic, and they happen to be people who are asset rich.

The search for a novel tax solution has led many tax jurisdictions to consider the private wealth of ultra wealthy individuals especially, says the article, considering their ability to avoid having to pay income taxes - typically the largest component of any country’s tax collection alongside corporate tax.

The article referred to a report earlier this year which exposed how the USA’s 25 richest people managed to avail themselves of tax avoidance methods to reduce their income taxes, in some cases to zero. While their collective wealth rose by US$400 billion from 2014 to 2018, they only paid US$13.6 billion in federal income taxes in those years. This amount paid in taxes is only 3.4 per cent of their increase in wealth in that period.

Progressive income tax systems globally have led those who are generally wealthy, but not the wealthiest, to pay more, since the amount of income taxes paid scale according to the taxpayer’s income. But income taxes are unlikely to feature heavily among the ultra-rich the article states.

One commentator is quoted as saying, “In reality, for most wealthy individuals and entrepreneurs, their wealth is locked up in assets and they typically do not draw high salaries. However, their net worth may be astronomical due to the stakes in the companies and assets they own. From this perspective, the effectiveness of our current income tax system has its limits.”

Taxing wealth, on the other hand, takes into account the amassed wealth of the individual. An Associate Professor of Economics at the Singapore University of Social Sciences said wealth taxes could be “less economically distorting than other taxes which are based on income or consumption”.

The article states, on net wealth taxes, one way to see how it may work is to look at countries like Switzerland, which imposes varying degrees of tax based on canton. Such a flat tax on wealth is arguably the purest form of wealth tax since it encompasses everything a person owns instead of individual items. Based on estimates, the Associate Professor said wealth taxes account for around 3.6 per cent of total tax revenue in Switzerland which, like Singapore, is also a wealthy country.

But the head of the Governance and Economy Department at the Institute of Policy Studies argued that the Swiss example shows instead that the revenue impact of a net wealth tax is too small to offset Singapore’s expenditure needs. He is quoted as saying, “Wealth tax is actually quite a modest contributor to the overall tax revenue, and for the average person as well as for the high net worth, the contributions are also not very large, even though the latter pays disproportionately more.

The article continues, the reality is that while discourse over wealth taxes has been raging in the past two years of the pandemic, countries have been stripping away such taxes over the course of a decade. Eight out of twelve European countries that had a wealth tax in 1990 later discarded them by 2019. Out of the thirty-eight member nations in the OECD today, only four have a net wealth tax - Colombia, Norway, Spain, and Switzerland.

France, which had a levy on wealth that it called its “solidarity tax”, abolished it in 2018 over continued fears of capital flight, a phenomenon in which wealthy individuals move their wealth into another tax jurisdiction where it cannot be taxed, or move out of the country entirely, taking their assets with them. One estimate said that more than 840 people left France in 2006, causing a loss of €2.8 billion in solidarity tax collection. The French government replaced the tax with levies on real estate. The article states the French example also reveals the high cost of collecting a net wealth tax - it is very challenging and costly to tally up an individual’s taxable assets and declare them, and for the authorities to make an assessment.

Apart from practical concerns over a wealth tax, some of those interviewed raised fundamental disagreements over such a tax which, the article states, also crosses the ethical line of fairness since it could be a form of double, or triple, taxation. The source of that wealth would, some commentators say, already have been taxed previously as income - or capital gains - elsewhere.

The article concludes that the Singapore Finance Minister recently hinted at what may come when he said that the Government will not focus on taxing the wealth of individuals based on their net wealth, but will consider how the entire system of taxes work in Singapore. He said, “The Government will continue to review to see what additional ways we can do to strengthen our system of taxation so that we can generate revenue, but do so in a way that's fair and progressive.”

As usual, IPTI maintains its strict policy of independence and therefore does not advocate for or against wealth taxes. However, we recognise that the issue is very much a live debate, particularly in light of the impact of the pandemic, and we will monitor the progress of such discussions with interest.

Moving on to IPTI activities, I must start with reference to the first ever “Conference of Valuation Agencies” (CoVA) which was an online event we hosted on 7-9 December 2021. We had a large number of attendees who, from the feedback we received, enjoyed the wide variety of topics covered at CoVA by speakers from around the world. Presentations were not limited to property tax matters, although they inevitably featured prominently at CoVA. But we also looked at “The Integrity, Independence and Importance of Valuation Agencies”, “Compensation for Cultural Loss”, “Challenges Facing the Modern Professional in Valuation Agencies” and a plenty of other topics, including ethics, that were of particular interest. To provide some variety in formats, in addition to presentations, we had some interactive sessions, videos, polling questions and lots of discussions with speakers and panellists. Overall, it was a very successful event and one that we will be repeating in 2022, hopefully as an in-person event.

On the subject of IPTI events, in addition to webinars, we are planning to hold the following during 2022:

• Corporate Property Tax Workshop (in-person) - 5 April 2022 - Chicago

• Annual Mass Appraisal Valuation Symposium (virtual) - 22/23 June 2022

• COST-IPTI Property Tax Workshop (in-person) - 13/15 September 2022 - Denver, Colorado

• Annual Caribbean Conference (in-person) - October 2022 - date and venue to be determined

• CoVA 2022 (in-person) - December 2022 - UK - date and venue to be determined

Lots to look forward to; for full details of forthcoming IPTI events, please visit our website: www.ipti.org

Now it’s time for a quick look at what is making headlines concerning property taxes in selected jurisdictions and countries around the world.

In the USA, a recent article states that local governments rely on taxes for revenue, but asks whether that the best system for a modern society. Over the last 30 years, it states, the American economy has evolved quite a bit. Financial assets have historically been held primarily in physical objects like gold, silver and real estate. But these days, with the rise of cryptocurrency, non-fungible tokens and trading apps that make stocks available to everyone, it’s become a little more abstract.

From 1989 to 2019, the article states, the top five fastest growing categories of American wealth were investment funds, retirement accounts, stocks and bonds. But while asset ownership has shifted dramatically, taxation has not - placing an undue fiscal burden on lower class constituents - according to the report titled “Rethinking Revenue: Rethinking Local Government Revenue Systems.”  It continues, “The changing economy has challenged the relevance of the property tax. Most fundamentally, a large part of the value created in the modern economy does not involve property - it often involves less tangible things, like financial instruments or bits and bytes. In short, wealth has become less connected with real property ownership and therefore does not represent the taxpayer’s ability to pay in the same way it used to.”

The report is the first in a series of reports considering the way governments obtain revenue for a project commissioned by the American Planning Association, the Government Finance Officers Association, the International City/County Management Association, the National Academy of Public Administration, the National League of Cities, the University of Chicago’s Harris School of Public Policy and the Government Finance Research Center. As the percentage of wealth tied up in non-tangible assets has increased - from 31 percent to 42 percent specifically - the relative share of wealth derived from physical assets like primary residences has correspondingly decreased. Because lower-income citizens usually have comparatively more of their wealth tied up in real estate, the report says, they shoulder more of the tax burden as a percentage of their income.

“Often, who pays the tax does not line up with who can afford to pay or who benefits from public services. For example, people whose wealth is primarily invested in property pay more than those whose wealth is located elsewhere (e.g., financial instruments). Most significantly, lower-income people often end up paying a disproportionate burden of local taxes,” the report says. “For instance, lower-income people spend a larger portion of their income on taxable goods than higher-income people, so the sales tax often places a disproportionate burden on low-income people.”

Beyond simply describing the problem, the report challenges “the relevance of the property tax” in a modern-day economy. The report cites a University of Chicago study that found “the burden of the property tax falls disproportionately on the owners of the least valuable homes.” To illustrate the point it states, “property valued in the bottom 10 percent pays an effective rate that is double that of property in the top 10 percent, on average across the United States.”

While this reliance on taxation as a system isn’t necessarily flawed, it says “over the years, many distortions have been introduced. For example, assessment practices may be intended to benefit certain classes of taxpayers, but this benefit then implicitly comes at the expense of other taxpayers. For instance, there are some states where homeowners get a property tax exemption, but renters don’t. It is hard to make the case that renters deserve to pay more taxes on a similar property. These distortions are often introduced by state legislation.”

Unfortunately, the report doesn’t provide a solution. It states that subsequent reports will highlight ideas that could bring “local government revenues more in line with modern economic realities, without placing additional burdens on taxpayers.” Again, at IPTI, we will monitor progress with interest.

In Greece, there is reported to be a “radical overhaul” of property taxation underway. Changes foresee the abolition of the additional tax on real estate, which paves the way for the accumulation of property, a new scale for the Single Property Tax (ENFIA) rates, and the introduction of a permanent mechanism for updating property rates (“objective values”) used for tax purposes, so that they remain close to the market/commercial value. The intention of the Finance Ministry is to also adjust commercial tax rates and age coefficients, which have remained at the same level for many years. This has resulted in unfair taxation, as a 26-year-old property has the same taxable value as a 50-year-old property. At the same time, the freezing of the capital gains tax is expected to move ahead as it is seen as slowing down investments in the real estate market, without even yielding much revenue. The reports say that the government’s financial staff will have to show its cards soon regarding the additional corporate tax and whether there will be some kind of “luxury tax” for high-value real estate. Other changes include the exemption of real estate transfers from VAT after the end of 2022, as well as the simplification of the property transfer process. Also on the agenda are financial incentives for real estate energy upgrades.

In New Zealand, Wellington City property owners will soon receive a Notice of Rating Valuation in the post with an updated rating value for their property. Rating valuations are usually carried out on all New Zealand properties every three years to help local councils set rates for the following three-year period. They reflect the likely selling price of a property at the effective revaluation date, which was 1 September 2021. On average, the value of residential housing has increased 60.4% since 2018 with the average house value now sitting at $1,435,000, while the corresponding average land value has more than doubled to an average of $985,000. Commercial property values have increased by 36.1%, and property values in the industrial sector have increased by 60.6% since the city’s last rating valuation in 2018. Commercial and industrial land values have also increased by 52.2% and 73.1% respectively. A spokesman said, “The commercial sector continues to have the greatest potential for impact from COVID-19. Our discussions with landlords and tenants across the city shows the retail space has seen little rental growth - particularly from those that rely on hospitality or tourism. On the flipside, the office sector continues to show strength in the face of the pandemic. Appetite is really robust for A-grade, seismically strong office accommodation. The government employment in this space has really helped that resilience.” The updated rating valuations are independently audited by the Office of the Valuer General and need to meet rigorous quality standards before the new rating valuations are certified. They are not designed to be used as market valuations for raising finance with banks or as insurance valuations, but they provide an interesting and useful insight into the dramatic changes in values, partly brought about by the pandemic.  

And finally, everyone is familiar with the saying that there are only two things in life that cannot be avoided - death and taxes. However, it seems that some can take property tax benefits with them beyond the grave. Reports from a newspaper in Illinois say that the homes of several “dead mobsters” continued to receive property tax breaks that are only available to senior citizens on fixed incomes. It is not clear whether the “mobsters” were “senior citizens on fixed incomes”, but they were certainly dead - in one case, for over 6 years before the error was discovered! Who says you can’t take it with you when you go?

Paul Sanderson JP LLB (Hons) FRICS FIRRV

President, International Property Tax Institute

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