4.1 Several factors inhibit making useful detailed recommendations about property tax in specific countries in Central and Eastern Europe:
It is too large and varied a region for such oversimplification. The geographical and economic conditions vary enormously. The different countries, and different regions within those countries, have developed their cultures over millennia. These distinctive characteristics remain in many cases despite their 40 or 70 years of socialist experience.
The general principles identified in relation to taxation and property tax apply in the large majority of these countries. The particular circumstances of a country form the basis for the application of these general principles on which it is very probable that a modern ad valorem property tax can be introduced. Only complete breakdown of systems of law and order presents an insurmountable obstacle to the implementation of property tax.
Detailed recommendations are also of limited use because most of the countries start with some sort of property tax in existence already although these are generally not true ad valorem taxes. Many countries are in the process of revising their systems and so any specific comments would soon be out of date. The following general considerations relevant to property tax in rural areas, therefore, may or may not be applicable in specific countries.
4.2 Agriculture is in a state of transition throughout Central and Eastern Europe. A prime concern of every transition country is access to the markets of the EU countries, particularly for their agricultural produce. At present there are factors that make it difficult for the agricultural industry of most countries in transition to compete. The former state farms are inefficient and short of capital, and encumbered with infrastructures they can neither afford to maintain nor replace. Many are not being run at a profit, or would not be considered to be doing so if depreciation is taken into account. Privatisation has created many small uneconomic badly sited holdings. Even those countries (such as Poland and the former Yugoslavia) which retained large areas under private ownership have many farms that are too small and too scattered to be economic. However, there is no reason to doubt that the agricultural sectors in these countries will be able to compete in the future. They will adapt to the circumstances.
4.3 None of these factors prevent the application of an ad valorem tax, although the assessment of small-scattered holdings entails more work and will be more costly. Coupled with low agricultural values, this suggests less favourable tax/cost yields. However, a modern system of property tax should be less complicated and cheaper to administer than some of the cadastral systems presently in use.
4.4 It is reasonable to anticipate a period of rapid change as countries adapt and compete. It is likely that the structure of holdings will change. Land values will probably increase. Regular property tax revaluations will be necessary to pick up these changes.
4.5 A broad indication of the magnitude of the potential tax base attributable to agriculture may be estimated from the relative size of agriculture in the economy. There are large variations. Those where agriculture is over 25 percent of GDP include Albania, Armenia, Georgia and Moldova. Those least dependant on agriculture are Czech Republic, Poland, Slovakia and Slovenia (4 percent); Estonia and Hungary (6 percent); and Russia(7 percent). The capacity of the agricultural populations in these countries to absorb increased tax liabilities is conditioned by the fact that agriculture supports a typically disproportionately large percentage of the population. Of course, the ability of rural people to pay the tax is an important factor.
4.6 Restitution and privatisation. The process of privatisation in almost every country was driven by political urgency. The resulting pattern of ownership is frequently uneconomic and has left problems that are relevant to property taxation which could pose difficulties in defining the property and valuation.
In many countries there are small restored parcels of agricultural land which now have no proper relation to the services installed to serve large collective farms during the socialist era.
There remain doubts about the legal status of many parcels.
The unclear legal status of certain communally managed properties will cause difficulties of valuation and enforcement of collection.
The unclear legal status of certain communally managed properties will cause difficulties of valuation and enforcement of collection.
4.7 Cadastres. In many transition countries, 'cadastres' have existed for a century or more. They vary in character but tend to incorporate a detailed classification of soil type and permitted land use. They are frequently maintained in a labour intensive manner faithfully preserving the original character of the document. It is also generally the case that the uses to which the cadastres are put do not warrant the time and expense applied to their maintenance.
4.8 It is worth considering whether, and if so how, these cadastres can be adapted to form a modern valuation list. It should in theory be possible because the cadastres are in fact 'valuation lists' that have become fossilised. When originally prepared they were remarkable documents, well adapted to their purpose and generally of a high professional standard. The purpose was to raise revenue and they correctly addressed the main economic base of the period: agricultural land. The quality of the soil was then relatively much more important than it is today. In the last century agricultural technology and mechanisation has lessened the relative importance of soil quality. For instance, wetland can often be drained at an affordable cost. Heavy land can be cultivated more easily with powerful machinery. Acidity is readily corrected by liming. Artificial fertiliser is applied to correct deficiencies on hungry land. Nor is it only soil quality that is important in agriculture. For many enterprises agricultural buildings are essential. In fact the pattern of agriculture has changed remarkably in the latter half of the last century and the methods of valuation and assessment must change with it. In summary there are two defects of most present day cadastres. First, they do not include the non-agricultural properties in the tax base. Second, they do not reflect present day agricultural values.
4.9 Nevertheless cadastres can form useful material from which a modern valuation list can be created. Many of the skills required to maintain a cadastre are relevant, with adaptation, to the assessment process.
4.10 Land registration. The subject of land registration has received much attention in most of transition countries but, in many, the situation remains less than completely satisfactory. Some of the underlying reasons are relevant to the design of property tax.
Land registration is a service to the public. The test of success is whether the public use the system to record property transactions accurately. This simple concept with its simple test of success is still not fully understood by many of the public servants administering the registration systems who still see it as part of a government control system.
There is often a multiplication of registers. Land ownership can be recorded in two registers: the cadastre and the land book. Building details are often in a completely separate register. Land and property owned by the public sector will probably be recorded separately with each ministry and local authority keeping their own records. Much land and property will continue to be held from the public sector (in one form or other) and this tenure will account for a large proportion of the country.
As a result, valuers cannot rely on the information in the registers and have to make their own researches at an additional cost.
4.11 Valuation. There is a shortage of valuation skills in the transitional economies of Central and Eastern Europe. The public service competes with the private sector, and the property tax administration with other public sector users of these skills.
4.12 It is sometimes suggested that rural property markets are too thin to provide a basis for a value based property tax. This is most unlikely to be the case. The activity in property markets is usually underestimated particularly in transition countries. It can be difficult for nationals to understand their own local property markets if they are not professionally involved in those markets. It is even more difficult for foreigners, especially if they have never been professionally involved in their own country, to recognize and understand property markets, particularly if they imagine that markets can be detected from official sources. A safe default assumption in almost any circumstances is that properties do change hands12 and there exists sufficient evidence for a skilled valuer to create a valuation list. The evidence may not appear in the official records but this matters little.13
4.13 At the start of the 1990s most transition countries considered that property markets were insufficiently developed to form the basis for ad valorem property tax. However, it is most unlikely that the current state of property market development will prevent the introduction of an ad valorem tax system. There are factors that the design of the tax must take into account:
Development has been much faster in urban areas than it has in rural areas. Evidence of value is therefore more difficult to find in rural areas.
In agricultural areas changes in occupation through leases and renting are much more common than sales. This is particularly so for agricultural land. Many of the leasing arrangements are informal and effected verbally.
Much of the market activity does not appear in the registers.
The price or consideration stated in official records cannot be relied on as being correct. It is frequently mis-stated.
The concept of market value is not yet firmly established. The lack of transparency of the market inhibits progress.
Foreign ownership of real property is often not permitted, and there are often strong feelings against foreign ownership of agricultural land.
Agricultural land values are often much lower than is the norm in EU countries. There are often large differences on either side of the EU border.
4.14 In several transition countries there is clearly an intention to move from a 'flat rate system'14 to a true ad valorem system of property tax. The fiscal and economic advantages are recognised by many in those countries. One of the unspoken factors inhibiting this move is a fear of a new system that seems to depend more on individual judgement than it does on fixed rules. The belief is often that this will leave even more scope for corrupt officials to extract irregular payments. Understandable though this belief might be, it is incorrect. In fact the reverse is generally the case. The underlying reasons are probably related to the lack of transparency of a flat rate system. Certainly it is known from examples elsewhere in the world that flat rate taxes do not stop corruption. This may also be the case in some transition countries where the flat rate and the lack of opportunities to appeal against the officially determined value increase the opportunities for corruption in official hands.
4.15 Instead, it is more probable that a change to an ad valorem system actually will lessen the opportunities for corruption provided that it is based on up-to-date values, that the entire valuation list is open for public inspection,15 and that there is ready access to a judicial appeal system that is free to the taxpayer. When the system works well, the basis of comparability means that the freedom for officials to reduce values is reduced because a) they can not afford to undermine their own list by individual injudicious reductions and b) it will be cheaper for the taxpayer to go to appeal than to pay a bribe. The practice of mass valuation of properties for taxation purposes leaves very little room for corruption practices as all properties are handled simultaneously without paying special attention to any particular property.
4.16 The way in which transparency is introduced will depend on the particular circumstances of each country. Where there are concerns of corruption at the local level of government, methodologies for mass valuation should be developed at the national level. The responsibility for setting tax rates should be assigned to local elected councils, assemblies or parliaments, and should not be left to local administrators. Local legislators should also be given the right to set the time of the next revaluation.
