Legal system creates difficulties; three bottle-necks to charging property tax?

from Real Estate Market magazine

Dec. 16, at the prize awarding conference for 90sq.m. housing design, vice minister of Construction, Liu Zhifeng, reveals that medium and small size apartments will be promoted in future by raising the cost of buying and owning large apartments and guiding the consumers into rational consumption, this can be done through encouraging design, and collecting property tax. His statement put all kinds of report about property tax in the press. The fact is, talk about collecting property tax has been going on for some while now, but the tax is still in a stage of study, without any progress. What makes collecting property tax so difficult?

The 70-year restriction

"In foreign countries, because ownership is completely private, taxing real estate is actually taxing land. But in China, consumers spend a lot of money to buy a house but actually buys the house itself, not the land, even though consumers have already paid the cost for the land. Because of this, if we collect property tax, this would be on both unfair and, in 50 to 70 years when the government comes back to take the land without compensation, a kind of confiscation of private property," Liu Weixin said at in interview with "Real Estate Market" magazine. Liu Weixin is vice director of Chinese Association of Urban Economics, he proposed collecting a property tax three years ago and has written many articles about this.
China's real estate ownership currently is tied to the 40 year (commercial land) and 70 year (residential land) limit for land use-rights.
Based on the Law of the Peoples Republic of China on the Administration of the Urban Real Estate, extension of land use rights must be re-approved and land transfer fees re-collected. Otherwise land use-right as well as any construction on the land will all be taken back by the government without compensation. This is exactly why collecting property tax is difficult.
Concerning Vice Minister Liu Zhifeng's recent statement about "collecting property tax on large apartments," Liu Weixin approves. He believes that in order to adjust the housing structure, we can start by collecting taxes on larger apartments. But an important premise is that ownership of the land and the house upon it must be unified. Otherwise this tax will remain empty talk.
From Liu Weixin's perspective, there are two ways to solve this: first, if the current land supply system is not changed, then we should completely privatize land, which means the ownership of land and structures on the land are completely owned by the consumer. Second, we change the land supply system and collect land rent every year.
"The 70-year limit not only involves consumer rights, but involves how to ultimately establish a market transaction system based on private ownership in a socialist country. If the Constitution names the right to use houses as "ownership," and stipulates that this right will automatically disappear after 40, 50 or 70 years, then one can definitely say that this is confiscation of private property. However, the "Property Law" currently being drafted clearly advocates protecting private property." says a legal expert who prefers to not reveal his name.
According to this expert, the contradiction among laws in China, and the conflict between different laws and legal regulations, is the root of the problem hindering the collection of property tax.
"If we really want to collect this kind of tax, we must amend the Constitution, abolish limits on land use-rights, and clearly define the ownership of housing. Or, in the "Property Law" about to come out, unify ownership of land and houses."

Ownership relationships for housing unclear

Apart from land use rights problems, ownership relationships for housing itself are also unclear. And this is another problem in collecting property tax.
"Two necessary conditions for collecting property tax are clear housing ownership and clear housing prices. Currently, we already have intermediary agencies that do housing price appraisals, but because the ownership of houses is so unclear, we have so far not conducted a census on housing," says Prof. Liu Huan, vice director of Central Finance University Tax College.
"However, to find all the house owners in Beijing currently is no easy matter. Many houses have been transferred and re-transferred several times by developers; to find the real "owner" would take many man-hours and cost a great deal."
Concerning this, Liu Weixin believes, the ownership of houses in China is indeed very complex. We have commodity housing, residential zone renovation housing, affordable housing, cooperative housing, and so on. Each type has a different ownership system. Under such circumstances, to find the real owner, one must straighten out all ownership relations.
Liu Weixin believes, although it will be difficult to straighten out, it will not be impossible. The key is whether government officials want to crack this nut or not.
"Three years ago, I proposed collecting a property tax, but to date there has been absolutely no progress and still just talk. The top and bottom of society are keen on collecting property taxes, but the middle is cold. That means the central government and the public support this, but the regional governments are adamantly apposed. Why? I believe it's not because the government employees don't want to push it, but some local government officials don't want it. For them, it involves individual interests. In China, some government officials own a large amount of real estate." Liu Weixin said bluntly.
The anonymous expert agrees with this and suggests: "The reason why property tax is going no-where, is that it indeed is linked to government officials' interests. But this doesn't mean it's not solvable. For some government officials who have made great contributions to urban and economic development, we should be lenient and tax them only if their real estate surpasses certain amounts or if they own more than two estates."
Concerning the difficulty of conducting a census on housing prices because of unclear ownership relations, Prof. Qiao Zhimin of Central Finance University proposes we establish an electronic information system on all housing information.
"This work looks difficult, but is quite do-able. Today we have the technical facilities. What we need is to enter all basic information for houses into a system. When housing ownership is registered, the basic information is already in there. Therefore, it is not difficult. As for people who buy houses using their relatives' names, we can find out by linking to the public security's household registration system."

The real estate taxation system is defective

"The total of taxes and fees involved in the whole industry is something ordinary citizens don't know and even people in the real estate development industry can't tell you," Ren Zhiqiang, chairman of board of Huayuan Group, says. This also makes it difficult to collect property tax.
Liu Weixin believes, China currently has too many types of real estate fees and taxes. There is a real estate tax, farm-land occupation tax, urban land use tax, education added tax, regulation tax for fixed asset investment direction, and so on. Many names and many redundant charges, plus the tax rate is in general too high. These are all an embodiment of the fact that our real estate tax system is imperfect. He believes that if we want to tax people for owning houses, we must perfect the current taxation system, collect taxes from more people, reduce the types of taxes, and lower the tax rate.
Director Jia Kang of the Ministry of Finance, Institute of Fiscal Science, also indicates that reform of real estate taxes is a must; we should abolish irrational fees as soon as possible and start collecting a unified property tax. The local government at the municipal and county level should be managing property taxes, and make this real estate tax gradually become the main source of income for regional governments.
However, many difficult issues will surface, such as what is the appropriate tax rate, and which irrational fees should be abolished.
Relevant people from the Ministry of Finance reveal that it takes a very long time to fine-tune the adjustment of tax-coverage, the tax rate, and the form of taxes, as well as specific operation models. To find the specific way to collect and administer the property tax, the Beijing tax bureau even sent people to Canada and Hong Kong to investigate.
In addition, another piece of news the reporter discovered is that to date, the State Tax Administration has not started any work on a property tax reform.
Qiao Zhimin believes that to collect a property tax, the government must invest a huge amount of human resources and money. Even if it is collected, the tax rate will be fairly low. Thus it will be hard to balance the revenues of regional governments. Because of this, they are not willing to really push for a property tax reform.
It is thus clear that collecting property tax is very difficult. In fact, apart from all these above, there are other difficulties, for instance the lack of fair and just real estate appraisers. Characteristics of real estate is they are all different, therefore, it is vital to conduct accurate appraisals of each individual house.
Currently, three government departments in China are in charge of real estate appraisals: the Ministry of Construction, Ministry of Land and Resources, and SASAC (State-owned Assets Supervision and Administration Commission). Since there is no unified regulation to follow, the three departments come up with three different results when appraising the same piece of real estate. Thus, which taxation the results should be based on becomes a difficult question. Concerning this, relevant experts suggest the three departments should form an appraisal team together, which will formulate a unified appraisal criterion, or, it will entrust independent appraisal agencies on the market to handle this.