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4.1 Several factors inhibit making useful detailed recommendations about property tax in specific countries in Central and Eastern Europe:

Agricultural conditions

4.2 Agriculture is in a state of transition throughout Central and Eastern Europe. A prime concern of every transition country is access to the markets of the EU countries, particularly for their agricultural produce. At present there are factors that make it difficult for the agricultural industry of most countries in transition to compete. The former state farms are inefficient and short of capital, and encumbered with infrastructures they can neither afford to maintain nor replace. Many are not being run at a profit, or would not be considered to be doing so if depreciation is taken into account. Privatisation has created many small uneconomic badly sited holdings. Even those countries (such as Poland and the former Yugoslavia) which retained large areas under private ownership have many farms that are too small and too scattered to be economic. However, there is no reason to doubt that the agricultural sectors in these countries will be able to compete in the future. They will adapt to the circumstances.

4.3 None of these factors prevent the application of an ad valorem tax, although the assessment of small-scattered holdings entails more work and will be more costly. Coupled with low agricultural values, this suggests less favourable tax/cost yields. However, a modern system of property tax should be less complicated and cheaper to administer than some of the cadastral systems presently in use.

4.4 It is reasonable to anticipate a period of rapid change as countries adapt and compete. It is likely that the structure of holdings will change. Land values will probably increase. Regular property tax revaluations will be necessary to pick up these changes.

4.5 A broad indication of the magnitude of the potential tax base attributable to agriculture may be estimated from the relative size of agriculture in the economy. There are large variations. Those where agriculture is over 25 percent of GDP include Albania, Armenia, Georgia and Moldova. Those least dependant on agriculture are Czech Republic, Poland, Slovakia and Slovenia (4 percent); Estonia and Hungary (6 percent); and Russia(7 percent). The capacity of the agricultural populations in these countries to absorb increased tax liabilities is conditioned by the fact that agriculture supports a typically disproportionately large percentage of the population. Of course, the ability of rural people to pay the tax is an important factor.

Land tenure and land administration

4.6 Restitution and privatisation. The process of privatisation in almost every country was driven by political urgency. The resulting pattern of ownership is frequently uneconomic and has left problems that are relevant to property taxation which could pose difficulties in defining the property and valuation.

4.7 Cadastres. In many transition countries, 'cadastres' have existed for a century or more. They vary in character but tend to incorporate a detailed classification of soil type and permitted land use. They are frequently maintained in a labour intensive manner faithfully preserving the original character of the document. It is also generally the case that the uses to which the cadastres are put do not warrant the time and expense applied to their maintenance.

4.8 It is worth considering whether, and if so how, these cadastres can be adapted to form a modern valuation list. It should in theory be possible because the cadastres are in fact 'valuation lists' that have become fossilised. When originally prepared they were remarkable documents, well adapted to their purpose and generally of a high professional standard. The purpose was to raise revenue and they correctly addressed the main economic base of the period: agricultural land. The quality of the soil was then relatively much more important than it is today. In the last century agricultural technology and mechanisation has lessened the relative importance of soil quality. For instance, wetland can often be drained at an affordable cost. Heavy land can be cultivated more easily with powerful machinery. Acidity is readily corrected by liming. Artificial fertiliser is applied to correct deficiencies on hungry land. Nor is it only soil quality that is important in agriculture. For many enterprises agricultural buildings are essential. In fact the pattern of agriculture has changed remarkably in the latter half of the last century and the methods of valuation and assessment must change with it. In summary there are two defects of most present day cadastres. First, they do not include the non-agricultural properties in the tax base. Second, they do not reflect present day agricultural values.

4.9 Nevertheless cadastres can form useful material from which a modern valuation list can be created. Many of the skills required to maintain a cadastre are relevant, with adaptation, to the assessment process.

4.10 Land registration. The subject of land registration has received much attention in most of transition countries but, in many, the situation remains less than completely satisfactory. Some of the underlying reasons are relevant to the design of property tax.

As a result, valuers cannot rely on the information in the registers and have to make their own researches at an additional cost.

4.11 Valuation. There is a shortage of valuation skills in the transitional economies of Central and Eastern Europe. The public service competes with the private sector, and the property tax administration with other public sector users of these skills.

Property markets

4.12 It is sometimes suggested that rural property markets are too thin to provide a basis for a value based property tax. This is most unlikely to be the case. The activity in property markets is usually underestimated particularly in transition countries. It can be difficult for nationals to understand their own local property markets if they are not professionally involved in those markets. It is even more difficult for foreigners, especially if they have never been professionally involved in their own country, to recognize and understand property markets, particularly if they imagine that markets can be detected from official sources. A safe default assumption in almost any circumstances is that properties do change hands12 and there exists sufficient evidence for a skilled valuer to create a valuation list. The evidence may not appear in the official records but this matters little.13

4.13 At the start of the 1990s most transition countries considered that property markets were insufficiently developed to form the basis for ad valorem property tax. However, it is most unlikely that the current state of property market development will prevent the introduction of an ad valorem tax system. There are factors that the design of the tax must take into account:


4.14 In several transition countries there is clearly an intention to move from a 'flat rate system'14 to a true ad valorem system of property tax. The fiscal and economic advantages are recognised by many in those countries. One of the unspoken factors inhibiting this move is a fear of a new system that seems to depend more on individual judgement than it does on fixed rules. The belief is often that this will leave even more scope for corrupt officials to extract irregular payments. Understandable though this belief might be, it is incorrect. In fact the reverse is generally the case. The underlying reasons are probably related to the lack of transparency of a flat rate system. Certainly it is known from examples elsewhere in the world that flat rate taxes do not stop corruption. This may also be the case in some transition countries where the flat rate and the lack of opportunities to appeal against the officially determined value increase the opportunities for corruption in official hands.

4.15 Instead, it is more probable that a change to an ad valorem system actually will lessen the opportunities for corruption provided that it is based on up-to-date values, that the entire valuation list is open for public inspection,15 and that there is ready access to a judicial appeal system that is free to the taxpayer. When the system works well, the basis of comparability means that the freedom for officials to reduce values is reduced because a) they can not afford to undermine their own list by individual injudicious reductions and b) it will be cheaper for the taxpayer to go to appeal than to pay a bribe. The practice of mass valuation of properties for taxation purposes leaves very little room for corruption practices as all properties are handled simultaneously without paying special attention to any particular property.

4.16 The way in which transparency is introduced will depend on the particular circumstances of each country. Where there are concerns of corruption at the local level of government, methodologies for mass valuation should be developed at the national level. The responsibility for setting tax rates should be assigned to local elected councils, assemblies or parliaments, and should not be left to local administrators. Local legislators should also be given the right to set the time of the next revaluation.

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