VAT on new buildings aims at tax dodgers, speculators
Transfer taxation modified in buyers favor; inheritors also stand to gain

DEMETRIS NELLAS

Economy and Finance Minister Giorgos Alogoskoufis yesterday unveiled the draft bill imposing a 19 percent value-added tax (VAT) on new buildings after January 1, 2006.

First-time house buyers will be exempt from the tax. The tax is going to be paid by property owners to construction firms which, in turn, will pay the VAT to the state. Transfers of properties acquired after January 1, 2006 will be subject to a graduated capital gains tax, whose rate depends on the number of years the seller owned the property before selling.

Thus, the tax rate is 20 percent for owners selling a property after ownership of up to five years; 15 percent if the ownership period was from five to 15 years; 5 percent if it was from 15 to 25 years; and 0 percent if the seller owned the property for over 25 years. Property buyers, who until now paid up to 11 percent of the property’s value as transfer tax, will henceforth pay a 1 percent tax called a transaction fee. Other provisions in the same bill increase the tax-free portion of inheritances or parental transfers of property from 20,000 euros to 80,000 euros and extend the payment time for inheritance taxes from 24 monthly installments to 24 bimonthly ones. The government presented the new bill as a step toward fighting tax evasion and speculation. At the same time it introduces VAT it will also raise the so-called ‘objective values’ of properties by up to 50 percent. These values, which differ according to location, are the ones on which property taxation is based. The VAT will be based on those values as well. While the government hopes the VAT, payable to the state through the construction firms, will help reduce the gap between the objective and the actual market values, this is far from certain. In the past, every time objective values rose, so did market values. The latter rose even when objective values stayed steady, as they have done since 2001. While the reported disparity between the two used to be between 30 and 50 percent, lately there have been reported instances of properties being sold at market prices up to 10 times their ‘objective’ value. Curiously, the last two times the objective values were upwardly adjusted, in 1998 and 2001, there had been a big increase in tax revenue in the year before that: In 1997, property tax revenues jumped 57 percent from the previous year, and in 2000, they rose 37 percent. Perhaps this is what the government intends to do; that is, raise revenue for 2005, ahead of the new measure. If that is so, this tax reform may be seen more like a desperate ploy to fill state coffers this year, when tax revenue targets have proved to be too ambitious.

Given until 2006 by the European Union to bring the budget deficit below 3 percent of Greece’s GDP, the government had planned for a deficit of around 3.5 percent this year, which would make the task relatively easy. If, however, as the present state of finances indicates, the deficit stays at around 5 percent of GDP, then the pressure for really deep, and unpopular, spending cuts will be immense.