New real estate tax: heist of the century, Russian-style

New real estate tax: heist of the century, Russian-style
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There are lots of ways to strip people of money. The safest one is by means of taxes, for example, real estate taxes.

A little history to begin with. In 1963, some British gentlemen stole 2.6m pounds sterling ($60m in modern money) from a mail train. The crime was called “The greatest heist of the century”. Though more than five decades have passed since then, it still thrills many people in many countries.

The Russian government has now decided to outdo the English, but little is known about the plans of the Russian gentlemen at work in our power structures. Do you want to learn the details? Read on, as it concerns almost all of you. 

Don't count payment documents before they hatch

People’s expenses have recently been growing faster than their incomes. Rather, incomes are falling and expenses are increasing. CAPEX allowance, toll parking, CMTPL(Compulsory Motor Third Party Liability) tariff increase, transportation tax – the list of new taxes imposed by the state is far from finished.

We are gradually approaching a situation in which the real incomes of the majority of Russians will not cover even compulsory payments: utility services payments, taxes, food, education, transport, etc.

However, everything pales in comparison with what our citizens may suffer this autumn, just after the elections. The owners of flats, cottages and land plots will get payment documents with the real estate tax calculated differently from the way everybody is accustomed to – not according to the inventory cost, but according to the cadastral cost.

These figures will have to be argued in court, whereas at present they may be argued through a pre-trial process, in special commissions for considering such controversies. At least, such is the judicial procedure suggested by the bill draft “On the State Cadastral Valuation” (SCV), introduced by the RF government. And do we, the citizens of the best country in the world, not know how difficult and time-consuming it is to wrangle the truth out of the Russian administration / justice system!

It should be remarked that this new order will concern the majority of RF citizens, as, according to statistics, 86% of our citizens are realty owners and tax calculated according to cadastral costs will end up unaffordable for many of them.

Faults and drawbacks

To remind you, where did the new real estate tax calculated as to cadastral cost come from? According to Ivan Grachev, Deputy of the State Duma, the government did not make any special calculations, but determined the sum empirically. For that, an experiment was held in Veliky Novgorod and Tver, and it is important to know the error limits of the final result.

— The experiment showed that the error limit within the cadastral cost determination might reach as high as 100%, the parliamentarian explains. — We have too few data and corresponding judgments to determine the actual cost of the rateable value.

The conclusion is clear: a tax with such vast deviation cannot be introduced. The government does not seem worried about it, but one may be rather secure in predicting the result.

The tax will be high for the poor and weak, and low for the rich and powerful, as the latter have the opportunity to hire good lawyers and strive for a reassessment of tax liabilities via the courts.

This is already occurring. According to Tatiana Golikova, Head of the RF Audit Chamber, large business has managed to decrease its tax base by 4 trn roubles since the beginning of cadastral property cost evaluations.


The rich also pay… but not much

One may study the example of the town of Shelekhov in the Irkutsk region. The realty cadastral valuation for small businesses and energy companies grew tenfold, whereas the land cost under the Irkutsk aluminium plant decreased two or threefold. The reason is simple: the directorate of the enterprise, part of the RUSAL company belonging to billionaire Oleg Deripaska, managed to prove in court that the market cost of the land is lower than previously calculated.

For the poor and weak, the situation looks hopeless. According to the governmental bill draft, state valuators will assess the property – in other words, the same officials will do the job, and their decisions will be unchallengable, as going to court is a very long and pricey process for an ordinary citizen.

Besides this, an undisputable evaluation cannot be a market evaluation: a market valuation always has a deviation range, and it may be argued, specified, etc. Even the most experienced evaluator can hardly take all of the details into account, and sometimes one small detail can change an object’s value tenfold.

Kirill Kulakov, Professor at MSUCE and First Deputy Director General of the Independent Examination Center for Real Estate, thinks it a big achievement to have kept the challenging procedure in the governmental bill draft.

— The procedure has proven its efficiency and allows people and businesses to hope for justice in calculating taxes from the new value of the cadastral cost, the expert argues.

But the right to create commissions for those who want to argue the evaluators’ decisions in a pre-court procedure is being transferred to the regions, and there is no guarantee that all regions will introduce it.

Meanwhile, according to Ivan Grachev, the poor and weak are likely to see an increase in their real estate tax by a factor of 2 or 2.5 in the near future.

From bad to worse: — As the tax has been introduced without any scientific calculations, it will gradually grow by 2—3% a year from the cadastral (market) cost of real estate, the parliamentarian warns, and adds: — It is almost the same as the Americans pay.

Finally, the tax will grow tenfold (!) as compared with the current value, the deputy predicts. To ensure this, the government intends to make a clever play: to take professional evaluators out of the equation and to assign state officials the task of property evaluation.

— Thus, the state is going to build a system comprising of the worst from both Soviet and free market practices, Ivan Grachev says.


Same SCV, only different

So, as you can see, the situation is quite disturbing. Is there an opportunity to change anything? As Andrei Krutov, the State Duma Deputy, says, a group of legislators have introduced their own bill draft, “On SCV”, which was first discussed by the professional community in order to head off possible mistakes.

The document includes two basic principles: the state cadastral valuation is carried out by professional evaluators, and businesses and citizens are given maximum opportunity for pre-court disputes of the resulting conclusions.

However, the deputies’ project has got stuck at the stage of consideration, whereas the governmental draft has every chance of being adopted by a Duma majority in its accelerated mode.


An oak or a calf?

The main problem in Russia is not that the population pays low taxes, but the way they are used, Ivan Grachev is sure. The excessive centralization of tax results in their inefficient expenditure, especially in the field of money distribution. In the USA a quarter of all fiscal incomes goes to municipal authorities, while only 10% does so in the RF. Besides this, the federal government takes 65% of all money, and of the rest, 25% goes to the regions.

But the state nevertheless lacks money, though independent assessments of business’ fiscal load show that it provides 60% of all income. In the USA, the consolidated budget is only 25—27% of GDP, and in Russia, tax collection makes up to 45% of GDP. Our state sees citizens’ businesses and property not as a factor of wellbeing but an opportunity to get more money from ordinary Russians. And now the power structure is going to deliver perhaps the most devastating financial blow of the last several years.

Is it possible to stop it? And do not the attempts of the professional community bring to mind the Russian proverb cited by Alexander Solzhenitsyn: ”A calf charged an oak, but broke his horns”.

It appears that the state intends to fill the coffers by any and all means.

— The only way to prevent them from doing this is to explain broadly what the population is expecting, Irina Rodchenko, Vice-President of the International Academy for Mortgage Loans and Real Estate, says. — People must understand the motivation behind it.


Before it is too late

In its intention to grab as much money as possible, the state is making a mistake. In fact, if the cadastral evaluation of real estate is close to the market evaluation, it may either grow or fall, especially in a crisis. If an object’s cost decreases, the tax should also decrease, but state evaluators are needed for the tax to grow constantly, and if the property were to be assessed by professionals, they would try to make objective calculations. The cardinal difference between professional evaluators and state evaluators is as follows: the former are interested in the actual assessment of a real estate object, at least due to their professional reputation, whereas the latter will not evaluate the real estate but will care only about determining the tax base.

This crucial difference will cost millions of citizens huge sums of money. If we keep silent, it may be too late.

Vladimir GURVICH