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MANAGING THE CHALLENGES OF RAPID URBANISATION: A Review of the Existing Property Tax System in Myanmar
LACHLAN MCDONALD AND ARKAR HEIN
November 2017
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About the Authors Lachlan McDonald is an economist on the ODI Fellowship Scheme. He has worked in a variety of roles in international development, global health and central banking across Asia and the Pacific. Arkar Hein is a program coordinator with Renaissance Institute. He has previously worked as a research consultant in the Unites States of America.
About the Renaissance Institute The Renaissance Institute (RI) is a policy institute in Myanmar that focuses on assisting the economic reform of Myanmar. Founded in 2013, RI provides analytical support and policy recommendations, assists government in capacity building and facilitates the communication between the government and other relevant stakeholders focused on revitalising Myanmar economy. In particular, RI supports key policy priorities of the current government: fiscal decentralization and public financial management reform.
Acknowledgement The authors would like to thank the municipal governments and the respective state and region government authorities in Bago, Hpa-An, Taunggyi, Pathein and Yangon for their assistance and support in undertaking this analysis. Thanks also to colleagues in the Renaissance Institute (in particular Hein Aung Kyaw, Ildrim Valley and Khin Moe Myint) and The Asia Foundation (James Owen and Ei Ei Thwe). We appreciate the support and guidance of Professors Roy Kelly and Bob Conrad of Duke University, and U Myo Myint and U Soe Win of Renaissance Institute. This research was funded by the governments of the United Kingdom, Australia and Switzerland with support from The Asia Foundation. The views expressed in this publication are the author’s alone and are not necessarily the views of the funding partners.
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Forward According to 2014 Census, approximately one third of Myanmar’s population resides in urban areas. As cities and urban populations grow rapidly, good quality urban services and infrastructure are increasingly needed. So too is good urban governance.
Good urban governance, strong local institutions and decentralisation are keys to the sustainable development of Myanmar. Municipalities are the most decentralised agency in the current Myanmar administration, being wholly accountable to the state and region governments.
Municipalities have the authority to mobilise financial revenues spend them on providing urban services and basic infrastructure. This authority needs to be used effectively and be focused on delivering for the local citizens.
This research presents means to improve the revenue mobilisation of municipalities. In particular, it reviews the importance of the existing property tax system in urban governance. It shows that property tax currently plays a smaller role in Myanmar than observed internationally. Further, the paper recommends ways to strengthen the existing property tax system, making urban revenues more efficient, equitable, and sustainable. It also recommends ways to build trust between municipalities and local citizens through raising public awareness.
Renaissance Institute is very pleased to present this research. We hope that it will improve understanding of urban finance in Myanmar and contributes to improved policy formulation and administration, leading to more effective revenue mobilisation and allocation within municipalities.
U Soe Win
Executive Director
Renaissance Institute
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Contents Executive Summary .................................................................................................................................................. i
1. Introduction..............................................................................................................................................................1
The potential for property tax in Myanmar .............................................................................................................. 3
2. Property tax: General principles ...........................................................................................................................5
3. The legal foundations for property tax in the urban governance of Myanmar ...............................................8
“Property taxes in disguise” ................................................................................................................................... 10
4. The existing property tax system in Myanmar ................................................................................................. 13
Property tax collected .............................................................................................................................................. 13
Tax administration and policy in individual municipalities ................................................................................ 15
Identification of the tax base ............................................................................................................................. 18
Valuation of the tax base .................................................................................................................................... 19
Cadastral record keeping .................................................................................................................................... 23
Tax rates and billing ............................................................................................................................................. 26
Tax collection ........................................................................................................................................................ 28
Enforcement .......................................................................................................................................................... 29
5. Assessment and Recommendations................................................................................................................... 30
Build awareness about municipal governance broadly and property tax in particular ............................. 31
Build stronger administration systems to widen the tax base and improve compliance .......................... 32
Adjust tax policy at state and region government level to improve the equity and effectiveness of the property tax system ............................................................................................................................................. 34
6. Conclusion ............................................................................................................................................................. 36
7. References .............................................................................................................................................................. 37
Annex A: International experiences in collecting property tax: ............................................................................. 40
Annex B: Valuation formulas for the purposes of property tax. ............................................................................. 42
Annex C: Property tax assessment notices ................................................................................................................ 44
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Executive Summary If Myanmar is to capture the social and economic benefits of rapid urbanisation and avoid the pitfalls of poorly managed urban growth seen elsewhere, then strong and effective urban governance will be necessary. Critically, municipal governments must have access to the resources they need, and the authority to spend them, on providing quality urban services and infrastructure.
Experience from around the world suggests that a strong property tax system can lay an important foundation for good municipal governance. Property taxes are regular and compulsory payments made by owners (or occupiers) of property based on an estimate of the property’s value. They are generally thought of as the price that urban residents pay for the benefit of receiving urban services. Cities around the world rely on them to fund urban services for a number of reasons. Land and buildings tend to be easily identifiable so evasion is difficult. Only the urban residents that directly benefit from urban services pay the tax and people with more valuable properties pay more tax. They also provide a steady stream of own-source revenue for municipalities that should grow over time as property values appreciate.
Put simply, property taxes are an efficient, equitable and effective revenue instrument for local governments; equipping them with the resources they need to make decisions that suit the local context.
In Myanmar, municipal governments occupy a unique position in an otherwise highly centralised state. Since 2011, they have been, in effect, a wholly decentralised arm of government, accountable only to state and region governments and with explicit authority over a wide range of core duties and responsibilities. This includes the collection of their own revenues. This high degree of authority and discretion over their budgetary resources makes municipalities an important example of the fiscal decentralisation permitted within the current Constitution. It also means that they have many of the tools at their disposal to manage the challenges of rapid urbanisation.
However, the full potential of municipalities in Myanmar has not yet been realised. The nature and function of municipal governments is little understood by the public or by policymakers. Service delivery is often weak and of low quality, which undermines public trust in local authorities. In this low-trust environment municipalities have become stuck in a low-tax, low-service equilibrium; in which people pay a small amount of tax but are fiercely resistant to increases. Accordingly, the majority of municipal revenues tends to be derived from non-tax sources, such as the proceeds from monopoly license auctions, not taxes collected from the public.
This provides municipalities with up-front revenues and requires little contact with citizens but has been shown to distort business investment, unfairly penalise the poor through higher prices for food and other basic goods, and result in unwarranted redistributions of wealth from rural to urban areas (because rural customers also face the higher prices, but all license revenues are spent on urban services).
This discussion paper attempts to build a common understanding of municipal governance and municipal revenues in Myanmar as an initial step on the path to reform. It specifically focuses on the existing property tax system. Drawing on actual tax collection data, interviews with municipal officials and detailed ongoing work with select municipalities over seven months, the analysis describes and
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evaluates the existing property tax system and how it operates in five cities across the country. This includes Yangon as well as cities in four other states and regions: Bago (Bago Region); Hpa-An (Kayin State); Taunggyi (Shan State); and Pathein (Ayeyarwady Region).
The results show that Myanmar has a functioning property tax system. In all of the cities examined property tax is regularly collected from urban residents. These taxes are distinct from other charges levied on property, such as land tax, stamp duty and capital gains tax, which are paid to the Union Government and/or only triggered by the sale or transfer of the property. They are also distinct from user fees, which are only paid if a customer uses a specific good or service.
Generally, the structural features of the property tax system are strong. The Constitution and local administrative laws are clear in providing the required authority to municipalities to administer and collect property taxes. Explicit exemptions tend to be minor and – outside of Yangon at least – tax administration is reasonably straightforward. Differences in tax collections between cities can be largely explained by differences in the administrative and policy settings.
However, property tax plays a much smaller role in municipal budgets than it could. Collections are small compared with international benchmarks and tax payments by individual properties are low relative to common household purchases – in most cases equivalent to the price of a few cups of tea, or less, paid every six months (Figure A and Table A).
The small amounts collected mean that property taxes account for a small share of total municipal revenue (2 – 6 per cent in the cities examined). This is a much smaller reliance on property tax than observed internationally.
The analysis reveals a number of administration and policy weaknesses, common across municipalities, which explain why tax collection is so small. These include:
• Ambiguity regarding who is responsible for paying property tax (i.e. owner vs occupier);
• Large gaps in cadastral records, which mean a substantial share of properties – potentially between one-third and one-half in some cities – are not paying property tax.
• Fragmentation of property-related information, which means municipalities are often not able to access the information required to register properties and levy property tax.
Figure A
Mid-point of property tax payments in each city Payments made every six months
City Amount Cups of tea equivalent* Yangon 203 MMK Less than 1 Taunggyi 604 MMK 2 Hpa-An 2,535 MMK 8 *Presumes the price of a cup of tea is approximately 350MK ($US $0.26)
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Myanmar Cambodia Thailand Lao PDR Indonesia China
Property Tax in Middle Income AsiaPer cent of Nominal GDP; 2013
% %
Sources: IMF Government Financial Statistics Database (Revenue): "Recurent taxes on immovable propoerty"; World Bank Development Indicators; Myanmar Minstry of Planning and Finance
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• A continued reliance on paper records, which introduces the risk of mistakes and
mismanagement, and means that policy decisions are often made without reference to quantitative evidence.
• Valuation systems that result in small payments among those that are actually paying property tax, treats different taxpayers the same and potentially distorts investment.
• Static property valuations, which means that the real value of tax collected falls each year. • Property tax bills that show separate service-related fees, which potentially creates confusion
among taxpayers by blurring the link between taxes and what they are actually spent on. • Weak enforcement powers of municipalities, which makes it difficult to control tax evasion. • A lack of taxpayer awareness, which is needed to promote greater voluntary compliance.
The results also show that there are some additional issues unique to Yangon. Property valuation techniques are complex and are sometimes overridden by arbitrary adjustments. Tax collections are also unbalanced, with the tourism and manufacturing industries bearing a large burden of property tax – including paying property taxes on movable machinery – while most urban residents pay next-to-no tax. The high effective property tax rates levied on these sectors may potentially distort investment in industries that are key to lifting many people out of poverty, and also heightens the risk of tax evasion.
A stronger property tax system is possible with well-targeted reforms to the existing system
For Myanmar to have a stronger property tax system no Constitutional change is required, nor do new tax systems or national laws need to be established. Rather, the existing property tax system, and its strengths, should be retained and built upon through well-targeted and practical reforms. Decision-making authority is appropriately decentralised to the sub-national level of government and administrative arrangements are generally well-suited to the existing capabilities of municipal governments.
Drawing on the evidence gathered in this research, eight recommendations are proposed to make the current property tax system work more effectively. These are deliberately sequenced and broken into three themes.
First, build awareness about municipal governance broadly and property tax in particular. This should begin immediately; indeed, this research is the first step on that path.
1. Develop a whole-of-government policy position on municipal governance.
2. Share positive examples and the lessons learnt from experimentation among municipalities.
3. Improve communication to increase public awareness and comprehension of property tax by: • clearly communicating the differences between property tax and other charges; • consolidating property tax bills to one single line item; • raising the public’s awareness of municipal responsibilities and funding needs; and • strengthening two-way dialogue with citizens.
Second, build stronger administration systems to widen the tax base and improve compliance. This can also begin immediately as they are under the control of municipal governments and changes are technically feasible. However, entrenched ways of working and perverse incentives in the current system mean that reforms will take time.
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4. Target common administrative weaknesses to widen the tax base and increase the tax yield by: • shifting cadastral records from paper to digital files; • auditing the accuracy of existing property classifications; • gathering evidence on the size of coverage gaps in the cadastral record; • better incentivising tax collectors to keep cadastral information updated; and • automating the sharing of property-related information between municipalities and other
government departments.
5. Focus on improving compliance by: • encouraging voluntary compliance though incentives; • making tax payments easier through the widespread use of electronic payments; • strengthening enforcement through better-targeted sanctions for non-payment; • strengthening and modernise the enforcement powers of municipalities; and • changing audit focus to collecting taxes from each household rather than meeting revenue
targets.
Third, adjust tax policy at the state and region government level to improve the equity and effectiveness of the property tax system. Policy changes will be most fruitful if they are built on a platform of evidence, public engagement and a strong administrative system. They therefore can begin in earnest, though should be planned over several years.
6. Improve property valuation techniques by: • accounting for location and physical size in property valuations; • re-examining relative values given to property characteristics within each city; • increasing the number of floors considered in property valuations; • improving the accuracy of residential property valuations in larger cities; • considering offsetting increases in valuations with reduced tax rates, at least initially; and • introducing automatic indexing of property values.
7. Introduce standard operating procedures (SOP) to reduce variation in some administrative functions, including: • identifying the tax base; • record keeping; • adding properties to the cadastral record; • property valuation; and • taxable components.
8. Change the tax mix in YCDC so as to not rely so heavily on businesses.
While not a silver bullet solution to the challenges of rapid urbanisation, a stronger property tax could have considerable rewards for Myanmar. It offers an opportunity to expand the tax base and to better align municipal revenues with their expenditure needs; both now and into the future as urbanisation gathers pace. It also offers an opportunity to help municipalities improve their revenue mix – relying less on a system of non-tax revenues that impose hidden costs on the population and distort investment, and shift to more sustainable and equitable revenue streams. With the right reforms property tax could be part of a sustainable development agenda that also makes cities more liveable as they become more important and cultivates their role as engines of growth. Ultimately, these are the foundations upon which a more peaceful and prosperous Myanmar are being built.
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1. Introduction Cities are becoming increasingly important in Myanmar. For several decades, urban population growth has been faster than growth in the total population, lifting the urban population to more than one third of the total in 2014 (Figure 1). This on par with neighbours Viet Nam and Lao PDR, ahead of Cambodia, though still well behind Thailand. While a considerable share of the urban population is concentrated in Yangon, population growth in other cities such as Mandalay, Bago, Taunggyi, Pathein and Hpa-An has overall been faster.
The trend toward a more urban and densely populated Myanmar is unlikely to abate. Yangon is projected to grow
Figure 1
more rapidly than most other cities in Asia in coming decades (LSE Cities, 2017). While continued patterns of migration in search of economic opportunity and away from dry rural areas should see populations continue to swell in other cities too.
Urbanisation will have important implications for Myanmar’s development prospects. Cities are an important step on the development pathway, providing close connections between people, goods and information. They will therefore be key to lifting productivity, income and living standards in Myanmar (Doberman, 2017). On the flipside, however, growing cities also present a raft of additional governance challenges, including increased congestion, pollution, poverty, and increased pressure on public infrastructure and essential services. If not adequately managed, these costs can overwhelm the benefits of urbanisation and have negative impacts upon economic development and public health. Yangon provides an instructive example; while it accounts for around one third of the country’s total economic activity (UNDP, 2015), the city is creaking under the strain of its large population (Fox, 2017)
The structural transformations brought about by urbanisation will also likely shape the nature of government in Myanmar. As they grow, cities will become an increasingly important interface between the Myanmar population and its government. Strong and effective municipal governance, equipped with adequate budgetary resources to provide urban services, is therefore of paramount importance if Myanmar is to avoid the pitfalls of poorly managed urbanisation seen elsewhere (Tewari, Godfrey et al., 2016). Actions taken early to prepare for future urban growth will also help avoid getting “locked in” to ineffective institutions and the large economic and political costs that come with changing course (Pierson, 2000).
Against this backdrop, a process of decentralisation also well underway in Myanmar. This is generally increasing the resources available to sub-national governments and equipping local decision makers with the authority to spend them. Municipalities, in particular, have an important role in this process. Arnold et al. (2005, p. xi) note that municipalities are “a significant experiment in Myanmar’s push towards greater decentralization”, owing to their unique accountability to the state/region
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1998 2004 2010 2016 2002 2008 2014
Urbanisation in MyanmarMillion%
Urban population (% of total)
Other Myanmar Cities*
Yangon
* Urban population refers to people living in urban areas as defined by national statistical offices. "Other cities" is urban population not living in the country's largest metropolitan area (Yangon) Source: World Bank Development Indicators
City Population
Myanmar
Thailand
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Cambodia
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governments, expansive mandates and the fact they are mostly self-financing – receiving only a relatively small amount of their revenue as transfers from higher-level governments. They therefore have many of the tools at this disposal to manage the challenges of rapid urbanisation.
To date, however, the potential of municipalities in Myanmar has not been fully realised. Studies have found that there is no dedicated urban planning within cities and the provision of urban services is generally weak (Arnold et al., 2015). Municipalities have relatively small budgets, and are chronically understaffed (Winter and Nanda, 2016).1 Trust in municipal government is also low, which undermines their legitimacy (Bissinger, 2016).
This weak perceived legitimacy is key to understanding the way that municipalities raise their revenue. Instead of collecting taxes transparently from the population, most municipalities rely heavily on non-tax revenues, mainly through issuing licenses to business. Particularly prominent is revenue derived from the auctioning of licenses for artificial monopolies.2 The most lucrative of these licenses for municipalities is slaughterhouses (Figure 2). These monopoly licenses have been shown to distort economic activity by reducing upstream and downstream investment, unfairly penalise the poor through higher prices for food and other basic goods, and result in unwarranted a redistribution of wealth from rural to urban areas (Bissinger, 2016). They do, however, provide up-front revenues, require little effort from municipalities and limits contact with citizens. Each of these is advantageous in an environment with low trust and
Figure 2
legitimacy. On the spending side, citizens often choose to be self-reliant rather than relying on the municipal governments – for example by instigating and financing their own urban roads through voluntary contributions (McCarthy, 2016).
Further, municipalities do not feature prominently in reform discussions. They have no Union-level Ministry or natural champion in Nay Pyi Taw to advocate on their behalf, which means that municipal governance is likely not explicitly debated at the Union Government, nor are the potential impacts on municipalities likely being considered in prospective policy reforms. With some notable exceptions (see below) municipalities have also not been a large recipient of technical assistance – with reform
1 Winter and Nanda (2016) were referring to Development Affairs Organisations (DAOs), though as at June 2017 YCDC’s Assessor’s Department was also officially understaffed by around one half of its permitted staff (YCDC, 2017) 2 Auctions are held for the exclusive rights to undertake certain businesses. These include the operation of slaughterhouses, ferries and pawnshops. They also include rights to collect fees from vendors in markets, collect road tolls and collect parking fees. These licenses have value because of the administrative restrictions placed on them. Prices are not set to market signals and instead are administered by the state (Bissinger, 2016). The smaller the municipality the more heavily it tends to rely on license auctions (Winter and Nanda, 2016).
Property Tax 4.9% Other tax 0.1%
Business Licenses
(permits) 6.0%
Other Monopoly License Auctions
49.1%
Slaughterhouse Monopoly License
Auction 21.1%
Other revenue (fees, charges
rents, etc.) 12.6%
Transfers from Union and State
Govt. 6.1%
Hpa-An DAO Revenue 2016/17Per cent of total revenue budgeted, revised allocation
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efforts to improve public financial management and deepen social accountability, having so far focused on the Union Government (Oxfam, 2015).
The potential for property tax in Myanmar If rapid urbanisation provides the motivation for municipalities in Myanmar to strengthen their budgetary position and improve urban governance then fiscal decentralisation provides the opportunity to experiment and reform. One avenue is a strengthened property tax system. Property taxes are an efficient, equitable and effective revenue instrument for municipalities; equipping them with the resources they need to make decisions that suit the local context. Accordingly, they are an important revenue sources for cities around the world.
Importantly, Myanmar already has a functioning property tax system. Structurally, the system has features that are similar former British colonies as well as Indonesia and the Philippines, among others (see Annex A for international comparisons).
However, actual tax collection data show that property tax plays a much smaller role in Myanmar than it could. The total yield of property tax is small, accounting for only 0.03 per cent of GDP in 2013. This is well below the rates observed in other middle-income countries in the region (Figure 3) and around the level of Pakistan, which is renowned for its exceptionally low property tax yield (Piracha and Moore, 2016).3 Data from 2016/17 from individual cities suggests that tax collection remains small. This clearly shows that property tax is being underutilised as a revenue instrument in Myanmar and that there could be scope to experiment at the municipal level increase its yield.
Reform is not likely to be effective, however, without first understanding how
Figure 3
the existing system works. This discussion paper catalogues and evaluates the current property tax system in Myanmar and provides concrete, practical and evidence-based recommendations for making it stronger. Drawing on actual tax collection data, interviews with municipal officials and detailed ongoing work with select municipalities over seven months, the analysis examines property tax in five cities across the country: the largest city Yangon as well as cities in four other states and regions: Bago (Bago Region); Hpa-An (Kayin State); Taunggyi (Shan State); and Pathein (Ayeyarwady Region). These cities, which collectively account for 12 per cent of the Myanmar population according to the 2014 Census, were deliberately chosen to give a cross-section of experiences across states and regions, because of existing relationships and data availability (see Box 1). The breadth of cities also
3 To put this into perspective, UN Habitat (2011) suggest the revenue potential for property tax in developing countries is between 0.5 per cent and 1 per cent of local GDP. For low-income countries typical figure for low-income countries lies within the range of 0.1–0.6 per cent of GDP (IMF, 2011; Kelly, 2013, cited in Piracha and Moore, 2016). Given that Myanmar has a comparatively small tax to-GDP ratio the tax potential may not be this high. Nonetheless, the fact that Myanmar is at the lower end of this estimate is still around 20 times higher than the current property tax collected in Myanmar suggests that yields are very low.
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Myanmar Cambodia Thailand Lao PDR Indonesia China
Property Tax in Middle Income AsiaPer cent of Nominal GDP; 2013
% %
Sources: IMF Government Financial Statistics Database (Revenue): "Recurent taxes on immovable propoerty"; World Bank Development Indicators; Myanmar Minstry of Planning and Finance
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acknowledges the importance of the urban hierarchy, with regional capitals currently hubs of strategic and commercial importance as well as future centres of industrialisation (Dobermann, 2016).
Box 1: Data gathering approach for this report
The information for this report was gathered as part of Renaissance Institute’s ongoing and intensive engagement with selected Development Affairs Organisations (DAOs) and YCDC in its partnership with The Asia Foundation's Myanmar Strategic Support Program (MSSP). This work has involved regular engagement with officials at all levels of municipal governance over seven months in 2017, including: Ministers; state/region DAO offices; Executive Officers; and tax collectors. Discussions have focused on problem identification and deconstruction and an iterative and adaptive approach to identifying reforms for property tax and state building that could be utilised in the local context – in line with the techniques outlined in (Andrews, Pritchett and Woolcock, 2012). The Myankhon mobile application, developed by Koe Koe Tech in partnership with The Asia Foundation, provided detailed digital property tax collection data for individual cities.
The rest of this paper proceeds as follows: Section 2 provides an explanation of property tax, including benefits and shortcomings plus international experience. Section 3 outlines the legal framework for municipal property tax collection in Myanmar, including the assignment of responsibilities to different levels of government. Section 4 uses actual tax collection data to catalogue the amount of property tax collected before examining the administration and policy settings in each city. Specific attention is given to identification of the tax base, valuation, record keeping, tax rate, collection and enforcement. Section 5 assesses the property tax system and proposes eight broad recommendations for improving it, and Section 6 concludes.
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2. Property tax: General principles Property tax is a regular and compulsory payment made by owners (or occupiers) of property to local governments, based on an estimate of the value of immovable land and buildings. Put simply, property tax is the price that urban residents pay for the benefits of receiving urban services (Bird, 1999). In Myanmar, property taxes are an ongoing tax on possessing property and are distinct from other taxes and charges levied on property, which are collected by the Union and/or paid once and triggered by property transactions. They are also distinct from user fees and mechanisms designed to address speculation. (Box 2). Indeed, both theory and evidence suggest that property taxes are a generally weak mechanism for dampening property price speculation (Box 3).
Box 2: Taxes and charges on property in Myanmar
Ongoing tax on possessing property
• Property tax: a regular and compulsory payment made by owners or occupiers of property to the local government for the benefit of receiving public services. Based on the value of immovable property (usually land and/or buildings). In Myanmar, set at various rates and collected by urban municipalities.
• Land tax: a regular compulsory payment levied on rural land based on a fee per acre. Collected by the General Administration Department and payable to Union, though presently very small.
Taxes triggered by a property transaction
• Capital gains tax (CGT): a mechanism to tax the income earned from the sale, exchange, or transfer of capital assets (i.e. any land and buildings). In Myanmar, prescribed under the Union Tax Law (2017, Chapter 7) – one single payment of 10 per cent, payable upon sale. Collected by Internal Revenue Department.
• Stamp duty: a transactions tax on land and buildings property payable by the buyer. In Myanmar Set at 5 per cent of the price of sale in Yangon, Mandalay and Nay Pyi Taw, and 3 per cent in other cities (Stamp Duty Act). Collected by Internal Revenue Department.
Other charges associated with property
• User fees: a voluntary payment for the consumption of a good or service. Focused on covering the cost of delivering a particular service. A useful mechanism for charging users for consuming private goods, such as piped water and electricity, though this requires accurate measurement of usage.
• Building permits: a one-time payment for property related permissions and services. In Myanmar, construction permits and building completion certificates must be obtained from municipalities.
• Development contributions: formal and informal contributions are sometimes collected from developers and builders to recover the cost of the additional public infrastructure required to service a new development in a municipality.
Taxes designed to discourage property speculation in an international context
• Property Speculation taxes (PST): a transactions tax that fades over time the longer a property is held. Owner occupiers are exempt so that the tax primarily affects investors. Taxes of this nature are used around the world, including in Malaysia, Taiwan, China, Germany and Hong Kong (Heywood and Hackett, 2013; Muller et al., 2010).
• Non-resident Speculation taxes: additional transactions taxes imposed on foreign buyers of property. Used in Canada and Australia (Australian Financial Review, 2017)
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Across the world property taxes are widespread and are an important source of own-source revenue for municipal governments (Martinez-Vasquez, 2008; McCluskey and Bell, 2008). In large part this is because of the unique advantages of property tax.
Property taxes are efficient. Property taxes tend to be non-distortionary for the broader economy in that they have a relatively small effect on resource allocation decisions (Johansson et al., 2008; Bell, 2003). Further, land and buildings are easily identifiable and immovable, which means that it is difficult to evade a tax on them. Property taxes are fair. The tax burden mainly falls on local residents that directly benefit from the local services funded by them.4 Evidence from developing countries indicates that the value of local public services is capitalised to some extent in property values (Haas and Collier, 2017). Accordingly, properties with better access to services have higher values and therefore pay a greater amount in property tax. On the flipside, in the absence of property taxes, private property owners are able to capture the full benefit of these public services benefits as profit.
Box 3: Property tax and speculation There is an argument that land taxes can help prevent land speculation by making it costly for speculators to hoard underdeveloped (vacant) land (UNHabitat, 2011). In this sense, land tax can be useful for encouraging a more rapid and intensive pace of development. In the case of taxes on buildings, though – which is what property tax mainly focuses on in Myanmar – the argument is much weaker. In theory, property tax could discourage hoarding of empty units for speculative investment purposes, though other non-tax instruments of specific speculation taxes are likely to be more effective (Norregaard, 2013). Recent evidence from China confirms this; in 2011, the government started testing new property taxes in Shanghai and Chongqing to quell real estate price speculation. The pilot did little to help curb the increase in housing prices and consequently no other cities were added to the trials. Local governments have instead resorted to other tools to quell speculation, most typically by raising down-payment requirements and mortgage interest rates. Some cities have also limited the number of properties each family can own, and prohibited quick sales (sources: Global Property Guide, 2011; Radio Free Asia, 2017).
Property tax provides municipalities with a stable, predictable and growing source of own revenues that is well suited to the task of funding local services. Cities in many developing countries continue to rely on a mix of revenue transfers from higher-level governments and raising revenue through business license fees. These revenues can be complex to administer, ad hoc, unreliable, have negative impacts on socioeconomic development and are not always under the under the control of municipalities (Haas and Collier, 2017). In contrast, property tax is systematic, provides ongoing revenue and tends to be under the control of municipalities. Further, since land is a scare resource, its value, and the value of property tax collected, tends to rise over time.5 While property tax revenues are not likely to provide sufficient revenues to fund major social expenditures (education, health, social assistance) they are generally sufficient to fund property-related services such as local roads and garbage disposal (Bahl, 2009), which are often assigned to sub-national governments.
The highly visible and regular payments of property tax can help improve the accountability of local governments. Taxpayers tend to notice the payment of property tax more than other taxes such as income taxes (which are withheld by employers) and indirect taxes and charges (which are often rolled
4 This concept is known as the “benefit principle” of taxation. It is still an open question as to how whether property tax is progressive in low- and middle-income countries (Norregaard, 2013). It is possible to introduce progressive rates of taxation into a property tax – with higher value properties paying higher rates of tax – though this is not encouraged as it is administratively complex and fails to account for “asset rich-cash poor” taxpayers (Kelly, 2013). A better way to make property taxes more progressive is to prioritise pro-poor spending. 5 This relies on valuation systems for property tax being flexible enough for property tax to capture the increases in property values. Generally, valuation systems are not so nimble. Accordingly, property tax is sometimes considered “inelastic” in that it does not grow automatically when the economy expands (Kitchen and Slack, 2016)
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into prices and largely invisible). People therefore know exactly how much property tax they are paying and are reminded each time there is a payment. This visibility can have advantages by heightening citizens’ expectations of municipalities and by making governments accountable for the revenue they generate (Kelly, 2013). However, the visibility of property taxes also tends to make them politically sensitive and often unpopular with citizens (Cabral and Hoxby, 2015).
Property tax supports decentralisation. Many studies have shown that property taxes provide financial support for the decentralisation of political decision-making (Norregaard, 2013; Kelly, 2013; Martinez-Vasquez, 2008; Ali et al., 2017). These links with fiscal decentralisation are often reflected in the administrative design of property tax – while policy-setting and oversight tends to sit with higher levels of government, where standardisation and uniformity are important, administrative functions are usually assigned to lower levels of government (UNHabitat, 2011).
However, property taxes are hard. Studies have also shown that the weak capabilities of local government is a key reason why property taxes fail to reach their potential in developing countries (Fjeldstad and Heggstad, 2012; Piracha and Moore, 2016; Kalkuhl et al., 2017). Municipal governments are, in theory, well placed to access the information required to tailor property tax systems to the local context. However, they can quickly become overwhelmed by the considerable amounts of information required to be kept on properties as well as the onerous administrative, monitoring and enforcement requirements.
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3. The legal foundations for property tax in the urban governance of Myanmar Municipalities occupy a unique place in Myanmar. In an otherwise highly centralised state, they stand alone as a wholly delegated administrative responsibility of state and region governments (Nixon et al., 2015). In large cities, such as Yangon and Mandalay, the separate administrative authority of cities has been in operation since colonial times (UNDP, 2015). More recently, this responsibility has been broadened to cities across the whole country, via the 2008 Constitution, which devolved responsibility for “development affairs”, interpreted as municipal governance, in general to state and region governments.6
Authority for lawmaking and budgeting that affects municipal governance across the country now sits wholly under the control of sub-national governments – separate from the Union government. State and region governments, in turn, delegate these management responsibilities to individual municipalities via relevant local laws. In Yangon, the Yangon City Development Committee (YCDC) has a wide-ranging mandate for managing 33 towns in Yangon City. This includes urban planning, infrastructure such as roads, bridges, and drains, sewerage, management of public spaces, and public health.7 In most other urban areas around the country, Development Affairs Organisations (DAOs) have a standing legal mandate from respective Development Affairs Laws in the states and regions.8 These laws give DAOs authority over a wide range of core duties and responsibilities, including construction and maintenance of roads in urban areas, water, and responsibility for the provision of streetlights and garbage collection (Arnold et al., 2015).9
Municipalities are largely self-financing due to their delegated tax collection powers and their responsibility for local economic governance. Schedule II (Section 1) of the Constitution vests authority in the state and region governments to collect “[m]unicipal taxes such as taxes on buildings and lands, water, street lightings and wheels”. These tax revenues are collected and retained by the respective municipalities, alongside a relatively large amount of non-tax revenue.10 Together, these revenues account for more than half of all own-source revenues of state and region budgets. Despite the wide mandates of urban areas, in reality, restrictive spending norms limit the actual flexibility that DAOs have to manage their affairs, with most spending is centred on capital infrastructure (mainly roads) and staff wages (see Box 4 for more details).
6 Strictly speaking, there is no mention of municipalities in the Constitution, though Schedule II permits state and region governments to pass Development Affairs laws. 7 A similar mandate is provided to the Mandalay City Development Committee (MCDC), which is not part of this study. 8 These, in turn, are based on State Law and Order Restoration Council’s (SLORC) Law 5/93 (see Arnold et al., 2015 for more information). 9 Rakhine State has not yet passed the DAO law, though a similar law has been submitted by the Rakhine State government. 10 In reality, tax represents a small share of overall revenue and non-tax revenue tends to dominate.
9
Box 4: Development Affairs Organisations
• The construction/maintenance of road-related infrastructure and the provision of solid waste management services are the most important public goods that are delivered by DAOs.
• DAOs do not have a mandate to provide services or infrastructure in large social sectors such as education and health, which are both areas for which the Union Government is responsible.
• DAOs play little part in any urban planning exercises, in large part because they exercise no control over land tenure or land administration (which sits with the General Administration Department).
• DAOs are largely self-financing, though they receive some shared tax revenue from the Union government and receive limited transfers from State and Region Governments.
• The largest source of own-source revenue is from a widespread system of auctioning licenses to create artificial monopolies (e.g. slaughterhouses and ferries). Revenue is also derived from other licenses permitting businesses to operate. Taxes, including property tax and wheel tax, are small.
• License revenue is inequitable because it is regressive, imposes arbitrary and unequal burdens on similar members of society and results in a large transfer of wealth from rural to urban regions.
• DAOs have constrained investment and spending options available to them due to restrictive spending norms. At least 50 per cent of total expenditure is allocated to capital spending (mainly road-related infrastructure and purchase of equipment and vehicle).
• Payroll expenditure is normatively capped at 30 per cent of total expenditure. This directly links staffing decisions to the amount of revenue generated. With small budgets, most DAOs are officially under-staffed.
Sources: Winter and Nanda (2016); Bissinger (2016); UNDP (2015)
Narrowing the focus to property tax, the Yangon City Development Affairs Law and the respective state and region Development Affairs (DA) laws (for DAOs) are broadly consistent in their basic structure and provisions. Municipalities are entitled to charge property taxes based on the valuation of immovable land and buildings in their designated locations. These taxes are specifically broken down into four components – a general charge on buildings and land, plus service-specific charges associated with street lighting, water and garbage removal. In YCDC, the law specifically defines property tax as the combination of the four components, which are referred to as “taxes”, while elsewhere the four components are referred to as “fees”.11 The respective laws specify a maximum rate for each property tax component.12
In YCDC, the law explicitly states that the four taxes are to be jointly collected, though it does not indicate who is liable for the payment (owners or occupiers). In contrast, the DA laws indicate that the building and land fee is payable by owners and the service-specific fees are payable by the occupants. Though, in reality, both YCDC and smaller cities tend to aggregate these various components and collect them in one single payment from whomever is occupying the property, so long as it is recorded for tax purposes (see Section 4b below).
In general, state and region governments are responsible for oversight and policy decisions affecting tax, including approving changes in the taxable value of properties and tax rates (via the Minister of Development Affairs and/or the state/region Development Affairs Committee, DAC, which is supported by state and regional development affairs director and his staffs). State and region directors have overall responsibility to supervise township DAOs’ works, scrutinize their budget and work proposals. However, they lack a considerable decision-making power and act mostly as a secretariat to coordinate between individual DAOs and the state/region Minister of Development Affairs and/or the state/region DAC. The individual municipalities are responsible for administering and implementing 11 The terminology may be slightly different in YCDC, referring to “general tax” (instead of building and land fee), “lighting tax” (instead of lighting fee), “water tax” (instead of water fee) and “garbage tax” (instead of garbage fee), but it is clear that they are referring to the same things. 12 For DAOs, the maximum rate is 10 per cent for each of the four fees, while in YCDC the maximums are 20 per cent for general tax, 5 per cent for lighting tax, 12 per cent for water tax and 15 per cent for garbage tax.
10
the system. In YCDC, exemption powers sit largely with the municipality, while in other cities these powers are assigned to the relevant Minster (Table 1).
Table 1: Legal Foundations for urban property tax in Myanmar
Location Relevant Law Property Tax Provisions State/Region Government Oversight
YCDC
2013 Yangon City Development Affairs Lawa
• Property tax is clearly defined as a combination of General tax, Lighting tax, Water tax and Cleansing tax.
• Payable by either owners or occupiers. • Based on an assessment of the annual rental
value of property provided by YCDC Assessor’s Department.
• The DAC may exempt or remove religious and public buildings, cemeteries from all components of property tax. Exemptions may be granted because of poverty (for less than one year) and other, non-specific, purposes.
• YCDC Assessor’s Department must seek an approval from the Yangon region government for any proposed tax policy changes (including changed to assessed property values).
DAOs
Respective Development Affairs Laws
• Ayeyarwady Region (2012 law amended in 2016)
• Bago Region (2014 law)
• Shan State (2013 law)
• Kayin State (2012 law)
• Building and Land tax payable by owner, service-specific user fees payable by occupants.
• Based on a valuation of the property, calculated as the annual rental value (ARV).
• Each component cannot exceed 10 per cent of the ARV (5 per cent for any government-owned / managed property).
• Appeals: can be made to the DAO Executive Officer (EO) for amendments to the tax rate or ARV. Minister's decision is final. (Appeal process also applies to other decisions made by EO/ DAC).
• Policy decisions made by the DAC need an approval from the Minister of Development Affairs (Shan State: State DAC, headed by the Minister).
• The Minister (State DAC) can veto any decisions made by the individual DAOs.
• The Minister (State DAC) can exempt or remove any property and individual for the payment of tax and user fees.
• Tax rates and assessed property valuations are the responsibility of the Minister (State DAC).
• Property values are updated from time to time.
a The 2013 law is in the process of being superseded by an updated law drafted in 2016. Source: Authors
“Property taxes in disguise” The DA laws prescribe that municipalities can collect four “fees”: a fee on building and land, plus three separate service-specific fees. Despite the local terminology, this paper takes the view, originally proposed by Bissinger (2016), that when several conditions are jointly satisfied these fees are actually “taxes in disguise”. Specifically:
1. the payment is compulsory; 2. the payment is based on an estimate of the value of the property, and not linked to the use of a
specific service; 3. the payment is collected by municipalities; 4. the payment is not linked to the cost of providing any individual service; and 5. the payment collected is then pooled as general revenue in the municipal budget.13
13 Bissinger (2016, p27) uses a similar test from the Michigan Supreme Court (1998). It is also our understanding that this may be consistent with the way that budget departments in individual states and regions treat this revenue for reporting purposes, though this could not be independently corroborated.
11
For most of the components observed in the cities in this study, these conditions are jointly satisfied. Figure 5 provides an illustration of the system. For most components households cannot voluntarily opt out from making payments, regardless of whether they used (or could access) each service. Payments are calculated as a fixed percentage of the assessed taxable value of the property. All components are bundled into one single payment collected by DAO employees.14 The revenue collected from each component is well below the true cost of the services that they are alleged to finance, according to Winter and Nanda (2015, p63), and the funding is pooled with other revenue to fund the general spending of municipalities, not just specific services.
Figure 5: Bundling fees into a property tax
Source: Authors
Complicating matters, somewhat, is that in some circumstances these joint conditions are not met. In these instances, the service-specific fees are, in fact, user fees. Accordingly, identifying what exactly constitutes property tax in Myanmar requires an understanding of the local context and some
14 The tax-like nature of service fees may be because the government has traditionally been the chief provider of services and because it is simply the legacy of old municipal practices. Presumably, it has also been easier to simply collect service fees at the same time as building and land tax.
12
subjective judgement. In Taunggyi, for instance, the DAO outsourced garbage collection to a private company in 2015. Since then, the company, not the DAO, has been responsible for collecting monthly user fees from most households – i.e. its customers. The payment made by households is no longer a tax but is a service fee, kept separate from the budget, and directly used to cover the costs of collecting garbage.15 Taunggyi is also experimenting with collecting user fees for water services, using meters to measure and charge households for their actual usage of each service. In this instance, too, the payment is a fee because it is not linked to the value of the property, but specifically linked to the use of the services. In YCDC, charges on both water and garbage collection are no longer being collected by YCDC’s Assessor’s Department as a tax. Attempts to reintroduce these payments as taxes have been held up by inaction at the region government.16 Pathein has never collected the water tax component because, its officials said, public water services are not provided to residents.17
15 This is the case for the 22 wards that make up Taunggyi City proper: in Ayetharyar (12 wards) and Schwenyaung (seven wards), which are also part of the DAO’s jurisdiction, waste collection is undertaken directly by the DAO itself, using its own vehicles and labour and payment is collected from semi-annual property tax payments collected from these residents (see Winter and Nanda, 2016, p19). 16 In reality, municipal administrations can propose changes to the way a service is provided or charged, though ultimate decision-making authority for any changes still rests at the state and region level. An example is from YCDC, where officials indicated that a clause in the 1990 Yangon City Development Affairs Law prohibited YCDC Assessor’s Department from collecting tax on a service where they were also collecting fees. Because properties were being charged separate user fees for garbage collection and piped water, the garbage and water taxes imposed by the YCDC Assessor’s Department were dropped. Separate guidance from YCDC’s Assessor’s Department indicates that garbage and water “taxes” are collected by the Engineering Department and Environmental Conservation and Cleaning Department, respectively (YCDC, 2017). It is not clear, however, whether these payments are indeed being collected, and whether they are taxes (i.e. compulsory and based on the value of a property) or fees (i.e. voluntary, and based on utilisation of services). In YCDC, water usage is metered and the municipality provides public garbage collection. Further work should examine the specifics of each service and payment conditions. Regardless, the relevant clause preventing the Assessors’ Department from collecting these taxes was removed in the 2013 version of the law, and YCDC by-laws were amended accordingly to reintroduce the collection of these two taxes. However, the changes are yet to be approved by the Yangon Region Government. The result is that YCDC Assessor’s Department is collecting less property tax than it would like to. 17 Legally, however, that would not preclude Pathein from collecting the water component from the population.
13
4. The existing property tax system in Myanmar The common legal framework for municipal governance in Myanmar means that there is a systematised structure to property tax that is consistent across the country. However, differences in the level of economic development, plus the devolution of administrative and policy responsibilities to the sub-national level, means that there is considerable variation in the amount of tax actually collected between places.
Property tax collected Aggregated budget data for states and regions indicate that YCDC dominates property tax collection in Myanmar, accounting for nearly half of all property tax collected in 2016/17 (around 13.2 billion MMK). This is unsurprising, given that Yangon city accounts for around one third of the urban population of Myanmar (according to the 2014 Census) and is a key driver of the country’s economic activity. YCDC also collects the largest amount of property tax per urban resident each year (Figure 6). Indeed, collections in YCDC are around 4.5 times larger than in Shan State, which has the smallest collections. Abstracting from the two most economically developed regions of Yangon and Mandalay, there is still considerable variation in per capita property tax collection between other states and regions. The reasons behind these differences, in places where urban characteristics are relatively more
Figure 6
Figure 7
0 500 1000 1500 2000 2500 3000
ShanBago
RakhineMagway
ChinMon
AyeyarwadySagaing
KachinKayin
MandalayThaninthari
YangonKayahMCDCYCDC
Total Property Tax Collected Per Urban CapitaBy State and Region, Millions of Kyat; 2016 /17*
MMK* 2016/17 budget estimates except for YCDC< which is 2016/17 actual. Per capita calculated using urban population in each township as per 2014 Census. Townships under the responsibility of YCDC and MCDC use 100% of the township population. Source: MOPF
03006009001200150018002100240027003000
0300600900
1200150018002100240027003000
YCDC* Hpa-An(Kayin)
Bago(Bago)
Pathein(Ayeyarwaddy)
Taunggyi(Shan)
Building & LandStreet LightingWater SupplyGarbage & Sewage
Property Tax Collected Per Urban CapitaIndividual municipalities; Actual Tax Collected 2016/17
KyatKyat
*DIsaggregated data was not available in YCDCSource DAOs; YCDC; Urban population for each township from 2014 Census
14
homogenous, is not clear. However, areas with the largest urban populations (such as Bago Region and Shan State) seem to collect less property tax per capita than areas with smaller urban populations (Kayah State and Thaninthari Region).18
Actual tax collection data from individual capital cities reveals three further important findings:
1. The total amount of property tax collected is considerably different between cities (Figure 7). Some of the difference in property tax collection can be attributed to differences in the composition of property tax. However, there is still considerable variation in the building and land and street lighting components, which are collected in all cities. Per capita collections of building and land taxes are 3.5 times higher in Hpa-An than in Taunggyi. This indicates the strong influence of administrative and policy differences, including tax rates, between cities.
2. The amount of property tax collected in Myanmar is small compared with other cities in Asia and small compared with other ordinary household purchases (Table 2). In Taunggyi, annual tax collected per capita is only 225 MMK ($US 0.16), while the median tax payment is 604 MMK – anecdotally, equivalent to the price of two cups of local tea. In Hpa-An, the annual tax collected per capita is 794 MMK ($US 0.58), with a median payment of 2,550 kyat every six months. Even in YCDC, which collects the largest amount of tax per capita (2,535 kyat; $US 1.86) collections are much lower than other large cities in Asia. The median payment made by the 283,569 residential properties for which data are available is only 203 MMK ($US 0.15). In fact, 82 per cent of residential properties pay less than 350 MMK – the price of a single cup of tea.19 Only one township in YCDC (Dagon) has a median tax payment in excess of 1,000 MMK (1,231 MMK). In Bahan, considered to be one of the wealthiest areas of Yangon, the median tax payment across 7,068 residential properties is only 254 MMK.
Table 2: Property tax in cities across Myanmar and Asia 2016/17 Compared with collections in Selected Asian Cities and other Ordinary Household Purchases
City/Municipality Per capita collected annually ($US in parentheses,2016 values)a
Median tax payment (each 6 months)
Cups of tea equivalentb
Taunggyi (2016) 225 MMK ($0.16) 604 MMK 2
Pathein (2016) 466 MMK ($0.34)
Bago (2016) 507 MMK ($0.37)
Hpa-An (2016) 794 MK ($0.58) 2,535 MMK 8
Yangon (2016) 2,535 MMK ($1.86) 203 MMK Less than 1
Ulaanbaatar (2013)c ($3.08)
Bangalore (2009) ($21.45)
Manila Metro (2009) ($22.05)
Delhi (2009) ($29.09)
Kuala Lumpur (2009) ($25.01) a – using the prevailing period-average USD exchange rate and adjusted for domestic inflation. b – presumes the price of a cup of tea is approximately 350MK ($US $0.26). c – property tax in Ulaanbaatar is levied only on businesses. Sources: DAOs; YCDC; McCluskey and Franzsen (2013); World Bank (2013); World Bank Development Indicators.
18 While the specific reasons for this are unclear, these data highlight the importance of broadening the tax base and strengthening tax administration in all cities, but particularly in larger cities. 19 The very small nominal tax payments by residential properties in YCDC helps to explain this group only accounts for around 13 per cent of total property tax collection in YCDC in 2016/17, despite accounting for around 95 per cent of all registered properties, according to YCDC officials. Foreign-owned industrial plants and accommodation accounted for almost three quarters of total tax collection.
15
3. The small collections mean that property tax is a small share of total municipal revenue (Figure 8). In the cities examined, property tax accounts for between 5 per cent and 7 per cent of total revenue and only 2 per cent in Taunggyi. To put these figures into perspective, property tax accounts for 39 per cent of municipal revenue in Australia (ABS, 2017) 30 per cent in the United States (Tax Policy Center, 2017); between 20 and 30 per cent in Mexico (World Bank, 2003a) and 13 per cent in the Philippines (World Bank, 2003b).
Figure 8
Tax administration and policy in individual municipalities The rest of this section drills down to examine the specific administrative and policy settings for property tax in YCDC and capital cities in four states and regions. It focuses on six components:
• identification of the tax base; • valuation of the tax base; • cadastral record keeping; • tax rates and billing; • tax collection; and • enforcement.
Each of the specific settings for these characteristics for the five cities are outlined in Table 3. The ensuing discussion focuses on the strengths of each of these arrangements and some important challenges.
02468101214161820
02468
101214161820
YCDC Hpa-An(Kayin)
Bago(Bago)
Pathein(Ayeyarwaddy)
Taunggyi(Shan)
Importance of Property Tax Per cent of total revenue; various municipalities 2016-17*
%%
* Actual tax collection data - Taunggyi is 2015-16. Property tax includes charges for building & land, water, street lighting and garbage dsposal as per the relevant Development Affairs Laws in each state and region. Total revenue includes current and capital revenue (where applicable). Excludes ODA grants and loans in YCDC. Includes transfer from region government in Bago.Sources: DAOs; YCDC.
16
Table 3: Property tax administration in cities in Myanmar Location
(population)a Tax base Valuation technique Record keeping Tax rate and billingb Collection
YCDC (5,211,431)
Approximately 300,000 properties on the cadastral record. The Assessor’s Department of YCDC collects property tax on private and publicly-owned immovable land and buildings. For factories, this includes the value of machinery. Payable by either owners or occupiers. Exemptions for religious and government buildings plus cemeteries. Full or partial relief from taxation can be provided for poverty (less than one year) and other non-specified reasons.
Annual (ARV) and monthly rental values (MRV) determined by Assessors Department of YCDC. Calculated using a complex series of formulas and classifications across nine types of property (see Box 6). Values last reviewed in 2014/15.
Digital cadastral record for tax billing purposes only for 283,569 ordinary residential properties. Includes unique taxpayer number, address, valuation and amount of tax payable. Information on all other property classifications kept on paper ledgers and maintained by assessors via field inspections. Information on non-residential properties in paper-based case files. Valuation information entered into cadastre manually. Only properties built after 2015 have accurate information on physical characteristics (kept separately in case files). No records kept of characteristics for properties built before 2015.
5-13 per cent – depending on the type pf property (includes: general and lighting taxes).
For private properties: every six months tax collectors from each township head door to door and collect on the spot. Collected once a year from factories/workshops and every three months from hotels and accommodations. Payments can also be made directly into designated bank accounts.
Hpa-An (75,884)
8,494 properties on the cadastral record. Payable by owners of all buildings (residential, government and commercial) regardless of whether rented or not. Exemptions for religious and most military buildings.
ARV calculated based solely on the physical characteristics of the building – the building materials and the height (three floors max). Same approach used for residential, and commercial properties. Values last reviewed in 2008.
Digital cadastral records for 8,057 properties, with the rest kept on a paper ledger. Digital records include information on ownership, building materials and height (floors). Updated by tax collectors using a phone-based app. Government buildings still recorded on a paper ledger.
30 per cent (includes: building, lighting, water and garbage).
Every six months tax collectors head door-to-door and collect payments on the spot.
16
17
Taunggyi (266,490)
33,764 properties on the cadastral record. Payable by owners of all buildings (residential, government and commercial) regardless of whether rented or not. Exemptions for religious buildings, prisons, cemeteries, government offices, military and properties with five consecutive years of absence.
ARV calculated as land area (square feet) multiplied by the value per foot – a scaling factor based on three types of road classification and building type (six floors max). Values last reviewed in 2014/15.
Digital cadastral records for 23,516 properties inside the 22 wards of Taunggyi City, with the rest kept on a paper ledger. Digital records include information on ownership, size of land, building materials. height (floors) and road type. Updated by tax collectors using a phone-based app plus information from engineering department (size of the dwelling).
8 per cent (includes building and lighting).
Every six months tax collectors head door-to-door and collect payments on the spot. Annual collection from government buildings.
Pathein (187,053)
18,748 properties on the cadastral record. Payable by owners of all buildings (residential, government and commercial) regardless of whether rented or not, and factories. Exemptions granted to religious and military buildings, plus some government buildings (schools and hospitals).
ARV calculated based on the physical characteristics of the building with informal adjustments made for the location of the property. Values last reviewed in 2012/13.
Paper-based cadastral record. Includes information on ownership, building materials and height (floors). Updated by tax collectors.
20 per cent (includes housing, lighting and garbage)
Every six months tax collectors head door-to-door and collect payments on the spot.
Bago (255,546)
26,415 properties on the cadastral record. Payable by owners of all buildings (residential, government, and commercial) regardless of whether rented or not. Exemptions for religious buildings, government housing and military.
ARV calculated based on physical characteristics of the house – the building materials and the height (three floors max). Applies to all residential and most commercial buildings. For factories in the Bago Industrial Zone a fixed value per square foot is allocated. Values for properties outside the Industrial Zone last reviewed 2012/13.
Paper-based cadastral record. Includes information on ownership, building materials and height (floors). Updated by tax collectors.
30 per cent (includes building, lighting, water and garbage) payable by all residential and most commercial properties. Factories and government buildings only pay building fee (with government paying at half the rate).
Every six months tax collectors head door-to-door and collect payments on the spot.
a Source: 2014 Census b See Table 5 for more information on tax rates. Source: Authors
17 17
18
Identification of the tax base There are generally few formal exemptions to property tax, though ambiguity over who is responsible for tax payments in DAOs can create informal exemptions.
In all of the municipalities studied, property tax is applied across residential and commercial properties plus some government properties. Government properties tend to be staff accommodation (including nursing homes) and offices for most government departments, as well as other government-owned properties such as banks, police and fire stations and warehouses and farms. Complete exemptions from property tax are rare and generally only apply to public education and health facilities, religious buildings, prisons, cemeteries and military installations.20 In YCDC, there is additional discretionary power to provide tax relief to people on the basis of poverty (though this lasts less than a year) as well as for other, non-specified reasons. While full exemptions are limited municipalities do implement a range of tax discounts for various property classifications (see Table 5 below)
There is ambiguity whether owners or occupiers are ultimately responsible for paying property tax in Myanmar. In YCDC, the Yangon Municipal Act makes no distinction, indicating that property taxes are is payable by the “owner of the land and building or the occupier”. In DAOs, DA laws indicate a split between the fees payable by the owners (building and land component) and those payable by occupiers (service-related components). However, the standard practice in cities examined in this study seemed be to charge either owners or occupiers for the full amount of the property tax liability, depending on who is utilising the property.
The ambiguity over ultimate responsibility for tax payments creates challenges for tax collection and can result in widespread informal exemptions. Interviews with officials in all DAOs revealed that a necessary precondition for charging taxes is that ownership is clearly identified and recorded. There are many instances where ownership of a given property is not clear – for example: due to owners being absent or evasive; when new dwellings are constructed; and when ownership is transferred.21 In these instances, taxes cannot be collected from the property despite the fact that the people utilising the property (i.e. the occupiers) can be clearly identified.
Related to the challenges of identifying taxpayers, there is no systematic treatment of the taxation of high-density properties. Smaller cities tend to collect one single payment from an apartment building, not separate payments from the individual owners or residents, though this is not consistently applied. YCDC separately accounts for individual residential apartments in condominiums, and businesses in shopping malls, while rented whole buildings are assessed as a single entity. Actual tax payments of rented whole buildings can either be collected as one lump sum payment or from individual owners depending on negotiations among the affected parties.22
YCDC also has the further issue of identifying which properties in the city are owner-occupied and which are rented. While both types of property attract the same tax rate, this information affects the valuation technique applied, and can considerably influence the total tax liability.
20 In Taunggyi, the DAO has also decided to exempt unoccupied houses that have been empty for at least five consecutive years. The Assessor’ Department of YCDC is also tasked with “systematically removing uncollectable tax” from the tax collection list (YCDC, 2017). In Hpa-An, taxes are collected from the military hospital, but not the barracks. 21 These challenges are linked to the fragmentation of property-related information between government departments (discussed below). 22 This perhaps partly explains why YCDC has only 300,000 properties on the cadastral record, despite being a city of more than 5 million people. Nevertheless, considerable coverage gaps are still likely to remain (see Table 5 below). It does indicate, however, the challenges associated with trying to identify the potential size of the tax base from population data and physical counts of properties.
19
Valuation of the tax base The technique for valuing properties makes sense for the local context but it has some important shortcomings.
All cities nominally use an annual rental value (ARV) approach to assessing the value of the tax base. When applied properly this is a complex, market-based system of property valuation (see Box 5). In reality, however, most municipalities tend not to calculate rental values and instead rely on administratively simple mass-appraisal techniques. Specifically, in the absence of market information, the physical characteristics of a given property are used to approximate its value. Better quality characteristics – e.g. more floors and higher-cost construction materials – are given higher values (see Annex B for details on the valuations in each city). Some cities, such as Taunggyi and YCDC, explicitly include a property’s location (proxied by the quality and width of the road and zones in the case of YCDC) in its valuation assessment. Pathein does too, albeit informally and at the discretion of the ward administrator, which means that values for each characteristic are presented as a range, not a fixed amount. Hpa-An and Bago ignore a property’s location in its valuation.23
Box 5: “Annual rental rate” and the calculation of the taxable value of property.
Annual rental value (ARV) is property valuation system common to former British colonies, including countries in Asia (e.g. Singapore, Malaysia, India, Pakistan); the Caribbean Islands (e.g. Bermuda, Trinidad, St Lucia, St Kitts and Nevis); and Africa (e.g. Nigeria, Gambia, Ghana and Sierra Leone) (McCluskey and Bell, 2008; Franzen and Youngman, 2009). Similarly, in Myanmar the approach stems from its colonial history, in particular the Yangon Municipal Act (1922). It is a complicated valuation system based on an estimate of the rent that could be expected from a property for one year in the open market. Given that most properties are not regularly sold, and many are not rented, the ARV estimations require considerable data on transactions and rents, plus administrative skill and judgement.
Valuing properties using a non-market, mass-appraisal approach is appropriate for developing countries while they wait for property markets to develop and government capability to be built (Bahl, 2009). It is simple, transparent, and easy to administer; avoiding the risk of overloading government systems. Pritchett, Woolcock and Andrews (2010) show that overloading government capacity before it is ready can be highly risky, and lead to both implementation failure and narrow the space for further reform
Table 4: Valuation techniques for property tax* Municipality Technique
Hpa-An Spot values allocated to four building types (bamboo, wood, brick reinforced concrete) and number of floors (3 max). The same values used for residential and commercial properties.
Bago Spot values allocated to three building types (bamboo, wood, reinforced concrete) and number of floors (3 max). The same values are used for residential and commercial properties. Factories in the Bago Industrial Zone: a fixed value (35 kyat) is allotted per square foot,
Taunggyi Values calculated as area of building (square feet) x value per square foot (Kyat) Value per square foot = specific valuations given to five building types (palm leaf roof, tin roof, wood, brick, reinforced concrete), number of floors (6 max) and road type (main, wide and narrow road)
23 Interviews with officials in Bago indicated that while they did not currently include the location in the valuation formula, they were intending to introduce the road type, similar to that used in Taunggyi and YCDC, into the formula in the future.
20
Pathein
Spot values allocated to six building types (bamboo, two types of wood, two types of brick and reinforced concrete) and number of floors (3 max). The same values used for residential and commercial properties. Values adjusted for location in collaboration with ward administrators. Split between three zones: downtown wards; wards in the inner ring; and wards on the outskirts of town. Factories in the industrial zone are valued separately.
YCDC
Two broad approaches to valuing properties across nine separate classifications (see Box 6). For foreign- and domestically-owned accommodation (including hotels, apartment towers, plazas, residences, buildings and rooms): o Actual information on income from operations after allowing for deductions, as per rental
agreements or financial statements. Deductions include other taxes and fees paid plus fixed percentage deductions for “building maintenance” and “general expenses”. In the absence of financial statements, values can be determined by the Assessors Department.
For ordinary residential buildings and businesses (including factories): o Area of land (square feet) x value per square foot (Kyat) plus area of building (square feet) x
Value per square foot (Kyat) (the same area is used for both land and buildings). o Values based on zones (first- and second-tier townships), the width of the road (main, wide and
narrow roads) and building materials (bamboo/palm leaf roof, wood with zinc roof, brick, and reinforced concrete).
o Taxable value is 6 per cent of the annual value of buildings; 3 per cent of the annual value of land (plus 6 per cent of the annual value of machinery for factories/workshops). Additional deductions are given for residential properties on higher floors.
* More specific details on valuation formulas are provided in Annex B Source: Authors
There are varying levels of technical sophistication in the formulas used to attribute values to properties (Table 4). The most straightforward (used in both Hpa-An and Bago and Pathein) simply allocates a spot value to each building characteristic (building materials and number of floors). These spot values are the same for residential and commercial property, though in Bago and Pathein, where industrialisation is further progressed, unique valuation approaches are also applied to factories in the respective Industrial Zones. In Taunggyi, the valuation approach is somewhat more sophisticated, with a value per square foot estimated from a property’s physical characteristics, which is multiplied by the measured size of the property. This is similar to the approach used in Pakistan’s Urban Immovable Property Tax (UIPT), the Philippines, parts of India and Indonesia (World Bank, 2006; Bahl, 2009).
YCDC has the most complex valuation approach, applying a multitude of formula across nine separate property classifications and adding in a complex array of automatic deductions. For residential buildings and businesses, separate valuations are estimated for buildings and land. These are based on similar physical and locational characteristics to those used in other cities, plus an additional factor related to the zone of the township (see Annex B). Occasionally, however, calculated valuations (based on physical characteristics) are superseded by what the YCDC Assessors Department considers to be a “reasonable” valuation. Machinery is also included in the calculation of taxable value for factories. For a range of other property classifications, including all accommodation and rental properties, actual information on net rental income (after deductions) is used to value the property for tax purposes. This is the closest approximation to the ARV valuation technique that exists in Myanmar’s property tax system. Box 6 provides more details on valuation approaches used for each property classification in YCDC.
In each city, there was no knowledge on how the values for each physical characteristic were originally established. However, to the extent that there is no effective link with actual market data,
21
and the fact that valuations is the responsibility of state and region governments, initial valuations are likely to have been arbitrary and linked to political considerations.
Box 6: Valuation approaches for property classification in YCDC (tax rate payable in parentheses)* Hotel, Motel and Inn (6 per cent): based on the monthly room rental income of hotels, motels and inns as recorded in the “monthly profit and loss accounting reports” supplied to Ministry of Hotel and Tourism. Tax payable calculated after the following mechanical deductions: income tax (10 per cent); commercial tax (10 per cent); service fee (10 per cent)’ rental fee paid to land or building owner, only if any such payment; and bank service fee (4 per cent).24
Foreign owned apartments, towers and residences (13 per cent): based on actual monthly rental income after deducting land rental charges and the following mechanical deductions: income tax (10 per cent); building maintenance (25 per cent); and general cost (25 per cent).
Foreign owned plazas (13 per cent): based on actual monthly rental income after deducting land rent charges and the following deductions: income tax (10 per cent); building maintenance (25 per cent); and general cost (25 per cent).
Rented land, building and rooms (13 per cent): based on the actual monthly rental rate described in the rental contract submitted to YCDC by the owner after allowing for the following mechanical deductions: income tax (10 per cent); building maintenance (25 per cent); and general cost (25 per cent).
Factory / Workshop (8 – 13 per cent): total value calculated as 3 per cent of land value, based on area multiplied by value per square foot; 6 per cent of building value, based on construction cost; and 6 per cent of machinery value, based on a list and expected value of machines. Two arbitrary upward adjustments are made to the estimated value of buildings: the first a 25 per cent increase to account for the “increment in market value”; and the second a 5 per cent increase “to compensate for the inflation rate” using the ratio of official-to-market exchange rates of MMK to USD dollar in 1998/99 (YCDC, 2017). Tax deductions are available for unexpected closure periods. Industrial zones that provide own private street lighting only pay general tax (8 per cent).
Ordinary Residential and Government Buildings (13 per cent): total value calculated as 3 per cent of land value, based on area value per square foot; 6 per cent of building value, based on area multiplied by the value per square foot. Values determined by the township tier, type of road and type of building. Progressive 20 per cent deductions are provided for each higher floor until 4th floor (e.g. the value of the second floor is 20 per cent less than the value of first floor and the third floor is 20 per cent less than the second floor). No additional deductions are granted above the fifth floor. Only applicable if there is no escalator.
Own property/business and wholesale complexes in the economic zone in Bayintnaung (13 per cent): total value calculated as 3 per cent of land value, based on area multiplied by value per square foot; 6 per cent of building value, based on area multiplied by the value per square foot.
Myanmar Port Authority (5 per cent): has to pay 5 per cent of all collection within the Yangon City Area as the property tax. * Ordinary residential and government are combined because the approaches are effectively the same. Source: YCDC (2017).
While the present approach to property valuation is straightforward and appears to be well suited to the local context in Myanmar, there are a number of important shortcomings:
• Undervalued properties. Officials in each city acknowledged that the values given to properties for tax purposes were well below their market value. In general, large undervaluations of property for tax purposes are common in developing countries (Martinez-Vasquez, 2008). Bureaucracies have little-to-no experience in property valuation and “thin” and underdeveloped property markets mean that there are insufficient transactions to accurately benchmark the values of properties. In Myanmar, where these challenges are acute, accurately valuing properties for tax purposes is particularly problematic.
24 According to YCDC (2017) these payments from hotels and other accommodation can be substantial, depending on the amount of rental income. Interestingly, the fact that accommodation provided around 30 per cent of total property tax collection (in 2016/17) suggests that YCDC is heavily dependent on the tourism industry for its municipal budget.
22
• Same treatment of different taxpayers. Mass appraisal techniques are necessarily blunt instruments that can only account for a limited number of differences between properties. Consequently, there are likely to be instances where actual variation between property values is not accounted for in the tax system, which can lead to highly inequitable outcomes between residents within the city. Some examples include: o Location: cities that are blind to a property’s location (e.g. Hpa-An and Bago) implicitly
equate values across the city and ignore access to services. Some areas (e.g. downtown) are likely to be better linked to public services, and therefore likely to have higher values, than properties far removed, holding all else constant.
o Size: only YCDC and Taunggyi consider the physical size of a property and only YCDC considers the size of land. This means that valuation systems tend to give the same values to larger properties with greater living space (i.e. more rooms and land) as they do smaller properties. Ignoring land and property size excludes an important indicator of wealth from the valuation calculation and an important determinant of market prices.
o Land use: in municipalities that allocate spot values to physical characteristics of properties (e.g. Hpa-An, Bago and Pathein) the same values are allocated to businesses (such as hotels) and residential dwellings if they are constructed with the same building material. This is despite the different permitted use of land, which can have an influence on land values.
• Values are static. Non-market valuation approaches mean that there is no automatic growth in the tax base as economic conditions improve. Consequently, tax revenues remain flat even as property values increase and as municipal costs rise. It also means that relative changes in values (for example, between locations within a city) are not being captured. Occasional upward revisions to property values are known to occur, though they are not linked to any objective measure of inflation or property price appreciation. Instead they are likely to be political calculations on what increases constituents will bear. They also tend to be applied equally across all areas of the city, which entrenches existing inequalities between taxpayers.
• Valuation approaches are static. In a number of cities buildings are assessed by the number of floors they contain – up to a maximum. In Hpa-An and Bago the maximum classification is three floors, while in Taunggyi it is six. The implication is that there is a cap on the property tax liability of larger buildings (e.g. four-floor buildings in Hpa-An are valued the same as three-floor buildings). This is likely to become an increasing issue as cities develop and larger, higher-density dwellings become more widespread.
• Unsystematic and complex classification systems in YCDC opens scope for errors and mismanagement. As the number of building classifications and calculations used to determine property values increases, so too does the complexity of the system. The amount of information required increases, as does the amount of discretion in the property tax system. It is perhaps because of this complexity that there is an allowance in YCDC for calculated property values to be superseded by arbitrary determinations of what is a “reasonable” value.25 This opens scope for mistakes and mismanagement and, with YCDC’s monitoring capacity limited, means that errors are unlikely to be discovered.
25 According to guidance from YCDC the difference between the calculated and “reasonable” valuations can be substantial – up to ten times higher in one example provided in the guidance note – which gives a rough indication of how low and arbitrary the current values allocated to physical characteristics may be (source: YCDC 2017).
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• Valuation approaches in YCDC may be creating distortions in key labour-intensive sectors – For a number of property classifications YCDC use actual reported rental income as the determinant of the taxable value. Even allowing for the fact that certain fixed percentage deductions are allowed, businesses that derive their primary income from rents (such as hotels and apartments) are likely to be facing particularly high effective rates of property tax as a function of net profits.26 This is not only likely to act a significant drag on investment, but may also encourage evasion. Further, the inclusion of machinery in the valuation of the tax base for factories appears to be against the spirit of property tax, which is to tax “immovable land and buildings” (YCDC, 2017). It also acts as a considerable additional cost on factories and a disincentive to invest in much-needed labour-intensive industries. Arbitrary upward adjustments to factory values made under the guise of “increment in market value” and “inflation” – which have no links to the common interpretations of either term – only serve to exacerbate these issues.
• A tax on density? – in DAOs there are some internal inconsistencies in relative valuations between property types. Arguably, in Bago, Hpa-An and Taunggyi the relative valuations discourage investment in high-density dwellings by increasing valuations at a constant or increasing rate for each additional floor that is added. This is not likely to be an issue at present, given the very low tax payments, though may become more important if tax liabilities were to rise.
Cadastral record keeping Paper-based and incomplete property records mean that a substantial share of properties is either not paying the right amount of property tax or are not paying tax at all.
An accurate record of properties is a prerequisite for effective property tax administration (Kent, 1988). Known as a “cadastre” these records identify the properties that are liable to pay property tax and how much tax must be paid. In each of the cities examined, cadastral records are kept, and include information on each property’s ownership, its location and the physical characteristics required to determine its taxable value. In all cities, at least some of these records are kept on a paper ledger (and in paper case files, as is the case in YCDC). Pilot projects have been developed in Taunggyi and Hpa-An to digitize the cadastral information and automate calculations of tax payable from each property’s characteristics (Box 7). In all other cities, property valuations (and thus tax liabilities) are entered by hand; this includes YCDC, which, while having a digital cadastral record for ordinary residential properties, has not yet automated the transference of valuation data.
26 The deductions are made with no reference to actual business costs. The implicit presumption is that the pre-tax margin on all rental income is more than 50 per cent – well in excess of what it likely to be the case.
24
Box 7: Digitisation of property tax records using the Myankhon application. As part of its Myanmar Strategic Support Program (MSSP). The Asia Foundation is supporting Koe Koe Tech (a Yangon-based social enterprise) to digitise cadastral tax information in Hpa-An and Taunggyi. Using app-based technology, property records are increasingly being transferred from paper ledges to Excel spreadsheets. This is helping to automate the calculation of tax liabilities and improve tax administration efficiency. It has also provided a readily available platform for the quantitative analysis of tax data, which would not have been possible with paper records. This analysis, in turn, is helping the respective municipalities and state governments to better understand their property tax systems and use evidence to evaluate the merit of different policy options. The pilot projects demonstrate the power of digital tax record keeping practical administrative and policy-making purposes. They are proving to be valuable technological innovations that could be rolled out across municipalities in Myanmar. Widespread digital record keeping could, in time, give rise to further improvements in efficiency – such as consolidated record keeping at the state/region government and widespread automated billing. At present, each municipality in Myanmar manages its own cadastre and billing, thus duplicating a straightforward administrative function.
In all of the cities studied, tax collectors are responsible for curating the information in the cadastres. This includes identifying and adding properties that are not currently on the register as well as updating existing records to reflect changes in ownership or any other characteristics that are relevant to the tax liability. However, cadastral records are often incomplete. Through interviews and close ongoing engagement with tax collectors, it was revealed that there are a number of key challenges:
• Fragmentation of property related information between government departments. In order to be able to make additions or changes to the tax cadastre, municipalities rely on property-related information that is kept with other government departments but not routinely shared.27 o Ownership of some properties is sometimes difficult to identify. In order to register a
property for tax purposes ownership needs to be clearly identified and registered with the local authorities. Identifying ownership of some existing properties, however, is inherently problematic. Some properties are empty or rented and municipalities have no access to information on the identity of the landlord. Consequently, municipalities have no option but to exclude the property from the cadastral record.
o Transference of ownership is not shared. Registering new ownership after a property is sold or transferred is a convoluted and fragmented process. Sale contracts, which include information on the buyer and seller and the property’s value, must be registered and endorsed by the Contracts Registration Office of the Land Record Department and the Ward Administrator. The IRD also receives information on sale price for stamp duty and capital gains tax purposes. This information is not automatically shared with the respective municipality for tax purposes. Instead, it is the responsibility of property owners to register their information with the municipality (and have little incentive to do so).
o Information on rental properties is systematically underreported in Yangon. YCDC’s Assessors department are aware that many rented properties have not been declared. Owners of apartments, in particular, have little incentive to reveal they are renting a property because it means declaring rental income to IRD and also because it triggers a change in the valuation technique that will likely increase property tax liabilities substantially. Pertinent information, such as rental agreements and registration of foreign
27 This includes Ward Administrators (from the General Administration Department), Internal Revenue Department (IRD), and the Ministry of Agriculture (in particular, the Department of Agriculture, Land Management and Statistics).
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occupancy, which is often lodged with ward administrators, is automatically not shared with YCDC for property tax purposes.
o Records are not responsive to changes in land use. Tax collectors can become aware of new property developments as well as sub-divisions of existing land into multiple properties, though records are not updated because municipalities are not privy to updated land titling information or relevant approvals are still working their way through the system. In the case of sub-divisions, this means that a single tax payment will continue to be collected despite the fact that there are now multiple identified properties.
• Inward migration is leading to rapid growth in populations and properties in urban areas and exacerbating the problems of fragmentated information. Low administrative capacity and fragmentation of property-related information makes it hard to keep track of these developments and keep cadastral records updated. Inward migration is also leading to population settlements on and around urban boundaries. Some properties in these settlements lie outside of municipal boundaries, though there is a strong expectation that the municipality will provide urban services (including garbage collection). However, because these properties technically lie outside of the urban jurisdiction, municipalities they cannot be registered for property tax. 28
• Informal settlements are not on the record. Some inward migrants are settling in informal accommodation that does not have relevant government approvals. Municipalities are understandably reluctant to register these properties and levy property tax on them because it would legitimise their claim.
• Some properties have ties with ethnic armed groups. Issues with listing properties can go beyond simple administrative challenges. For example, in Kayin and Shan States some properties associated with ethnic armed groups were never listed, meaning tax collection is presently not possible.
Low property tax compliance is an issue common to developing countries where property-related information is hard to access (Bird and Slack, 2004). In Myanmar, the coverage gap in cadastral records appears to be substantial, though a lack of data on the total number of properties eligible for property tax in each city means that the specific size of the gap is difficult to determine.
Table 5 estimates the size of these gaps in Hpa-An, Taunggyi and selected townships of YCDC by comparing the number of property tax records in 2017 with other available information. Data on population and households from the 2014 Census gives a sense of the size of each city, though with recent migration these figures are probably underestimates. Officials in each city were asked for an estimate of the total number of properties that should be eligible for property tax. This provides a lower bound of the estimated gap in cadastral records. Independent information was also gathered on electricity connections as a real-time indicator of the number of properties. While imprecise, and likely an overestimate of the number of eligible properties, this provides a higher bound of the estimated coverage gap.29
The results show that a large share of properties – potentially between one-third and one-half – are missing from the cadastral records. This is consistent with a study of townships in Kayin and Bago, in
28 In Hpa-An it is estimated that the DAO spends money providing urban services to around 3,000 houses that are technically situated outside the DAO boundary. Accordingly, the DAO cannot collect property tax from these houses. 29 The number of electricity connections is most likely to be an overestimate of the number of properties in each municipality that are eligible for property tax because some properties may have multiple connections and others (such as hospitals and schools) are exempted from paying property tax.
26
which only around half of all households were observed to be paying property tax (McCarthy, 2016).30 Further, local municipality authorities are not aware of the size of the coverage gaps and are likely underestimating the issue.
Table 5: Property Tax Cadastral Records and Electricity Connections
Municipality Hpa-An Taunggyi Insein
township (YCDC)
Pazundaung township
(YCDC)
Hlaing township (YCDC)
Cadastral record (2017) 8,494 33,656 20,145 2,125 11,884
Urban population (2014) 75,884 266,490 305,283 48,455 160,307
“Urban” households (2014)a 16,055 57,709 61,676 10,306 32,837
Officials’ estimate (2017) 13,000b 45,000c -- -- --
Electricity connections (2017) 31,000 (approx.) 37,401d 52,264 15,723 43,000 (approx.)
Coverage gap % based on officials’ estimates (lower bound)
35 25e -- -- --
Coverage gap % based on electricity connections (upper bound)
73 37 61 87 72
a – “Urban” households for Hpa-An and Taunggyi are an estimate based on the number of households reported in the Census for the entire township, scaled by the percentage of the urban population. 100 per cent of reported households in YCDC townships. b – Midpoint of a range of estimates based on the number of properties according to ward-level census data and the average household size for Kayin State. Corroborated in interviews with the local Township Development Affairs Committee. Does not include commercial properties. c – From interviews with DAO officials. Includes properties in the sub-townships where the DAO spends money. d – Only for 22 wards of Taunggyi City and so should be compared with the 23,516 records on the digital cadastre. e—A count of properties from satellite imagery of the smallest ward in Taunggyi (located downtown and likely to be one of the more well-covered areas with relatively little inward migration) revealed a coverage gap of around 20 per cent. Sources: Ministry of Electricity and Energy; DAOs; YCDC; Authors.
Tax rates and billing Tax bills include detailed information on tax liabilities, including tax rates. However, the separate specification of individual charges may be undermining trust in local government.
Property tax bills are issued based on the information in the cadastral record and the respective tax rate. In some cities (Bago, Pathein and Hpa-An) these bills are hand-written, while in others they are prepared electronically. Bills are prepared in triplicate, including an initial tax notice which is presented to the tax payer, a receipt provided on payment, and an invoice retained by the municipality. Each city’s bill is slightly different, though there are some common elements (see Annex C for snapshots of tax bills). All bills include information on the period of the tax, the characteristics of the property and its assessed value and the total tax liability.31 Most cities itemise the tax bill into the individual components, including the individual tax rates and tax liabilities.
Between cities, there is considerable variation in property tax rates. Summing the rates for the individual components the total tax rate in DAOs ranges from 8 per cent to 30 per cent while in YCDC it is 13 per cent for most properties (Table 6). Bago and Hpa-An have the highest tax rates overall, in part because collect all four tax components but also because they levy the highest rates for 30 While the number of households may not reconcile precisely with the number of physical properties – for instance, in apartment buildings in each city, property tax is only payable by the owner of the building, not the individual apartments – the sheer size of this gap between properties in the cadastral record and households in the Census provides sufficient circumstantial evidence to suggest that a substantial share of properties remain unrecorded for the purposes of paying property tax. 31 In Bago and Taunggyi the tax bill has a distinctive header, with the former naming the bill as “Land and building tax, water tax, lighting tax and garbage tax” while the latter stating it is the “property tax bill”.
27
individual components. This includes the maximum allowable tax rates for both the building and land and garbage components. In contrast, Taunggyi collects only two of the eligible components and also charges relatively low rates, which explains why tax collections are much smaller than in other cities. There is wide variation in the tax rates charged on building and land, which are collected by all cities, though not for street lighting, which is also universally collected. The reasons behind the specific rate setting in each location are not clear and would be a valuable area of future work with state and region governments, which have the authority to set tax rates within their jurisdiction.32 Discounts are applied to specific property classifications in individual municipalities, befitting their individual administrative autonomy.
Table 6: Property tax rate applied in each urban area* Per cent of ARV; annual
Township Building and
Land Fees (General Tax)
Street Lighting Fees
(Lighting Tax)
Water Fees (Water Tax)
Garbage and Sewerage Fees (Garbage Tax)
Total
Taunggyia 4 4 0 0 8 Patheinb 7 6 0 7 20 Hpa-Anc 10 4 6 10 30 Bagod 10 4 6 10 30 YCDC 8 5e 0 – 3.25f 0 – 8.5g 13h a Prior to 2015, Taunggyi charged garbage tax at 8 per cent and water tax at 4 per cent of ARV, respectively. Houses in sub-townships, which do not receive private sector garbage collection, are still being charged 8 per cent garbage tax by the DAO. b Pathein has never charged water tax because water is not provided direct to households. c Government properties in Hpa-An play a flat rate of 8 per cent. d Factories in Bago only pay the building and land tax and are exempt from other taxes. e Factories in the industrial zone are exempt from lighting tax. f A water tax of 3.5 per cent is collected in some townships of YCDC though little guidance is presented on where exactly. g Government buildings pay the same rate of general and lighting taxes as most other properties, but also pay garbage tax (8.5 per cent in townships in the downtown area and 6.5 per cent in other townships). h Most property classifications in YCDC are charged 13 per cent, except for Myanmar Port Authority (5 per cent), accommodations (6 per cent) and factories in the industrial zone (8 per cent). Source: Authors
The itemising of property tax bills into separate components is mainly for presentational purposes. Interviews revealed that there is widespread recognition within municipalities that there is no direct link between service-specific taxes and the provision of the respective service.33 However, there is a general belief that the disaggregation of tax bills improves transparency and enhances communication with the public.
Contrary to the impression of tax officials, the separate itemizing of property tax bills may be counterproductive, creating confusion among the population by blurring the link between property tax revenues and what they are actually used for. It may also be fuelling perceptions that the government is unaccountable. Tax collectors in multiple cities report that they field a lot of complaints, specifically around the fact that they are being charged fees for services that they do not receive (in particular, garbage collection) and there is almost no knowledge that property tax funds general municipal spending, including roads and salaries. Until recently, YCDC also separately itemised its tax bill, though reformed its billing to consolidate payments into one single line item, labelled “property tax”. It is not clear whether this has helped improve comprehension or reduced
32 In aggregate, tax rates are high (though below the maximum rates allowable) and potentially justify the undervaluation of properties for tax purposes. 33 In one city, where an estimated 25 per cent of households were not receiving any garbage collection service despite being charged a nominal garbage fee, the garbage collection fee was seen as a general levy for a “clean city”. Officials in YCDC and Hpa-An also acknowledged that the guidelines on what each tax should cover are for internal purposes and were not budgeting norms, per se.
28
complaints, though this would be a worthy evaluation. However, in YCDC, it was noted that taxpayers also conflate property tax with other types of payments, such as fines and fees.
The general misunderstanding of property tax and its function, as well as the way that it is communicated are potentially exacerbating trust deficits and may help to explain why other studies have observed that municipalities face considerable political opposition to any increases in property tax rates (Bissinger, 2016; Winter and Nanda, 2016).
Tax collection Property tax collection relies on personal relations of tax collectors, which is both a strength and a weakness of the existing system.
In all of the municipalities examined, property tax payments are collected every six months by a cadre of tax collectors that are employed by each municipality.34 Tax collectors go door to door and collect payments on the spot, which are then deposited into accounts at the Myanmar Economic Bank (MEB). Throughout the year there can be many interactions with individual taxpayers because collectors sometimes need to visit properties multiple times to collect payments. YCDC also includes a facility to pay taxes directly into a designated MEB account. This is used by some of the larger business taxpayers, though not generally utilised by households, who make payments to tax collectors.
The use of tax collectors appears to be a strength of the current property tax system but also exposes it to potential problems. Having collectors move door-to-door minimises the cost of compliance for taxpayers, which should assist with collection. With their regular interaction with citizens, tax collectors form relationships with taxpayers over the years and become an important interface between the public and the municipality. Interviews with tax collectors reveal that they spend time explaining to disgruntled taxpayers the role of the municipal government and property tax within it and that these interactions become easier over time. In the absence of cadastral maps, municipalities rely on collectors’ familiarity of their collection routes to identify changes in a property’s characteristics, including ownership transfers, and can update the cadastral records accordingly.
On the flipside, the reliance on individual tax collectors for the system to function is also a vulnerability. While strict revenue targets (see below) mean that collectors must gather the assessed taxes, tax collectors have considerable discretionary power to influence total property tax liabilities, for example by determining the way a property is classified in the cadastral record. When combined with the fact that collectors typically know more about their collection routes than their superiors, records are not systematically audited and there are limited resources for monitoring, the considerable discretion given to tax collectors heightens the risks of mistakes being be made, or worse for collusion of corruption to occur. Evidence from Pakistan of widespread corruption in property tax collection (for example, deliberately under-reporting properties, excluding one whole floor from a multi-storey plaza and showing corner properties to be located on the lesser-quality road) demonstrates that this issue should not be taken lightly (Piracha and Moore, 2016).35
34 Some payments are collected annually, such as those from government departments, while in YCDC hotels are charged every three months. 35 We saw no evidence whatsoever of any collusion between tax collectors and property owners or corruption in how property taxes were collected in this research. With tax payments presently so small in Myanmar, such issues are probably not prominent at this stage. However, they could become more problematic if tax liabilities were to rise with reform.
29
Enforcement Municipalities have the authority to collect property taxes but have limited enforcement power to ensure that these taxes are actually paid.
Tax bills in all municipalities include a note indicating that the liability must be paid within ten days of receiving the notice (see Annex C). All municipalities have recourse to the provisions originally stated in the Revenue Recovery Act (1890), which entitles the municipality to take legal action in the event of non-payment. In YCDC, the 2013 YCDC Law (Article 33) law further states that for any arrears of property tax YCDC can seize the property until the arrears are settled.
Interviews in all cities revealed that these provisions are rarely, if ever, used, despite the fact that properties are known not to pay their taxes. The explanations given were that the court system is too cumbersome and costly, while the magnitudes of the amounts being billed make it uneconomic to use scarce resources chasing unpaid amounts. The lack of a precedent also means there is also a reluctance to take legal action to reclaim unpaid taxes.
Interviews also revealed that tax collectors regularly pay taxes out of their own pockets when taxpayers are either late with their payments or simply refuse to pay. While it was difficult to get precise information about this activity, it appears to be at partly a function of the strict auditing norms from higher levels that tax collectors meet their assigned revenue targets, the onerous paperwork required to report instances of evasion, and the small tax liabilities of each property. However, it means that the true scale of the non-compliance issue (both in terms of the numbers of properties and the amounts of revenue) is difficult to estimate with precision.36
36 Tax collectors in Taunggyi said they do get some of the money they pay out of their pockets “eventually” – so some of this is a timing issue.
30
5. Assessment and Recommendations This analysis has revealed that Myanmar has a functioning property tax system. It has also shown that the system has a number of strengths and weaknesses. There is a sound legal framework in place for municipal governments to administer property taxes. The similar legal foundations for urban governance means that there are structural similarities to property tax across different cities. Generally, at least outside of Yangon, tax administration is relatively straightforward, though the city-level variation in administration means that there are varying degrees of effectiveness.
Municipalities are generally able to retain revenue collected from property tax and have discretion over how it is used (subject to strict spending norms). This makes it an important example of the fiscal decentralisation permitted within the Constitution. Further, because municipalities in Myanmar are mainly responsible for property-related services (such as constructing local roads and collecting garbage) and are not responsible for providing services or infrastructure in large social sectors such as education and health, revenues from property tax are well suited to municipalities’ needs.
Responsibility for policy development and oversight of property tax sits with elected officials in the state and region governments, while administrative functions (such as record keeping, billing, and collection) are assigned to the individual municipalities. On the one hand, this matches the authority and capacities of the different levels of government. On the other hand, it introduces a fundamental tension in the system; that the level of government relying on the property tax revenue (municipalities) is not the same level of government in control of making changes to tax policy (the states and regions). This potentially restricts the ability of municipalities to calibrate features of their systems (such as valuations and tax rates) to meet their needs. It also means that the level of government that is politically accountable for changes to the system does not directly benefit from making changes, which can delay necessary reform.
Despite its strengths, the property tax system in Myanmar clearly plays a smaller role in public financial management than it could. Tax collection is low – measured against international benchmarks and in terms of ordinary household purchases. This largely reflects a number of common administrative and policy weaknesses, including: ambiguity regarding who is responsible for paying property tax; taxable values that are underestimated and not regularly updated; missing properties from the cadastral records; a reliance on paper records, which introduces the risk of mistakes and mismanagement; little incentive to update these records, which entrenches these shortfalls; confusing billing that may well also be undermining the very legitimacy of municipalities; and weak enforcement.
Importantly, for Myanmar to have a stronger property tax system no Constitutional change is required, nor do new tax systems or national laws need to be established. Rather, it requires required well-targeted and practical reforms to the existing system.
Drawing on the evidence gathered in this research, eight recommendations are proposed. These are deliberately sequenced and broken into three themes. First, raising awareness of the municipal governance and property tax system can begin immediately; indeed, this research is the first step on that path. Second, administrative reforms to widen the tax base and improve compliance can also begin immediately as they are under the control of municipal governments and are technically feasible. However, the entrenched ways of working and perverse incentives inherent in the current system mean that they will take time. Third, policy reforms at the state and region government level are likely to be most fruitful if they are built on a platform of evidence, public engagement and
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strong administrative systems. They therefore can begin in earnest and occur alongside other reforms, though reforms should be planned over several years.
Build awareness about municipal governance broadly and property tax in particular 1. Develop a whole-of-government policy position on municipal governance.
Municipalities are not currently high in the priorities for public sector reform in Myanmar and have no specific Ministry in the Union Government. A concerted effort is therefore required to bring stakeholders from across government together to engage in a broad policy dialogue on municipal governance and set in place a new strategy for dealing with rapid urbanisation.
Whole-of-government engagement, could be in the form of a select committee or broad caucus. Representatives should be drawn from the Union Ministries that engage with municipalities and sub-national levels of government, and specifically include representatives from Development Affairs Organisations / Development Affairs Committees.37 Such a forum would provide the space for dialogue to help broaden and deepen the understanding of the issues with municipal governance, in particular the present distortionary mix of revenues and the very small role played by property tax.
Multi-stakeholder engagement should, at the very least, aim to mitigate the risk that policy decisions at the Union level will be made without adequate regard for their impact on urban governance. Preferably, it would help strengthen intra-government cooperation and guide reforms that actively support municipal mandates. This includes overcoming issues that cannot be addressed unilaterally by municipalities, such as sharing of information and clarifying jurisdictional responsibility over informal settlements on the urban fringes.
2. Share positive examples and the lessons learnt from experimentation among municipalities.
The structural similarities of property tax combined with city-level variations in administration provides a good opportunity for municipalities to learn from each other. Cities presently have the authority to pilot new innovations. Lessons from these experiences can be learnt, documented and shared with other cities. Notable examples where such horizontal learning opportunities are already possible include:
• the use of locational factors in the calculation of taxable value (Taunggyi and YCDC); • the digitisation of property tax records (Hpa-An and Taunggyi); • the use of a mobile app to help streamline administration processes and automate the
calculation of tax liabilities (Hpa-An and Taunggyi); and • the consolidated billing of property tax (YCDC).
3. Improve communication to increase public awareness and comprehension of property tax
Ultimately, property tax reform is impossible without public support for change. Previous work has found that municipal governments suffer from perceived lack of trustworthiness and thus legitimacy. How property tax and other municipal revenues are presented and communicated is likely to have an important bearing on how it is perceived by the community. Improved communication practices can help target these, and other, negative perceptions.
37 Discussions could be facilitated with the support of Renaissance Institute and The Asia Foundation.
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i. Clearly communicate the differences between property tax and other charges. Clarifying public misunderstanding over what is property tax and drawing a distinction between it and other taxes, user charges, and fines, is an important first step to improving public awareness.
ii. Consolidate property tax bills to one single line item. Bundling all components of property tax into one single payment on the property tax bill could help overcome some of the unnecessary public confusion among taxpayers about property tax by delinking in people’s minds that revenue from the individual components is earmarked for specific services. YCDC have already made this change, rolling all components of property tax into one single payment yet retaining the individual distinctions under the law so as not to run afoul of maximum prescribed tax rates.
iii. Raise the public’s awareness of municipal responsibilities and funding needs. Improved fiscal transparency could help to raise overall awareness of the wide mandate given to municipalities and the importance of local revenues in meeting these needs. For instance, it is generally little known that municipalities rely heavily on a regime of non-tax revenues, and that these impose costs on the public. Communicating this fact, plus the fact that property tax revenues are currently very modest relative to international benchmarks, and payments are low relative to other household purchases, could build understanding on the need increase tax in the revenue mix.
iv. Strengthen two-way dialogue with citizens. In addition to improving comprehension of property tax, better communication between municipalities and citizens opens scope for improving overall accountability. Mobile phone technology and social media could be used to improve civic engagement, in line with promising evidence emerging from Pakistan (Asim and Dee, 2016). These could capture information on citizens’ perceptions and disseminate messages from the municipality back to the population.
Build stronger administration systems to widen the tax base and improve compliance 4. Target common administrative weaknesses.
A wide tax base is essential to ensuring the property tax yield is as high as it can be given the existing policy parameters in a location. Keys to this are effective record keeping, closing the large outstanding gaps in cadastral records, and ensuring that information in records is kept up to date and accurate.
i. Shift cadastral records from paper to digital files. Electronic databases can improve tax administration by reducing the scope for mistakes and mismanagement in the assessment of tax bills. It can also improve the operational efficiency of tax collectors by automating the calculation of tax liabilities and assisting with the analysis of tax data.
ii. Audit the accuracy of existing property classifications. Small-scale independent audits of a random sample of properties on the existing cadastral record will provide valuable information on the accuracy of existing records.
iii. Gather evidence on the size of coverage gaps in the cadastral record. Initial work could focus on comparing the number of properties in randomly chosen wards using with the number of properties on the tax record. Work could also link electricity meters to property tax records to get a sense of the coverage gap. Over time, cadastral information can be verified using geographic information system (GIS) mapping data as it comes on-line.
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iv. Better incentivise tax collectors to keep cadastral information updated. Tax collectors have the best knowledge of properties on their collection routes. At present, however, they are mainly incentivised to meet revenue collection targets, not maintain cadastral records. Tax collectors should be encouraged to flag properties that are either not presently on the record or incorrectly recorded. Once flagged, municipalities should set in train processes to register or update these properties in the tax records. Different approaches could be trialled to incentivise tax collectors to perform these functions, which could be evaluated.
v. Automate the sharing of property-related information between municipalities and other government departments. Automatically sharing verified property-related information (on ownership and price) with municipalities each time a property is sold will allow cadastral records to be automatically updated – making registration for tax purposes easier and helping owners to comply with the law. Information from state-run utilities on electricity and water connections should also be shared with municipalities, to monitor the completeness of cadastral records and to strengthen sanctions by linking withdrawal of services to non-payment.
5. Focus on improving compliance
As Kelly (2013, p26) notes, “It is only when property tax is collected and enforced that taxpayers have a very real interest to ensure that the property tax physical information and property tax values are accurate”. Accordingly, municipalities must identify ways to encourage compliance through a mix of incentives, sanctions and penalties that work in the local context.
i. Encourage voluntary compliance though incentives. Mechanisms could be trialled that encourage people to pay their taxes. Examples include public notices or certificates of appreciation. Similar incentives could also be used to encourage property owners to voluntarily register their properties for tax purposes.
ii. Make tax payments easier through the widespread use of electronic payments. Longer-term, automated billing could be introduced that links electronic cadastral records with mobile phone accounts. In addition to making payments more straightforward, electronic payments would reduce scope for leakages in the system and assist with voluntary compliance and monitoring and perhaps even reduce resistance to property taxes by making them less salient. Cell-phone tax payments have been successfully adopted in Kenya.
iii. Strengthen enforcement through better-targeted sanctions for non-payment. At present, legal sanctions appear out of reach given the difficulty of accessing the courts and the small amounts of tax revenue being collected. Non-legal sanctions, such as the withdrawal of electricity or other essential services (e.g. access to credit for businesses, future access to land titling services for individuals) could be used against properties on the record that are serially non-compliant, as well as properties that are identified as being not on the record. Care will need to be exercised to not overly burden the poor with a withdrawal of services.
iv. Strengthen and modernise the enforcement powers of municipalities. The Revenue Recovery Act (1890), should be reviewed and updated to reflect modern day realities. This includes the size of penalties.
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v. Change audit focus to collecting taxes from each household rather than meeting revenue
targets. Making it less administratively burdensome for tax collectors to report non-payments may help create better incentives to follow up non-payments rather than encouraging collectors to make payments out of their own pockets.
Adjust tax policy at state and region government level to improve the equity and effectiveness of the property tax system
6. Improve property valuation techniques
Low valuations clearly play a role in the small amount of property tax collected. Fine accuracy and detail should not be the objective in improving valuation, but rather a valuation system that best reflects the different stages of property markets in each city, while retaining its administrative simplicity, and provides a growing revenue base over time. Changes to the tax policy, including valuations, need to be agreed by the State and Region governments, and so are inherently political.
i. Accounting for location and physical size in property valuations. Location and size are important determinants of a property’s value. However, a number of cities do not consider these factors when valuing properties for tax purposes. Simple mechanisms are available for including location, such as the characteristics of the roads (as used in Taunggyi and YCDC) and zoning (as used in YCDC and Indonesia).
ii. Re-examine relative values given to property characteristics within each city. The spot values given to different physical and locational characteristics should be periodically reviewed to determine whether they remain appropriate for the local context and are internally consistent. Relative valuations between characteristics could be based on actual market relativities for each characteristic.
iii. Increase the number of floors considered in property valuations. As cities grow, larger buildings and higher-density living will become more normal. At present, smaller cities place a maximum on the number of floors that are considered in valuation calculations. Adding more floors to the existing property classification system will more accurately value larger properties and allow valuation systems to evolve with cities’ development.
iv. Improve the accuracy of residential property valuations in larger cities. Technologies are available that could support more accurate mass property valuations, including geographic information system (GIS) mapping, satellite data, and computer-aided mass valuation systems (CAMA). Price information could also be sourced from other government departments, such as IRD. Further research and analysis could focus on the applicability of these technologies to the largest cities in Myanmar, such as Yangon, as they are not likely to be appropriate for smaller satellite cities. Even within Yangon, initial trials are likely to be best suited to areas where residential property values are clearly highest (such as Inya Lake and Golden Valley).
v. Consider offsetting increases in valuations with reduced tax rates, at least initially. Offsetting valuation adjustments with reduced tax rates could help reduce initial political opposition to changes and demonstrate to the population that the purpose of the revalutaion is not increased revenue per se but improved equity of the property tax valuation system. Longer term, it would help condition taxpayers to revaluations that are focused increasing property tax collections as the municipal revenue mix is adjusted. Any
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changes to valuations need to be carefully communicated with citizens, perhaps with an opportunity for them to provide their views.
vi. Introduce automatic indexing of property values. The taxable values of property should increase over time. Modest incremental revaluations may be preferable to the sporadic and ad hoc changes that occur at present. Indexing all property values to consumer price inflation may be the most politically palatable option in the immediate term as there are strong equity arguments for maintaining the real value of property tax. However, indexation should not be seen as a substitute for revaluations, which is about ensuring equity is maintained in the valuations between propoerties.
7. Introduce standard operating procedures (SOP) to reduce variation in some administrative
functions.
At present, there is little guidance to municipalities on key administrative functions. Accordingly, each municipality experiments on their own, with varying levels of effectiveness. While there are opportunities to learn from each other from these experiments, higher-level guidance in terms of SOPs for some administration processes would be useful. Guidelines and manuals could be developed in each state and region, or even nationally. They could sit with the relevant state DAO director or the Minister of Development Affairs (or DAC). These could draw from the best administrative practices in Myanmar and internationally and could also help settle some key policy questions. Examples include:
i. Identifying the tax base: SOPs that address the current ambiguity regarding who is responsible for paying property tax (i.e. the owner or occupier).
ii. Record keeping: SOPs that guide the digitization of property-related information and automating the sharing of property-related information between government departments and municipalities.
iii. Adding properties to the cadastral record: SOPs that allow municipalities to be more proactive in gathering the required information to register properties known to be missing from cadastral records.
iv. Property valuation: SOPs that guide the inclusion of location in property valuations, as well as the timing and factors to consider in general property revaluations.
v. Taxable components: SOPs to guide municipalities on how to treat the individual components of property tax. For example, whether to charge each prescribed component as a tax or a user fee. 38
8. Change the tax mix in YCDC so as to not rely so heavily on businesses.
Presently, factories and accommodation businesses bear a disproportionate property tax burden in YCDC – accounting for almost three-quarters of the total tax collected. In contrast, residential properties pay next-to-no tax. The current tax mix is likely to directly threaten business investment (including foreign direct investment) – thus counteracting efforts to reduce business costs through
38 There is an argument that the only components that should be collected as a tax is the charge on building and land because it is the only pure form of property tax (potentially the street light charge because it is a pure public good). The other service specific charges (water and garbage) could each be collected as user fees because they are private goods (Collier and Haas, 2017). Stripping the service-specific charges from property tax require some increase in property valuations to offset the loss in revenues. Future work could focus on the amount of the revaluation required. More fundamentally, though, in Myanmar it is questionable whether essential services, in particular garbage collection, should be financed via user fees. Fees link service access with capacity to pay, while the lack of enforcement of anti-dumping rules means there is a possibility that residents will simply choose to illegal dump rather than pay a fee. This can have considerable negative spillovers to the community at large.
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other taxation concessions. It is also likely to be threatening the viability of labour-intensive industries, such as manufacturing, which are key to lifting many people out of poverty.
6. Conclusion Municipalities in Myanmar already have many of tools at their disposal to manage the challenges of rapid urbanisation. However, they are locked into a low-tax, low-service equilibrium, in which people pay small amounts of taxes and receive low-quality services but are fiercely resistant to tax increases. Tax collections are small relative to international benchmarks and tax payments are small relative to other household spending. Municipal revenue is instead predominantly comprised of non-tax revenues, in particular the business licensing regime, which can distort economic activity and unfairly penalise the poor.
A stronger property tax system offers an opportunity to better align municipal revenues with their expenditure needs, both now and into the future as urbanisation gathers pace. It can also help municipalities shift to more sustainable and equitable revenue streams.
While there are many upsides to a stronger property tax system, it is clearly not a silver bullet for municipalities. Around the world property tax is part of a mix of revenue sources for cities, including an effective interrgovernmental fiscal transfer system and other taxes and charges. This should also be the case in Myanmar. Further, simply increasing revenue will not automatically lead to improved urban governance. Also required is a focus on urban planning and development and improving the overall quality of local service delivery. Alongside attempts to reform property tax these issues are presently the focus of both the Renaissance Institute and The Asia Foundation in their engagement with municipalities.
Myanmar can, and should, build on its current property tax system in a way that suits the local context. The first step is to understand how the current system works. This analysis provides a baseline level of understanding of the existing property tax system by systematically reviewing taxes across five cities.
Further detailed analysis in these, and other, cities is clearly needed. Examining key features of the property tax system in more detail – such as identification, assessment, valuation, billing, collection and enforcement – would help provide further clarity on specific policy and administration weaknesses and how to implement reforms to make the tax system more effective and fair. Particular attention should be given to the largest cities of Yangon and Mandalay given their importance to the economy and population of Myanmar.
In addition to helping Myanmar sustainably manage the oncoming challenges of urbanisation, a stronger property tax has the potential to strengthen the financial underpinnings to the administrative and political decentralisation that is already underway in Myanmar. It can be part a sustainable development reform agenda that also makes cities more liveable and cultivates their role as engines of growth. Ultimately, these are the foundations upon which a more peaceful and prosperous Myanmar are being built.
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Annex A: International experiences in collecting property tax: Cambodia39
▪ Tax on Immovable Property, a central government shared tax, is imposed on properties located in municipalities and provinces. Payable by owners at a rate of 0.1 per cent on all buildings and land (residential and commercial) valued in excess of 100,000,000 riels (approx. $25,000).
▪ The tax base is the market value, as determined by the Property Evaluation Commission for Property Tax of the Ministry of Economy and Finance (MoEF), less the threshold.40
China
▪ In 2011, the Chinese authorities piloted a property tax in Shanghai and Chongqing.41 Taxes were limited to investment properties and certain homes (luxury and high-end homes). A 1.2 per cent property tax was imposed on the original price minus accumulated depreciation – not an assessed value of the property. A rate of 15 per cent is applied to actual rental income for leasing property.42
▪ The policy was originally aimed at reigning in real estate speculation and providing local governments (which are not granted any legal authority for taxing or borrowing) with a significant revenue source. The theory was that a property tax would drive owners of multiple homes to reduce their holdings of empty units for investment purposes, and therefore increase the supply of housing and dampen prices.43
▪ However, by 2017 authorities had backed away from extending property tax beyond Shanghai and Chongqing to the country as a whole as the taxes did little to help curb housing price speculation.44 Instead, individual cities have been encouraged to implement disincentives to restrict buying multiple properties. Forty local governments have also taken specific and targeted actions to quell speculation – most typically by raising down-payment requirements and mortgage interest rates. Some cities have limited the number of properties each family can own. While other have prohibited quick sales.
Indonesia45 ▪ Between 2010 and 2014, Indonesia transferred responsibility for the rural and urban land and
building tax to its nearly 500 cities and districts as per Law 28 (2009), with 100 per cent of revenues and administration assigned to local governments.
▪ Tax is payable annually on land, buildings, and permanent structures. ▪ Local governments are given broad authority to determine the tax rates (with a maximum rate
of 0.3 per cent set by the law), exemptions and collection arrangements. ▪ The system allows for differences in tax rates across regions and different minimum value
exemption thresholds for the tax between regions. 39 DFDL (2017). “Cambodia property tax update”, online resource, available from:https://www.dfdl.com/resources/legal-and-tax-updates/cambodia-property-tax-update/ 40 PricewaterhouseCoopers (2015). “Cambodian 2015 Tax Booklet”, online resource, available from http://www.pwc.com/kh/en/publications/assets/Cambodia-PBT-2015-final.pdf 41 Global Property Guide (2011). “China introduces property tax to douse sizzling housing market”, online resource, available from: http://www.globalpropertyguide.com/Asia/china/Price-History-Archive/China-introduces-property-tax-to-douse-sizzling-housing-market-1251 42 Man, J. Y. (2012). “China’s Property Tax Reform Progress and Challenges”, Land Lines, April 2012, Available from: http://www.lincolninst.edu/publications/articles/chinas-property-tax-reform 43 Global Property Guide (2011). 44 Radio Free Asia (2017). “China Cancels Property Tax Plan”, by Michael Lelyveld, online resource, available from: http://www.rfa.org/english/commentaries/energy_watch/china-cancels-property-tax-plan-04032017111632.html 45 von Haldenwang, C. et al. (2015). “The Devolution of the Land and Building Tax in Indonesia”, Deutsches Institut für Entwicklungspolitik, Kelly, Roy, “Strengthening the Revenue Side” Chapter 10 in Fiscal Decentralization in Indonesia a Decade after Big Bang, (Jakarta: University of Indonesia Press, 2012), pp. 173-206.
41
▪ Mass valuation techniques are used for valuing land and low-value properties. Land is organised into zones of different values per square metre zoning is often used to estimate property values with each zone having a standard value per square metre, combined with simple cost tables for building structures. For high-value properties, more complex valuations methods have been used.
▪ The property taxes on estates, forestry and mining remain structured as a shared tax, fully under the policy and administrative control of the central government.
Viet Nam
▪ Property tax is Viet Nam is structured as a central government shared tax, with 100 per cent of the revenues assigned to the provincial and local levels.
▪ In 2010, adopted an area-based tax, adjusted for location, on non-agricultural land (excluding housing) and is considering further reform in this area.
India
▪ State governments are constitutionally mandated for all matters relating to local governments including taxes on land and building and the power has been devolved to local governments.
▪ The municipal governments levy property taxes in accordance with statutory limits (ceiling rates of taxes) and procedures (valuation, exemptions and administrative and enforcement mechanisms) specified by the State governments.
▪ Taxes are imposed on buildings along with associated land, and is levied on owners. However, vacant urban land is generally exempted, except in a few cities.
▪ The method of calculation varies across municipalities, ranging between purely Annual Rental Value (ARV) and Capital Value based on unit area characteristics.
▪ Some municipalities use a hybrid method of rental valuation based on location.
Mongolia
▪ Introduced in 2000, the central government defines the tax base and tax rates for property tax, and provincial governments impose taxes.
▪ The tax rate varies from 0.6 per cent to 1 per cent of capital value. ▪ The property value, excluding the underlying land, is determined by the valuation as registered
at the state registry for immovable property. If there is no such registration, the value is determined by the valuation of insurance on the property. If there is none, the value is established as the value that is written down in financial records of the property owner.
▪ Residential houses and industrial estates are exempted.
Singapore
▪ Tax is levied on all property owners in Singapore and is applicable whether the property is owner-occupied, rented out, or left vacant.
▪ Calculated using an imputed Annual Value (AV) of each individual property multiplied by a progressive rate of taxation.
▪ AV calculated by annualising the monthly market rent of the unit after deducting reasonable rentals for furniture and maintenance fees.
▪ Inland Revenue Authority of Singapore (IRAS) factors in the transacted rents of comparable units in the vicinity and derives a value based on the location, size, conditions and other physical attributes of the property.
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Annex B: Valuation formulas for the purposes of property tax. Hpa-An (Kyat per characteristic; government and private buildings) Building Type 1 floor 2 floors 3 floors Bamboo building with palm-roof 3,500 Wooden building 10,000 17,000 Brick 27,000 50,000 Reinforced Concrete 27,000 50,000 100,000
Bago (Kyat per characteristic; government and private buildings) Building Type 1 floor 2 floors 3 floors Bamboo building with palm-roof 5,000 Wooden building 40,000 60,000 Reinforced Concrete 100,000 200,000 500,000 Industrial zone 35 kyat per square foot
Pathein (Kyat per characteristic; government and private buildings) Building Type 1 floor 2 floors 3 floors Bamboo building with thatch roof 4,000 – 6,000 Wooden building with the thatch roof 6,500 – 10,000 Wooden building with zinc roof 11,000 – 15,000 16,000-20,000 Brick building with wooden pillars 21,000 – 30,000 32,000 – 35,000 Brick building 36,000 – 40,000 41,000 – 45,000 46,000 – 80,000 RC building 60,000 – 100,000 100,000 – 150,000 150,000 – 200,000 Industrial zone 1,500,000 – 15,000,000
Taunggyi (Kyat for square foot; government and private buildings) Building Type Main Road Wide Road Narrow Road Palm leaf roof - 9.3 9.3 Tin roof 1 floor - 12.4 12.4 Tin roof 2 - 15.5 15.5 Wood 1 floor 46.5 24.8 15.5 Wood 2 floors 62 31 24.8 Brick 1 floor 62 46.5 31 Brick 2 floors 93 62 46.5 Reinforced Concrete (RC), 1 floor 124 93 77.5 RC 2 floors 170.5 155 93 RC 3 floors 232.5 217 124 RC 4 floors 310 279 186 RC 5 floors 372 310 248 RC 6 floors 465 327 310
YCDC Value of Building (Kyat for square foot; government and private buildings)
Building Type 1st tier township* 2nd tier township
Bamboo / Palm roof 200 100
Wood with zinc roof 400 200
Brick with wooden pole 600 400
Reinforced Concrete (RC) / Steel 700 600 * Includes: Pazuntaung, Botahtaung, Kyauttada, Pabedan, Latha, Lanmadaw, Dagon, Mingalar Taung Nyunt, San Chaung, Kamayut, Tamwe, Bahan, Yankin, Mayangone, Hlaing, Alone, Kyeemyintine, South Okkalapa, North Okkalapa, Thingangyun, Tharkayta, Insein, Dawpone.
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YCDC Value of Land (Kyat for square foot; government and private buildings)
Building Type 1st tier township* 2nd tier township
Narrow road 800 400
Wide road 1,000 600 * Includes: Pazuntaung, Botahtaung, Kyauttada, Pabedan, Latha, Lanmadaw, Dagon, Mingalar Taung Nyunt, San Chaung, Kamayut, Tamwe, Bahan, Yankin, Mayangone, Hlaing, Alone, Kyeemyintine, South Okkalapa, North Okkalapa, Thingangyun, Tharkayta, Insein, Dawpone.
YCDC Value of Factories (Kyat for square foot)
Building Type Building Land Machinery
Wooden 800-1000 For all of the industrial zones, 95 kyat per square
foot.
Value reported by the owner Brick with wooden poles 1001-1500
Reinforced Concrete (RC) / Brick 1501-3500
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Annex C: Property tax assessment notices
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