Builders object to VAT, higher objective values

Ministry proposals would effectively increase property taxation

Real estate professionals and the government clearly do not see eye to eye: While the former clamor for a three-year delay in introducing value-added tax (VAT) on new buildings and want only a moderate rise in the so-called objective values on the basis of which properties are taxed, Finance Ministry officials are calling for a sharp rise in the objective values, an average of 40 percent, while in some areas such values are to rise as much as 250 percent.

The government has decided to introduce 19 percent VAT on buildings that get building permission after January 1, 2006. An exception will be made for those building their first home. According to information obtained by Kathimerini, the European Commission has already accepted the government’s argumentation in favor of this exception.

The Constructors’ Association objects to the introduction of VAT which, it says, will abolish the widespread practice of property exchange (known as antiparochi) whereby a property owner sells his or her parcel of land to a construction company in exchange for one or more apartments in the building constructed on that land. This practice has been widely blamed for the anarchic development of major urban areas, but its de facto abolition would be a disaster, according to Dimitris Kapsimalis, president of the Constructors’ Association.

“A 19 percent VAT on new construction is too high and creates problems in the market, while essentially putting an end to the (property exchange system) on the basis of which Greece was built over the past 60 years and which provided the market with new housing,” Kapsimalis told reporters yesterday. He also accused the government of reneging on a promise not to change the tax regime in the property market for the two years following the 2004 Athens Olympics.
Moreover, Kapsimalis said the introduction of VAT and the planned increase in objective values are designed to favor banks and big construction companies.

“(The decisions) do not have an economic rationale but cater to the interests of the banks and three big construction groups which want to invest the capital gained on the stock market in the real estate sector. On the other hand, these measures mean the end of (property exchange) leaving the smaller construction firms without the raw material — the land — and forcing them to borrow from banks in order to acquire property. In this way, the construction firms will in turn become less property developers and more like property managers,” Kapsimalis said, adding that most small firms cannot lower their prices because they already operate on extremely small profit margins.

Stratos Paradias, the president of the Property Owners’ Association, supported Kapsimalis’s views, adding that the market would “freeze” because of the VAT and the higher taxation that would result from the rise in objective values. As a result, there will be increased joblessness in several professions that depend on construction and, possibly, a big hike in rents.
What Kapsimalis, especially, failed to say is that forcing the construction firms to borrow from banks to buy properties would force them to sell those properties earlier instead of delaying their construction or their sale in order to create an artificial market bottleneck and hike prices. The construction companies themselves believe this practice will result in a 15-20 percent hike in the price of new buildings in 2005; the hike may be even bigger if high oil prices persist.

Contrary to construction companies’ claims that they operate on very small profit margins, the government considers them as a category of big tax dodgers who take advantage of the structure of the market to issue false invoices concerning construction costs.

Aware of the fact that chasing tax evasion in the sector is a nearly impossible task, the state has taxed property through the so-called objective values or estimates of what a property should cost in a given area. Historically, the discrepancy between market and objective value has been about 30 percent. However, the gap has increased over the past few years, in some extreme cases reaching a ratio of 10 to one.

The Finance Ministry has set up a commission to revise objective values. However, knowing that combining the introduction of VAT with this rise is politically sensitive, officials issued a statement yesterday to the effect that “the ministry denies most categorically any rumors about the level of objective property values. No decision has been made.”
This statement notwithstanding, Kathimerini is in possession of the proposals made by ministry experts concerning objective values. For example, in the southern Athens suburb of Hellenikon, the top value is proposed to increase by 240 percent, to 4,500 euros per square meter from 1,320 currently. Big rises are the norm in most Athens areas. In some cases, the Technical Chamber of Greece has objected, deeming the increase too small.