Real estate investors take tax seriously. Most investors maintain a keen eye on the fiscal environment within the local jurisdiction.
Many countries levy a recurrent property tax as well as one or more taxes on the sales price of property transfers.
For governments, transfer taxes are easy tax ‘handles’ because it is the gateway for most buyers and sellers to acquire legal record of ownership hence voluntarily compliance. The risk of non-compliance is usually too high.
In Kenya, legal liability for payment of tax on property transfers may rest with the buyer. In fact, for most countries, the buyer often bears the tax burden irrespective of whether the law places the legal liability with the seller or not.
An attractive feature of property transfer taxes is the ease with which they can be collected. The title or deed registration system used in most countries efficiently and cost-effectively functions as an audit mechanism to ensure compliance.
Usually, a tax receipt or exemption notice must be provided by the relevant collection agency before the transfer is legally completed.
In Kenya property transfers basically attract two taxes according to an analysis by the African Natural Resources Centre (ANRC), a stamp duty i.e. a revenue stamp affixed to the contract document and/or deeds documentation and a capital gains tax.
IMF data from 2008 to 2017 shows that African countries generate the lowest amount of property taxes, only 0.3 percent of GDP on average compared to a value between 2 and 3 percent of GDP for Organization for Economic Co-operation and Development (OECD) countries. This includes both recurrent and transfer taxes.
For many developing countries including the European Union, property transfer taxes generate significant revenues over and above recurrent taxes.
The challenge with high property transfer taxes, as an additional cost to property transactions is its probability of reducing prices as well as the volume of transactions, thereby undermining the development of formal property markets.
The ANRC study proposes a realistic value limit below which transfers are zero rated in order to encourage the transfer of low-value properties, making it easier for first-time buyers to enter the formal property market especially for most developing countries where the bulk of property transactions are by first time buyers.
Property transfer taxes impose a cost on property transactions thereby reducing the volume of formal transactions and slowing the development of the real estate market.
The relatively high level of transaction costs associated with transfer taxes may reduce the efficiency of the property market. This may be especially relevant for many African countries where property markets may still be immature or largely informal.
In addition, there are often multiple levels and layers of property transfer taxes which raises the overall effective tax rate on some transferred properties to very high levels and may amount to a substantial burden on the transfer of property. This may increase the risk of tax evasion and avoidance behaviour.
Moreover, there are usually other non-tax transactional fees associated with property transfers, such as registration fees, legal fees, estate agent fees, and in many cases third party fees include VAT.