Raise your land taxes!
IMF recommends that Government do away with discounts, and let homeowners be levied in full on their property
Today, we bring you the final segment of the IMF tax study A Tax Reform Road Map For Simplicity And Revenue Buoyancy. In it, the Washington-based financial institution strongly suggests that the Freundel Stuart administration significantly lower the exempt level for residential properties, eliminate senior deductions, and strengthen the hardship tribunal procedures to effectively address true hardship cases.
A. Land tax and property transfer taxes.
116. Building and land owners are liable to land tax on the market value of their property at rates currently ranging from 0.1 per cent to 0.75 per cent. The relevant legislation is the Land Tax Act, Cap 78A, and the tax is administered by the BRA. All properties are revalued on a three-year basis. There are approximately 115,000 parcels. Rates of tax for 2014 are given below:
Thus, the first $190,000 of the value of residential properties is exempt from tax (this has increased from $125,000 in increments over the last several years); and residential property is subject to a progressive rate schedule. Non-residential properties and unimproved land are taxed at a flat rate. There have been several recent reductions in selected rates on residential property and on non-residential property, in particular as revaluations have increased the value of the base.
There is for all taxpayers a ten per cent discount in liability when tax is paid within 30 days of receiving the notice, and five per cent if paid within 60 days.
117. There are eight categories of exemptions, and a list of other special treatments. Exemptions include crown land; University of the West Indies; religious and benevolent organizations; cemeteries; and land which is exempt by statute or by decision. Other preferences including the following have been granted:
(a) A cap of $60,000 has been placed on tax liability on residential property.
(b) For villas, as defined by the Tourism Development Act, a reduction of 25 per cent.
(c) For hotels, as defined by the Tourism Development Act, a reduction of 50 per cent.
(d) For pensioners who are owner-occupiers, a reduction of 60 per cent.
(e) Approved manufacturers who have exported more than $100,000 in a year, a reduction of 50 per cent (introduced in 2012).
(f) Those certified to be engaged in the production of solar energy and/or the manufacture of goods to be used in the production of solar energy, a reduction of 50 per cent (introduced in 2012).
118. More recently, outright exemptions of land tax for long periods have been granted under special agreements with developers of major tourism resort projects. (See Table 18 at right.)
119. A number of amnesties on payments of arrears of land tax have recently been implemented. In early 2008, the penalty and 50 per cent of the interest due on arrears of tax were waived if tax was paid by March 31, 2008. A similar waiver was offered in 2012, with the difference that the full interest due, as well as penalty, was waived.
120. A new tax, called the Municipal Solid Waste Tax, was introduced in 2013, effective in 2014. First payments [were] due on June 30. The base for the tax is on the site value of improved land, and the tax rate has been set at 0.3 per cent. Since this is a new tax, a long list of preferential treatments has not yet accumulated; however the legislation specifies that the minister may grant special treatment of any person on grounds of undue hardship.
121. Transfers of real property are also subject to stamp duty and to property transfer tax. Stamp duty is imposed at the rate of $10 for every $1,000 on the transfer of real or personal property. Transfer tax is imposed at a rate of two and a half per cent on the value of real property in excess of $150,000 for land with structures, and on the whole value for transfers of land with no building and on long-term (greater than 25 years) leases. Stamp duty and property transfer tax have been exempted under a number of agreements with developers of major tourism properties. Finally, unlike in a number of other countries in the region, there is no alien lands holdings fee charged in Barbados.
122. The structure of the taxation of real property is broadly acceptable, although a number of parameters could be adjusted to make it a fairer tax and produce more revenue. Land tax alone raises revenue equivalent to about 1.4 per cent of GDP; while the mission did not receive exact numbers, property transfer tax may raise another 0.2 per cent. There is scope for raising more revenue from the recurrent tax on property. The overall taxation of real property transfers, at three and a half per cent, is not especially high, absolutely and in comparison with other countries in the region. As a general matter, taxation of gains is to be preferred to taxation of the overall value of the transaction.
123. A number of countries in the region have a value threshold similar to that in Barbados, but the case for such a measure is weak. Similarly the case for the reduction for pensioners can be considered to be weak. The relevant criterion in both cases should be ability to pay, rather than property value or age. Ability to pay can be dealt with effectively by the hardship tribunal already in place in Barbados. Consequently, the value threshold of $190,000 should be reduced significantly, and owners of lower valued properties and pensioners should receive property tax relief only on application and demonstration of hardship. This preference should require annual demonstration and renewal.
124. The $60,000 cap on residential land tax liability should be removed. Since there is no link made between tax liability and the provision of services by the Government that benefits the property and the property owner, the relevant consideration should be ability to pay.
125. Some countries in the region have recently removed the progressive rate schedule for residential properties. This was motivated in part by administration costs and because the progressive rates were claimed to introduce distortions into property owners’ behaviour. Barbados should not follow this example without careful review of the costs and benefits of the current progressive rate structure and the alternatives.
Even if a flat rate of land tax for residential properties is rejected, it would be worthwhile to review the current structure of rates. A rate of 0.1 per cent appears inconsequential (but may be appropriate for the lowest value properties if the value threshold is reduced or eliminated), while the top rate could potentially be adjusted to accommodate the removal of the cap on tax liability. The rate structure would also need to be informed by the revenue requirement of Government.
126. There is no strong justification for the sizable discounts offered for timely payment of land tax. As with the other taxes in Barbados, taxpayers should be expected to comply in a timely manner with the tax laws. The tax administration should focus its resources on assisting taxpayers to comply with the tax in a timely manner, and employ modern enforcement measures to deal with cases of noncompliance. Many of these are already in place, including garnishment, power to distrain for taxes, and power of sale.
1. Significantly lower the exempt level for residential property, eliminate senior deductions, and strengthen the hardship tribunal procedures to effectively address true hardship cases. Hardship should be demonstrated annually to renew the relief.
2. Eliminate the discount for early payment of land tax.
3. Abolish the $60,000 cap on land tax liability.
4. Review the progressive rate structure for the residential land tax.
B. Improving tax policy design with a tax policy unit.
127. Although closely related, the Finance and Economic Affairs Department in the Ministry of Finance (MOF) and the Tax Policy Unit at the Barbados Revenue Authority are separate administrative units. The mission understands, however, that both departments cooperate in the process of revenue forecasting and tax policy analysis. Evaluation of tax policy proposals are done by the Finance and Economic Affairs Department in consultation with BRA, that provides estimates of the revenue impact of the proposals.
128. A small group of officials in the MOF should be tasked with the formulation of tax policies. Good tax policy design needs to be supported by the establishment of a specialized and capable tax policy unit (TPU). A TPU should deliver on four key functions which are important both during major structural reforms but also for smaller annual tax changes. They include: (1) Revenue analysis, revenue forecasting and economic impact analysis — is the most crucial output as the TPU needs to monitor whether the revenue outcomes are achieved. Moreover, such unit should be in cooperation with the macroeconomic division responsible for establishing collection goals for the revenue administration. (2) General tax design — specialist groups of tax policy analysts deal with policies relating to direct taxes and indirect taxes. In addition to the annual legislative program, the divisions would be responsible for ongoing evaluation of the effectiveness and efficiency of the tax laws, and undertake research on international trends and emerging tax design issues. (3) International tax treaty negotiations — international tax expertise is needed for negotiating tax treaties. It requires analysis of the effects of tax policies on inbound and outbound investments. (4) Legal drafting — is one of the most complex stages in tax policy design as it has to translate policy design into transparent law. The drafting language must be informed by the interpretations of a jurisdiction’s tax courts.
129. Although the responsibility for revenue forecasting may rest with MOF, cooperation with the revenue agency would be beneficial in providing accurate and timely revenue forecasts. In addition, tax expenditure reporting would require close coordination with BRA since the taxpayer data required resides there. A formal memorandum of understanding between the MOF/TPU and BRA should provide for the exchange of privileged taxpayer information without disclosing taxpayer identities. Further training of staff both in the MOF and BRA may be needed to develop models of revenue forecasting, tax expenditure estimates, and distributional analysis.
130. A TPU should make use of modern analytical tools for purposes of estimating economic, distributional, and revenue impacts of policy measures. Given the small size of both corporate taxpayers and individual taxpayers different tools such as micro-simulation models can be developed to analyze the distributional effects of the current tax system as well as the economic effects of tax proposals. Development of analytical capabilities, however, requires time. In the short run, one or more international experts could assist in developing the necessary tools for tax policy analysis consistent with best practices.
131. A successful TPU has to focus on continual training of the staff in the latest theoretical developments and modeling techniques. While training is essential in capacity building, the staff should be provided with software and other tools that will enable them to perform their duties with efficiency. It is important to support the analytical capacity in tax policy with one or more academic institutions which may preserve the capacity for the future. The types of capacity building may include internal staff seminars, short courses, learning by doing together with international experts, workshops and participation in degreed programs at universities. To this end, management of TPU should seek continuous skills transfers to the staff of the newly established department.
1. Enhance the TPU at the Ministry of Finance to conduct revenue analysis and tax policy development.
2. Seek an experienced international expert to provide support in developing the tax policy strategy.
3. In the medium term consolidate all tax policy functions in the MOF.
4. Over the medium term, TPU should attain capacity through training in respect of general tax analysis, revenue analysis and forecasting, and legal drafting.
5. Formalize with the revenue administration access to taxpayer data and cooperation through working groups.
6. In order to improve capacity, institutionalize transparent consultations with tax practitioners, taxpayers, and other institutions in which tax policy is extensively discussed.