The study of property taxation in Europe offers special challenges because each country has a different definition of land and property, and a different approach to local property taxation. The term property often includes both land and buildings, but may also include plants and machinery as well as certain possessions, such as automobiles. In Denmark, for example, separate taxes may be levied on the land and property elements of a single holding.

Among the 41 counties in our study, we identified 61 different forms of local taxation. Most are based on annual value, usually assessed on a capital or rental basis, and are payable annually. While most countries tax the sale of property at the state level, the Czech Republic, Italy, Portugal, Slovakia and Spain levy such taxes locally. Yet, amid such diversity, a basic central pattern emerges. Each county, except Malta, operates some form of annual property tax on the use or occupation of land and/or property, usually levied at the local level, and the revenues contribute to the provision of local services.

Tax Reform and the European Union

Over the last 10 years France, Denmark, Germany, the Netherlands, Belgium, the United Kingdom and the Republic of Ireland have either completed or are in the process of completing substantial reforms to their taxation systems. Other countries have undertaken more minor reforms. Even some emerging democracies are reviewing and reforming their relatively new taxation systems in light of changes elsewhere. No individual tax exists in isolation, and all are affected by larger fiscal, economic and political developments. The reform of one tax will often have consequential effects on others, and property taxation in all its forms is no exception.

One impetus to tax reform in Europe is the European Union (EU). Fifteen of the countries in our study are members, and many other countries are in various stages of being considered for membership. Many countries are taking this opportunity to reform and improve their tax administration systems and to make their taxation rates competitive with those of other member states. Tax harmonization is not one of the declared aims of the EU, although it may be a natural consequence of many EU polices.

The main incentive for tax reform in Europe is coming from the states themselves. In one of the first signs of the problems caused by traditional national taxation systems, the Ministry of Finance in the Netherlands noted in the early 1990s that not only were businesses locating in the most tax-favorable areas but they also were buying goods and services from other countries where tax rates and other costs were lower. The close proximity of the Netherlands to Germany, France, Belgium and Luxembourg, as well as the good transport links between the countries, exacerbated the situation.

The introduction of the Single European Market has opened internal markets to foreign competition with the removal of trade barriers and the abolition of customs duties between member states. Business competitiveness now depends primarily on efficiency and the amount of taxation imposed by the national government, rather than on state aid and trade policies.

Approaches to Local Taxation

The Taxpayer

The majority of property taxes are payable by the owner. Of the 51 taxes we studied, 29 identified the owner as the taxpayer and 12 are paid by the occupier; the remaining 10 are sales-based taxes. The occupier figure was distorted because the United Kingdom accounted for 50 percent of this figure, due to differences in the implementation of its local taxes. In the Netherlands both parties can be taxed at different amounts. For sales-related taxes the results were less clear, with the taxpayer being the seller in half the cases and the purchaser in the other half.

Sources of Valuation Information

Many countries have some form of computerized cadastral system to record property-related information, and as part of the assessment process different levels of government usually exchange information. The nature and implementation of such systems vary considerably, from a series of different registers administered at various levels of government to a single register administered nationally.

The rights of the taxpayer to centrally held information also differ among countries. Some provide no rights to any information, while others provide notice whenever a new valuation or alteration is made. In some cases, valuation and comparable evidence may be made available at the request of the taxpayer.

Bases of Valuation

Three alternative approaches for the valuation bases are used most frequently. The Capital Value Approach is normally based on the open market value of the property at a specified baseline date, which may be a current date such as the start of the tax year. Sweden designates a date two years before the tax year. This approach has the advantage of giving valuation authorities more time to consider all the evidence available before arriving at their final valuations. The open market value is usually defined on the basis of a property’s best and/or highest value.

The Rental Value Approach is based on the open market rental value at a specified date. England, Wales, Scotland and the Republic of Ireland specify a baseline date some time before the new values come into effect, as in Sweden. The open market rental value may be restricted by assumptions as to changes of use and alterations. The rationale is that the tax is levied on the occupier and the amount of tax is based on the current use of the property, not its potential value.

Properties not normally bought and sold in the market require alternative approaches to valuation. For example, the use of a revenue (or accounts) approach has been adopted in England and Wales for many types of leisure-related property, and its use is expected to increase. The cost approach, related to the cost of construction, also is widely accepted in England and Wales and in other European countries.

The Overall or Unit Approach relates to a property’s size. The tax is levied at a prescribed rate per square meters or per unit, which may vary depending on the predominant use of the property. These rates may be loosely based on rental or capital values, but are more often an arbitrary rate fixed by the appropriate taxation authority. In 1997 the Netherlands moved away from such a system in favor of a market-related capital value approach. Many new democracies have adopted the unit approach due to a lack of property information, a limited and restricted property market, and insufficient resources to enable the development of alternative systems. It is anticipated that many of these countries will move to a value-based system when resources and circumstances permit.

A number of other approaches are used under special circumstances. One is the capital value banding approach adopted for the valuation of residential property for the Council Tax in England, Wales and Scotland. In this approach property is ascribed to various value bands rather than valuing each individual property precisely. Another example is the local business tax, which includes the value of the property plus in the case of France a percentage of salaries and in the case of Spain and Switzerland the business profits.

Revaluation of the Tax Base

One of the key factors in examining European property tax systems is whether the valuations on which the tax is charged are up-to-date. Our research identified a very mixed picture: some countries have not revalued their tax bases for many years and others undertake revaluations regularly, every four or five years (see Table 1). Many countries have either no provision for regular revaluations or have postponed revaluations so often that their tax base bears little resemblance to current market values.

Indexation

Many countries have attempted to overcome the problems associated with infrequent revaluations by some form of indexation. Those countries performing annual revaluations may implement them through actual annual revaluations, indexation of an earlier revaluation or self-assessment declarations by the taxpayer. While annual indexation between regular revaluations every few years may ensure a relatively accurate tax base, its use becomes more questionable when the base has not been updated for 10 or 20 years. The position is made far worse in countries where the property market is changing rapidly, especially in major cities and towns. Any adopted index needs to be closely related to the property market in that location and to the specific property type. In most cases, however, the index is a single figure applied across the entire country and for all types of property.

Exemptions and Reliefs

Exemptions can be considered from two viewpoints: the nature of the property or the nature of the taxpayer. In addition, some countries have introduced arrangements that place a ceiling on the amount of tax payable. Some common features relating to the types of properties for which some form of relief may be granted are:

• land owned by the state and used for the provision of public services, such as schools, hospitals, cemeteries etc., if usually exempt or excluded from the tax legislation;
• land and property used for religious purposes;
• historic land and buildings;
• agricultural land.

Relief to taxpayers takes many forms and can include:

• relief to persons of retirement age;
• relief to disabled persons;
• relief of a percentage of the tax for certain owner-occupiers or remittance of an initial amount of the tax.

Calculating the Amount of Tax

The simplest systems for calculating tax payments adopt a given tax per square meter occupied. Once the area of the property is agreed, it is a relatively simple matter to apply a given tax rate to that area. In some countries, the assessed value must be multiplied by an index or co-efficient and then by a locally determined rate that can vary depending on the size of the authority levying the charge. In France, the situation is even worse for the business tax, where a series of limitations have to be calculated to ascertain whether a ceiling or cap applies to the taxable amount.

Appeal Systems

Most countries have a system by which the taxpayer may challenge the tax assessment or valuation, although that action generally does not postpone the payment of the tax. In some cases the first step is an informal approach to the authority, which may be able to resolve the dispute without the need for more formal action. Where a formal approach is adopted, the appeal may be dealt with as part of the general tax appeal process through the normal tax tribunals and courts, or it may be handled outside the normal tax system, often in courts and tribunals established for the purpose.

Tax Collection and Payment

In many countries taxes are collected by the national tax authority, often as part of the income tax process. This method has the advantage of being linked with national exemptions and benefits; the resulting tax is usually payable over the whole tax year. Under the second common method, the tax is paid directly to the relevant taxing authority, sometimes in installments.

Conclusion

European countries are constantly reviewing their tax systems and adopting the best features of other systems. This presents special challenges to a survey such as ours, but also enhances its potential impact by allowing comparative analysis to influence new legislation. One very important conclusion at this early stage of the research project is the importance of keeping the tax base up-to-date. This not only simplifies the entire valuation and collection process but also ensures a tax base that is more acceptable and understandable to taxpayers. During this year we propose to widen our research and complete data collection on other European countries. In addition, we will attempt to compare the amounts of revenue raised by each type of taxation and analyze them within the context of each country’s local government and finance system.

Peter K. Brown is professor of property taxation at Liverpool John Moores University, a frequent author and a regular speaker on valuation, rating and taxation matters. Moira Hepworth is head of research at the Institute of Revenues, Rating and Valuation (IRRV), based in London. The authors are joint recipients of a David C. Lincoln Fellowship in Land Value Taxation. This article is based on their first year of research and their recent working paper.

Related Publication

Peter K. Brown and Moira Hepworth. 2000. “A Study of European Land Tax Systems.” Lincoln Institute Working Paper. 156 pages.

Governments have often intervened in land markets in Asian cities, but with limited effects. In recent decades, economic globalization and political democratization have created even stronger demands for more efficient and equitable land use policies. Rapid economic growth in cities with scarce land resources has generated a wave of new thinking on land values and land markets among scholars and policymakers.

The GATT (General Agreement on Tariffs and Trade) negotiations are stimulating new production structures in much of Asia, which consequently shift demand from agriculture into manufacturing and other urban land uses. At the same time, local governments are struggling with more financial autonomy and are becoming dependent on revenues from increased land values to subsidize the costs of development.

Three countries illustrate emerging land and tax policy issues raised by these complex interactions of international and local economies.

In Taiwan, land values for urban and agriculture uses are extremely divergent. The immediate issues are: 1) how to better use the 40,000 hectares of agricultural land that are no longer needed for production as a result of the GATT agreements; and 2) how to distribute the development benefits created by this conversion of agricultural land.

In Korea, the challenge concerns the legality of taxation to capture excessive increases in land value and gains from land speculation. Faced with builders’ pressure to develop greenbelts and open spaces in metropolitan areas and with local politicians’ concerns over fiscal autonomy, the central government is preparing a major tax reform to capture these increments in land value.

In Japan, land values have changed dramatically over the past ten years, but the reasons for these fluctuations are not always clear. Land speculation, unpredictable market forces and government regulation all play a part. Analysis of failed attempts to control land prices will be valuable in developing future policies.

Land Value and Speculation

The perception of land value in Taiwan, Korea, and Japan may not be significantly different from that in other capitalist countries. The problem is in the speculative value, also known as “unearned income” or the “unearned increment” in land value. This value can be so high that it distorts all the legal, administrative, political and social measures designed to manage the use of land. In Japan, for example, land value in major cities tripled from 1983 to 1989. In Korea, land value increased 13 times between 1975 and 1990, while the national income increased only 5 times in the same period. In Taiwan, the value of farm land increased 155 percent from 1986 to 1990, compared to the GDP’s 36 percent growth during the same period.

Policies intended to control land values during periods of high speculation are unlikely to succeed. During the boom times of the 1980s in all three Asian countries, special interest groups and politicians dependent on economic growth failed to anticipate any negative downturn effects. Land policies became disorganized, and conflicts arose among different government departments. For example, some local governments subsidized farmland owners who had already sold their land for conversion to urban uses and had benefited financially from this speculation. Financial institutions provided loans to corporations which depended on land speculation for their corporate earnings. The results were devastating: farmers who wished to farm could not afford to buy farm land; manufacturers could no longer compete when 60 percent of their investments were spent on land costs; and average citizens had an even more difficult time owning a house.

Reevaluating Land and Tax Policy

As land values have dropped in recent years, there is a new opportunity to revise land policies. Special interest groups and land value speculators have softened their opposition to government intervention on land markets. The GATT and WTO (World Trade Organization) negotiations are requiring countries to better coordinate their land policies and general economic policies in the interests of industrial readjustment. Future policies in Taiwan, Korea, and Japan will likely incorporate the following measures:

New regulations will be designed to convert some farmland and environmentally less-sensitive land for housing and mixed-use urban development. The goals are to continue sustainable development and to assist the conversion of the agricultural sector.

Tax reform and exaction-like laws will be introduced to capture the “unearned income” from land speculation. A capital gains tax, land value tax and land value increment tax will be the hallmarks of tax reform. Local government will be given more autonomy to require private developers to share benefits with the community.

Land use planning systems will be coordinated at all levels of government to manage growth. New land use controls will be designed to cope with new economic activities derived from the economic readjustments.

To help advance these land and tax policy reforms, the Lincoln Institute research staff is working with colleagues in each country. The Council of Agriculture in Taiwan, Republic of China, and the Institute are conducting a three-year joint study (1994-97) on land value capture and benefit distribution mechanisms. A team of researchers from the Lincoln Institute and the Korea Tax Institute is researching tax reform for the Korea Ministry of Finance during the 1995-1996 academic year. Both American and Japanese scholars are examining land values in Japan from a macroeconomic perspective.

Alven Lam in a Lincoln Institute fellow whose current research focuses on land value capture and property rights in Asia.

Additional information in the printed newletter.

Chart: Indices of Korea Land Values and Major Economic Indicators: 1980, 1985 and 1990. Land prices, housing prices, national income and wholesale prices are charted. Source: Office of National Statistics, Korea Statistical Yearbook, each year, and Kim, Dai-Young, “Choices for Future Land Policy,” in Land Policy Problems in East Asia, 1994.