Considering more appropriate taxes for the real estate sector

March 24, 2022 | 10:58
The Ministry of Finance has been gathering opinions on housing and property taxes, which is attracting interest, including that from domestic and foreign experts.
Considering more appropriate taxes for the real estate sector
Cuc Le Head of Advisory Cushman & Wakefield Vietnam

Although most experts believe that a property tax is necessary to combat speculation, stopping the massive development of real estate could lead to a return of the housing bubble. Taxation of houses and properties is quite common in countries around the world. However, from the perspective of a foreign consulting company, we believe that the recent increase in real estate prices is quite high due to the unbalanced supply and demand in the market. This phenomenon in Vietnam is consistent with the global situation, as many countries are seeing rising prices due to uncertainties from the pandemic.

The application of this law in Vietnam will be relatively complicated and many aspects need to be considered. We believe that it is still too early to do this in the current context when the economy is still under many influences of the pandemic.

Currently, Vietnam does not have a tax on the value of property. This tax is quite common in some developed countries in the world. To use this form to limit speculation is no easy feat. Vietnam does have a tax on personal income from the sale of real estate, also with the purpose of limiting speculation and hoarding. The addition of a new tax might cause duplication, which can strongly impact the economy in general.

The application of a new tax rate needs to be studied carefully because of its impact on the economy as a whole and on people’s incomes.

There are many examples in the world of taxing real estate buyers, with the following standing out. In Singapore, when purchasing real estate, the buyer will have to pay about 3 per cent. However, when buying the second property or more, people with Singaporean nationality will have to pay an additional tax of 17 per cent, adding up to a total of 20 per cent. If the buyer is a foreigner, they have to pay an additional 25 per cent for the second home. Therefore, tax revenue will increase significantly and depend on each group of buyers.

Singapore’s property tax rate is progressive and there are two different rates for owner-occupied and non-owner-occupied residential properties. Some examples of the former can be condominiums, subsidised public flats, or other residential properties where you would need to physically live in the property.

Residential properties which are rented out are considered investment assets and hence are taxed at a higher rate than owner-occupied properties. This tax structure makes the property tax system more progressive by ensuring that higher-value properties would be subject to higher tax rates.

In another example, the United Kingdom last year passed a tax on real estate buyers. If you buy the first property, you will have to pay a basic rate and add 3 per cent. The rate will be based on the value of that house, but determining the home value is quite complicated. The rate will vary according to the value of the property.

When comparing taxes in Vietnam and other countries, we can see that each country has its own plans to apply these. We can refer to the Singaporean model, with two progressive rates for properties that are used or unused by the owner, calculated on the expected one-year rental income of the property.

In the United States, the rates used are uniform for property classes. However, rates vary from state to state and are detailed by state law. Or in the UK, for properties under $165,000, there is no need to pay tax, and over $165,000, a different rate applies, plus the rate for the second property.

In general, there are many options on how to form this law. Time and place are critical to the successful application of this type of tax, which of course also requires careful study and assessment of its impact on the socioeconomic environment. The method and basis of application also need to be elaborated in accordance with the situations of the majority of the population.

In other countries, this legislation has contributed significantly to government revenue, but will also affect the number of real estate transactions on the market. In general, taxing real estate buyers in countries around the world and in Vietnam will have a certain impact on the market when an appropriate system is applied.

The strategy for allocating and using tax proceeds should be reinvested in society through activities such as developing the education system, building public facilities, infrastructures, strengthening national defence and security for the country and the locality.

Meanwhile, the valuation of real estate needs to have a reliable and complete information source, and at the same time, the legal aspect of the project must be transparent and clear.

The real estate market in Vietnam is on the rise and is very attractive, and there are many investors who buy two or more properties. The proposed tax may reduce the attractiveness of this segment, and will affect the volume of real estate transactions in the market, but overall long-term investment and rental performance are still good as investors can still benefit for more than 10 years.

On the other hand, the new taxes are expected to lead investors to divert towards markets without such restrictions.

From the perspective of a real estate consulting company, we need to conduct in-depth market research to be able to assess the impact of this law on the real estate market. There must be the participation of all levels of government and relevant departments, economic and financial experts as well as professional real estate market research companies to be able to build a suitable system that can succeed in practice.

By Cuc Le

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