Recurrent Property Taxes in Africa: Recurrent Property Taxes in Africa: Policy Issues and Administrative Policy Issues and Administrative

ChallengesChallenges

Prof Riël Franzsen

SA Chair in Tax Policy & Governance

Director: African Tax Institute,

University of Pretoria

IntroductionIntroduction

• Property tax – definition and terminology

• Property tax systems – international overview

• Property tax systems – African overview

• Key policy issues and administrative issues

• Country specific examples (if time permits)

• Tax reform

• Considerations for property tax reform

Property Tax, Rates and Land RentProperty Tax, Rates and Land Rent

“Property tax” is (narrowly defined as) a recurrent

tax imposed by government on the ownership or occupation of immovable property

“Rates” is the term used in many countries (especially those with a British colonial heritage)

to refer to a property tax levied at the local government level

“Land rent” (or “ground rent”) refers to a rent charged (and collected) by government for the right to occupy

(and develop) government-owned land

Property Tax OptionsProperty Tax Options

• Simple per-unit (“flat tax”) systems

• Area-based systems– Simple area (unadjusted) (m)– “Calibrated” area systems (e.g., adjusted for location and/or use)

• Capital value systems– Land only– Land and buildings collectively– Land and buildings separately– Buildings only– Value-banding

• Rental value systems– Land and buildings collectively– Buildings only

Property Tax SystemsProperty Tax Systems

Land Value Only

Improved Value

Land & Buildings

Buildings Only

Banded Values

Annual Value

Area

Calibrated Area

No Property Tax

Franzsen and McCluskey, 2005; UN-Habitat, 2011; Fjeldstad and Heggstad, 2012; Franzsen and McCluskey, 2013; McCluskey and Franzsen, 2013b; Norregaard, 2013

Map image: http://commons.wikimedia.org/wiki/File:BlankMap-World-v2.png

http://upload.wikimedia.org/wikipedia/commons/d/d5/Colonial_Africa_1914_map.png

Colonial Africa in 1914Colonial Africa in 1914

Franzsen, 2014Map image: http://www.worldatlas.com/webimage/countrys/af.htm

Property Tax Systems in AfricaProperty Tax Systems in Africa

Land Value  

Improved Value  

Land & Buildings  

Buildings Only (CV)  

Annual Value

Buildings Only (AV)  

Area/Calibrated Area  

Flat Tax  

No Tax

AlgeriaAngolaBeninBotswanaBurkina FasoBurundiCameroonCape VerdeCentral African Republic (CAR)ChadComorosCongoCôte d’IvoireDemocratic Republic of the CongoDjiboutiEgyptEquatorial GuineaEritreaEthiopiaGabonThe GambiaGhanaGuineaGuinea-BissauKenyaLesothoLiberiaLibyaMadagascarMalawiMaliMauritaniaMauritiusMoroccoMozambiqueNamibiaNigerNigeriaRwandaSão Tomé & PríncipeSenegalSeychellesSierra LeoneSomaliaSouth AfricaSouthern SudanSudanSwazilandTanzaniaTogoTunisiaUgandaZambiaZimbabwe

Languages versus Tax BaseLanguages versus Tax Base

Afrikaans  

Arabic  

English  

French  

Portuguese

Spanish  

Swahili  

Other  

Map image: http://geocurrents.info/place/subsaharan-africa/african-country-names-in-indigenous-languages Franzsen, 2014

Land Value  

Improved Value  

Land & Buildings  

Buildings Only (CV)  

Annual Value

Buildings Only (AV)  

Area/Calibrated Area  

Flat Tax  

No Tax

Tax Base

Language

The Revenue Mobilization ModelThe Revenue Mobilization Model

Policy variables Administrative variables

• CVR: Coverage ratio - the amount of taxable property captured in the tax registry, divided by the total taxable property in a jurisdiction

• VR: Valuation ratio - the value on the valuation rolls divided by the real market value of properties on the valuation roll

• CLR: Collection ratio - the annual tax revenue collected over total tax liability billed

Revenue =Tax

baseTax rate CVR VR CLRx x x x

Kelly, 2000; 2013

Key IssuesKey IssuesPolicy:

Revenue:• Importance?• Potential?

Tax base: • Area-based or value-based?• Single or multiple?• Broad or narrow?• Use?

Valuation:• Appropriate budgeting• Regular revaluations• Oversight and quality control

Tax rate:• National or local (with/without oversight)?• Annual?• Single or differential?

Tax administration:• Allow system maintenance

Administration: Tax base: • Property identification• Property data management

Valuation:• Procurement• Regular revaluations• Objection and appeal• External quality control

Tax rate:• Differentiation

Tax administration:• Billing• Payment/collection• Enforcement• Continuous system maintenance

Revenue Importance and PotentialRevenue Importance and Potential

• The recurrent property tax is perceived to be an ‘ideal local tax’ (Bird and Slack, 2004; Bahl, 2009; McCluskey and Franzsen, 2013a))

• In realty, revenue is poor or at best modest in developing and transition countries; the property tax generates 0.3-0.6% of GDP for developing and transitional countries and up to 2-3% of GDP for OECD countries (Bahl, 2009; Norregaard, 2013)

• Property taxation has tremendous potential for mobilizing improved revenue and equity, especially in transitional and developing countries (Kelly, 2013; Norregaard, 2013)

• At metropolitan/city level, the property tax may, however, be quite important (Africa: McCluskey and Franzsen, 2013a; Latin America: De Cesare, 2012)

Metro Population Property tax

Country (million)

Metro (million)

Metro % of total

Country total

Metro Metro % of total

Accra 25.2 3.9 15.48 3.73 (2007) 1.93 51.74

Cape Town 48.9 3.0 6.13 26.492 (2009)

3.241 12.23

Dar es Salaam 43.6 2.7 6.19 7.580 (2010) 4.212 55.57

Durban (eThekwini)

48.9 3.5 7.16 26.492 (2009)

3.912 14.77

Johannesburg 48.9 7.5 15.34 26.492 (2009)

3.331 12.57

Kampala 35.9 1.7 4.74 43.30 (2008) 4.98 11.5

Pretoria (Tshwane)

48.9 2.5 5.11 26.492 (2009)

2.257 8.52

Importance of Metropolitan Property Tax in selected African Cities

McCluskey and Franzsen, 2013a

• Diversity of tax bases: Benin, CAR, Côte d’Ivoire, Niger, Zimbabwe

• Limited in-country coverage: Angola, Botswana, Cameroon, Lesotho, Liberia, Mozambique, Swaziland, Uganda

• Poor coverage within jurisdictions: Kenya (Nairobi and Mombasa), Lesotho (Maseru), Tanzania (Arusha) and Uganda (Mbarara)

• Rural land and communal land generally not taxed (however, e.g., Namibia, South Africa)

• Extensive exclusions and/or exemptions: Egypt, Tanzania, Uganda

• Move to capital improved value as preferred tax base: Cameroon, Mauritius, Mozambique, Nigeria (Lagos State), Rwanda, South Africa

• Undeveloped/vacant properties taxed: Botswana, Côte d’Ivoire, Namibia, Sierra Leone, South Africa

Tax Base: Choice and CoverageTax Base: Choice and Coverage

• Serious shortage of skilled and qualified valuers: All countries, including South Africa

• Capacity to prepare and maintain valuation rolls: All countries

• Accuracy and cost assessed values should bear an appropriate relation to the eventual amount of the tax bill: Tanzania, Malawi, South Africa

• Procurement of professional services: South Africa

• Lack of proper/any external quality controls: All countries

• Limited education and training opportunities for valuers

Valuation IssuesValuation Issues

Valuation ServicesValuation Services

• Valuation service providers:– Government or government agency: Botswana, Côte d’Ivoire,

Lesotho, Malawi, Senegal, Uganda, Zambia– In-house (i.e. municipality itself): Lesotho, Mozambique,

Namibia, South Africa, Tanzania, Zambia– Private sector: Malawi, Namibia, South Africa, Swaziland,

Tanzania – Self-assessment: Cape Verde, Liberia, Rwanda

• Recent changes in respect of valuation services– Government to in-house: Lesotho– Government to private: Botswana, Malawi, Uganda– Self-assessment: Rwanda

• Increased utilisation of computer-assisted mass appraisal (CAMA): Cameroon, Malaysia, South Africa

Cost of 1Cost of 1stst Valuation Roll in relation to Revenue Valuation Roll in relation to Revenue in Four Rural Municipalities in South Africain Four Rural Municipalities in South Africa

Municipality (Province)

Total Number of Properties

Total Cost (Excl VAT)

Cost per Property

Revenue for 2009/2010

Aganang (Limpopo) 24,258 R1,650,000 R68 R190,082

Umzumbe (KZN) 1,232 R1,440,357 R1,169 R510,309

Blouberg (Limpopo) 5,795 R2,300,000 R397 R484,582

Mutale (Limpopo) 1,255 R3,671,124 R2,925 R763,922

Source: Franzsen & Welgemoed, 2011

“Governance” questions:•Procurement of valuation services?•Quality control?•Education of local councillors and officials?

Policy questions:•Who should be responsible for valuations and valuation quality control?•Should small rural councils have a value-based system?•Is a property tax an option at all?

Which system has the competitive advantage?

Area-based Value-based

Area-based: Advantages: • Simplicity• Cost• Functions in less formal markets• Self-assessment

Disadvantages:• Lack of buoyancy• Fairness• Subjectivity if adjusted for

location, etc.

Value-based: Advantages:• Buoyancy• Value reflects benefits received• Equity (if well-maintained)

Disadvantages:• Requires some market formality• Data intensive• Constantly changing• Costly to implement and

maintain

“Still, the unassailable advantage of the area-based approach is that it enables the imposition of a property tax where there is no property market – that is where there is no direct evidence on the market value of properties. As such, it might be an appropriate interim, if not long term, approach for a country while it waits for its formal property market to develop.” (Bahl, 2009)

• Fixed tax rates: Cameroon, Egypt, Rwanda, Tanzania

• Tax rates struck annually: Botswana, Namibia, South Africa

• Set nationally in some countries: Angola, Cameroon, DRC, Egypt, Rwanda

• Set locally, but require national government approval: Botswana, Namibia, Uganda

• Capping of rates: Uganda, or possible limitation of annual increases in rate: South Africa

• Differential rates in many countries: Botswana, Lesotho, South Africa, Swaziland, Tanzania

• In some instances too low to recover valuation and/or tax administration costs: Tanzania, South Africa

Tax RatesTax Rates

Billing, Collection and EnforcementBilling, Collection and Enforcement

• Problems with billing (e.g. manual systems, unreliable mailing systems, lack of street names): Malawi, South Africa

• Inappropriate use of limited resources: Tanzania (e.g. In Dar es Salaam valuers did billing (2002))

• Collection by (national) revenue authority: Tanzania (Dar es Salaam: 2008-2013)

• Limited payment options: Kenya (as opposed to South Africa)

• Political interference: Kenya, Nigeria, Uganda

• Available enforcement mechanisms not used: Most countries

EgyptEgypt• Property tax revenues less than 1% of total national revenues

between fiscal years 2001/2002 and 2009/2010

• 2008 Real Estate Tax Law to replace three property taxes:– Real Estate Tax (since 1842); Agricultural Land Tax; Entertainment Facilities Tax

• 2008 law: To commence in ????

• Tax base: Net annual rental value– Residential: gross rental minus 30%; Other use categories: gross rental minus 32%

• Tax rate: Uniform 10% across the country

• As a result of a LE500,000 (approx. US$88,000) value threshold, more than 90% of properties will be excluded

• Valuation done by a committee; 5-year valuation cycle – with maximum increases of 30% for residential properties and 45% for non-residential properties in any one cycle

KenyaKenya

• Almost a century of land-value taxation

• 2010 Constitution and new local government dispensation (March 2013)

• Article 209(3) of the Constitution – meaning of “right to impose property rates”

• Nairobi last revalued in 1982 and Mombasa in 1991

• Nairobi tax rates: Was increased from 17% to 34%, but high court has annulled the increase (August 2014)

• Question: Is an ad valorem system achievable and sustainable?

RwandaRwanda

• Introduced: 1974; decentralized in 2002

• Tax base: used to be area and location (Kigali, urban areas or towns, trading areas, rural) and use (residential, business, agriculture)

• Tax rate: 0.2% (on hotels: 0.22%)

• Ground floors (100%), 1st floors (50%), 2nd floors (25%), no tax on basements and third floors +

• Taxpayers obliged to annually report property changes

• Introduced ‘value’-based system with self-assessment – Dec 2011…

• Question: Is an ad valorem system achievable and sustainable?

South AfricaSouth Africa

• Key policy principle: Uniformity

• Tax base: Market value for all use categories

• Valuation issues: Capacity and external quality control

• Annually revised ‘rates policies’

• Question: Is an ad valorem system achievable and sustainable in respect of all local municipalities?

TanzaniaTanzania

• Dual system: Value-based (DRC of buildings) and calibrated area-based taxes

• Poor base coverage in many jurisdictions

• Few valuers, costly valuations

• Low, static tax rates

• Problems with billing, collection and enforcement

• Political interference

• Question: Is an ad valorem system achievable and sustainable?

UgandaUganda

• 1979 Decree replaced by new legislation in 2005• Tax base: Annual rental value• Valuation: New valuation roll for Kampala City

Council (2004)• The new system remains compromised as a result of

inappropriate legislation and capacity constraints• Problems with billing, collection and enforcement• Political interference and lack of support

• Question: Is an ad valorem system achievable and sustainable?

“The best approach to reforming tax in a developing country – indeed in any country – is one that takes into account taxation theory, empirical evidence, and political and administrative realities and blends them with a good dose of local knowledge and a sound appraisal of the current macroeconomic and international situation to produce a feasible set of proposals sufficiently attractive to be implemented and sufficiently robust to withstand changing times, within reason, and still produce beneficial results.”

Bird & Oldman Taxation in Developing Countries (1990) 3.

“Of course, no one wants to hear that it may take decades before they are in a position to undertake this or that particular reform successfully, whether in tax structure or tax administration... What people want to hear is rather that they can simply bolt on this or that new feature to their existing system without making anymore basic changes, and still get good, quick, and preferably quantifiable results.”

Bird, 2013

Tax Reform (1)Tax Reform (1)

“Tax policy is the product of political decision making, with economic analysis playing a minor supporting role.”

Richard Holcombe (Holcombe, 1998)

“Good tax policies are worth very little if these cannot be implemented effectively.”

Richard Bird (Bird, 2004)

“Tax administration is tax policy.”

Milka Casanegra de Jantscher (Casanegra de Jantscher and Bird, 1992)

“There is no single set of prescriptions - no secret recipe - that, once introduced, will ensure improved tax administration in any country.”

Richard Bird (Bird, 2004)

“...[F]undamental strengthening of revenue collection will be largely a matter of persistent and unspectacular effort ...”

Michael Keen (Keen, 2012)

Tax Reform (2)Tax Reform (2)

Recent or Current Property Tax ReformsRecent or Current Property Tax Reforms

Developed countries

Developing/transition countries Map image: http://commons.wikimedia.org/wiki/File:BlankMap-World-v2.png

Franzsen, 2014

Map image: http://www.worldatlas.com/webimage/countrys/af.htm

Property Tax ReformsProperty Tax Reforms1991 – 2000:MalawiSwazilandZambia

2001 - 2010:CameroonCape VerdeCentral African RepublicCongoEgyptLiberiaMadagascarMauritiusMozambiqueNamibiaNigeriaSenegalSierra LeoneSouth AfricaTanzaniaUganda

2011 – Current:EthiopiaKenyaNigeriaRwandaSomaliaSouthern SudanZimbabwe

Contemplated:BotswanaGhanaLesothoSeychellesFjeldstad and Heggstad, 2012; Franzsen, 2014

Considerations for Reform (1)Considerations for Reform (1)

• Appropriate constitutional, legal and institutional environment

• Political commitment and community support are critical prerequisites for whatever system is selected – i.e. proper education/communication (Indonesia, Northern Ireland)

• Appropriate property tax policies (i.e. achievable and sustainable goals)

• “Simpler can be better” as it could lead to – – Improved base coverage– Savings on the cost of assessment, objections and appeals, as

well as collection

Considerations for Reform (2)Considerations for Reform (2)

• Reform: “Collection-led” (Indonesia) or “valuation-pushed” (Tanzania)?– Dillinger (1992) states that “the low yield of the property tax is... the

combined result of inappropriate policy and poor tax administration”.– Kelly (2013) states: “A major constraint to improving the property tax in

transitional and developing countries is weak administration, often a result of political, institutional and capacity constraints.”

– All the integral parts for a successful system require attention (i.e. property discovery, base coverage, valuation (where applicable), assessment, billing, collection and enforcement)

• “Transitional” alternatives may produce a more equitable spread of the tax burden in a more cost effective and sustainable (?) manner– Market-calibrated area (e.g. India, Israel)– Value-banding (e.g. Great Britain, Ireland)

• Migration (back) to a discrete-value system when capacity constraints are met/revenue yield justifies it…– However, “temporary” measures may become difficult to replace: Estonia,

Bangalore, India (Rao, 2008)…

ReferencesReferences

• Bahl, R.W. 2009. ‘Property tax reform in developing and transition countries’ USAID Working Paper.• Bird, R.M. 2004. ‘Administrative Dimensions of Tax Reform’, Asia-Pacific Tax Bulletin (March) 134-150.• Bird, R.M. 2013. ‘Foreign Advice and Tax Policy in Developing Countries’, Georgia State University: International Center for Public

Policy Working Paper 13-07 (April). • Bird, R.M. and Oldman, O. 1990. Taxation in Developing Countries, Baltimore: The Johns Hopkins University Press, 3• Casanegra de Jantscher, M. and Bird, R.M. 1992. ‘The Reform of Tax Administration’ (eds.) Improving Tax Administration in

Developing Countries, Washington DC: IMF, 1.• Bird, R.M. and Slack, E. 2002. Land and Property Taxation Around the World: A Review’, Journal of Property Tax Assessment &

Administration (Vol 7, No 3) 31-79.• De Cesare, C. 2012. ‘Improving the Performance of the Property Tax in Latin America’, Policy focus Report, Cambridge MA: Lincoln

Institute of Land Policy.• Dillinger, W. 1991. ‘Urban Property Tax Reform: Guidelines and Recommendations’, Urban Management and Municipal Finance,

Washington DC: World Bank.• Fjeldstad, O. and Heggstad, K. 2012. ‘Local government revenue mobilisation in Anglophone Africa’, CMI Working Paper WP 2012: 6.• Franzsen, R.C.D. and McCluskey, W.J. 2005. ‘An Exploratory Overview of Property Taxation in the Commonwealth of Nations’, Lincoln

Institute of Land Policy Working Paper, (see http://www.lincolninst.edu/pubs/pub-detail.asp?id=1069).• Franzsen, R.C.D. and McCluskey, W.J. 2013. ‘Value-based Approaches to Property Taxation’ in McCluskey, W.J., Cornia, G.C. and

Walters, L.C. (eds.) A Primer on Property Tax: Administration and Policy, West Sussex: Wiley-Blackwell, 41-68.• Franzsen, R.C.D. and Welgemoed, W. 2011. Submission on Proposed Amendments to the Municipal Property Rates Act (MPRA),

Unpublished report for the South African Local Government Association (SALGA).• Holcombe, R.G. 1998. ‘Tax Policy from a Public Choice Perspective’, National Tax Journal (Vol 51 No 2), 359-371.• Keen, M. 2012. ‘Taxation and Development – Again’, IMF Working Paper, Washington DC: IMF.• Kelly, R. 2000. ‘Designing a Property Tax Reform Strategy for Sub-Saharan Africa: An Analytical Framework applied to Kenya’ Public

Budgeting & Finance (Winter 2000).• Kelly, R. 2013. ‘Making the Property Tax Work?’ Georgia State University: International Center for Public Policy Working Paper 13-11

(April).• McCluskey, W.J. and Franzsen, R.C.D. 2013a. ‘Property Taxes in Metropolitan Cities’ in Bahl, R, Linn, J. and Wetzel, D. (eds.)

Metropolitan Government Finance in Developing Countries, Cambridge MA: Lincoln Institute of Land Policy, 159-181.• McCluskey, W.J. and Franzsen R.C.D. 2013b. ‘Non-market Value and Hybrid Approaches to Property Taxation’ in McCluskey, W.J.,

Cornia, G.C. and Walters, L.C. (eds.), A Primer on Property Tax: Administration and Policy, West Sussex: Wiley-Blackwell, 287-305.• Norregaard, J. 2013. ‘Taxing Immovable Property – Revenue Potential and Implementation Challenges’, IMF Working Paper,

Washington DC: IMF.• Rao, U.A.V. 2008. ‘Is Area-based Assessment an Alternative, an Intermediate Step, or an Impediment to Value-based Taxation in

India?’ in Bahl, R.W., Martinez-Vazquez, J. and Youngman, J. (eds.) 2008. Making the Property Tax Work: Experiences in Developing and Transition Countries, Cambridge MA: Lincoln Institute of Land Policy.

• UN-Habitat, 2011. ‘Land and Property Tax—A Policy Guide’, Nairobi: United Nations Human Settlement Programme (Principal author: Lawrence Walters).