Paying our share
New land and buildings tax in Thailand has its critics, but rates are modest compared with elsewhere in the region. By Karnplu Itthiratanakomol
Some businesses in Thailand have been grumbling about how they will suffer once a new land and buildings tax takes effect in 2017, but the fact is that taxes on property in Thailand would still be among the lowest in the region.
The government of Prime Minister Prayut Chan-o-cha last month approved the long scrutinised bill to tax land and buildings in hopes of reducing disparity, encouraging utilisation of undeveloped land, and possibly adding some money to government coffers.
The new law would impose taxes on primary residences and land appraised at 50 million baht or more in value. To the relief of the middle class, that eliminates more than 99% of all the houses in Thailand. Houses or farmland with an appraisal price above 50 million will be subject to progressive rates of tax, with second homes taxed at higher rates. The rates would be between 0.03% and 0.30%. The taxes would be applicable to foreigners if any happen to own condominiums worth 50 million baht or more.
For commercial property, the bill sets a ceiling rate of 2% of appraised value for land use. In an effort to increase the availability of land for farmers, there is a ceiling rate for vacant or undeveloped land to 5% in order to promote efficient land utilisation.
For land with multiple usages, for instance, a two-storey shophouse with a business on the ground level and a dwelling on the upper floor, both residential and commercial tax rates will be used.
“The ceiling rate of 2% for commercial use is already a low rate compared to other countries in the region,” said Somchai Jitsuchon, research director for inclusive development at the Thailand Development Research Institute (TDRI).
The Finance Ministry has estimated that the land and building tax could bring in 64 billion baht in revenue, 60 billion of which would come from commercial buildings. Owners and developers of commercial property in particular will now have to take the new tax factors into consideration when planning their strategy.
Still, the taxes in Thailand are among the cheapest in the region except for Indonesia where taxes are levied only on the sale of property.
According to Atiphat Muthitacharoen, an economist with Chulalongkorn University, the land and buildings tax will be imposed based on property value rather than the revenue it generates.
The previous local development tax was collected based on land size on a regressive basis, with exemptions varying by area.
“Land of 100 square wah (400 square metres) in size in Bangkok would be exempt from local development taxes, even though it could be worth about 60 million baht,” he said.
“But the question is, we don’t have specific data on the land size and its worth, as most people in Thailand have to build their homes. Setting a ceiling for residential use at 50 million baht should minimise impact among the middle and lower classes.”
Mr Atiphat said that improved land utilisation could be one of the most important achievements of the new tax regime.
“For example, land in some prime areas rents for only a fraction of the price that could be charged. Business operators should adjust in the interests of efficiency,” he said.
For income-generating properties, it is still not completely clear whether the existing “rental tax” (12.5% of annual rental value and collected by local authorities) will remain or be replaced by the new tax. The new tax regime is based on the property value with much lower rates, and administered by the central government.
“Businesses might actually profit from the new tax as they wouldn’t have to deal with local administrations. That will decrease their cost and difficulties,” Mr Atiphat said.
Dr.Somchai of the TDRI says the businesses that would be affected would be mainly ones with high asset value. Tax on property for commercial use is levied from the first baht they invest with no exemption, unlike residential properties, where anything valued below 50 million baht is exempt.
Since the new tax system will replace the existing house, land and development taxes, its effects will vary.
“Some businesses might actually profit from this new tax system as they wouldn’t have to pay the house and land tax,” said Dr.Somchai.
“But on the other hand, businesses that were exempted from such tax will now have to pay the land and buildings tax.”
He said businesses occupying large areas of land such as warehouses, golf courses, and low-rise housing estates, would probably face the highest amounts of tax.
Vertical developments such as condominiums might not be affected directly in terms of tax liability but could see a decline in demand.
“SME businesses in high appraisal value areas such as Sukhumvit and Silom are not in a worrisome situation. If they could afford to do business in such areas, they wouldn’t be burdened with paying the tax,” Dr.Somchai said.
He said SMEs in areas that are not as expensive would have more to be concerned with, especially if they are not making large profits, as they would face higher costs. “But a small business with low property value wouldn’t be bothered much by this new tax.”
However, SME tenants could suffer if an owner decides to push the burden of the land and buildings tax onto them, as it replaces the existing house and land tax, which some tenants are responsible for.
Already burdened with corporate, value-added and withholding taxes, many SMEs are demanding clarity about whether the new tax regime is intended to replace the house and land tax.
“Replacing the house and land tax with the land and buildings tax would make me pay seven times more than I usually do,” said the owner of a well-known restaurant on Sukhumvit Road.
The restaurant opened a year ago on a rented land of 100 square wah on one of the priciest streets in the country. She agreed on a contract stating the tenant would be responsible for the land and house taxes.
The restaurant owner, who asked not to be named, said her business strategy was based on rent being no more than 14% of the restaurant’s revenue. The new tax would make her cost much higher.
The owner of a 200-room hotel also complained, saying the new taxes could cost him anywhere between 15 million and 20 million baht annually and eat up most of his profits, as the building occupied prime land acquired by his ancestors when it was far cheaper than it is today.
“SMEs play a big part in driving Thailand’s economy. Having our income reduced by this tax would make it difficult for business to grow, or worse, they might even have to stop,” said the restaurant owner.
OTHER ASIAN MARKETS
The merits of different approaches to property tax in Asia can be debated endlessly. Some people see the system in Thailand, even with very modest rates, as a perpetual burden on the title holder, whereas taxes in other countries are based on rental income or on transaction value once a sale takes place. What follows is a brief rundown of other tax regimes:
Singapore: Taxes are levied on the annual value of all immovable property at a flat rate of 10% for non-residential use.
Residential properties are taxed on a progressive basis. For nonowner occupied residential properties, rates of 10-20% for apply on values from S$30,000 to S$90,000. For owner-occupied properties, rates of 4-16% apply on amounts exceeding S$55,000.
Vacant land for housing development intended for owner-occupation can be taxed at the residential owner-occupier tax rates for a maximum of two years while development is under way. All other vacant land will be taxed at 10% during the development period
Vietnam : Land users pay an annual non-agriculture land use tax at 0.03% to 0.15% of the land price. The tax base is the land area used based on the prescribed price per square metre.
Indonesia: A progressive tax rate is imposed on the sale value of the property, ranging from 0.01% for properties worth up to 200 million rupiah to 0.3% for properties over 10 billion rupiah.
Malaysia: Land tax or “quit rent” is levied yearly on all landed properties at one to two sen (0.01 to 0.02 ringgit) per square foot. The liability is generally estimated to be less than 100 ringgit per year.
The assessment tax is a local tax based on the annual rental value of the property, as assessed by local authorities. It is generally levied at a flat rate of 6% for residential properties.
China : The current focus is on development and sales of property, without taxing home ownership or the market value of homes.
Investors tend to purchase multiple houses and hold them off the market in hopes of further appreciation, which has fuelled price rises in major cities. Therefore, these real estate taxes levied on individual owners who have more than one property tend to cool down the market.
For owner-occupied properties in Shanghai, the real estate tax rate is from 0.4% to 0.6% of 70% of the original value of the property.
Non-residents earning rental income are liable for business tax at 3%. Taxable income is computed by deducting business tax, operating, administrative and financial expenses from gross income.
India: There is no comprehensive system of property taxation in India. Practices differ among states and even among municipalities within states. For leased properties, tax is levied on the annual rental value. In Delhi, property taxes range from 6% to 10%.
First published: Bangkok Post on Saturday, June 27, 2016