Friday, March 11, 2011

Luxury Tax Finalized

The proposed luxury tax was finalized this week, according to the Taipei Times:
“The purpose of the bill is to slow down the frequency of property sales and address public discontent with rising commodity prices [partly] driven by consumption of high-priced products,” Lee said.

Lee said the implementation of the tax on the sale of non-self-use properties would stabilize the market rather than deal a blow to the real estate industry, because only an estimated 20,000 property transactions would be subject to the tax.

The draft act stipulates that owners of residential units, commercial units or vacant lots owned for less than one year, would be taxed 15 percent of the selling price, or 10 percent if they had owned the property for more than one year but less than two.

Article 5 of the draft act includes 10 exemptions.

Among them are situations when the seller owns only one property that is not leased out for business purposes; when the property is sold to the government or ordered by authorities to be auctioned off; and when an owner sells a property owned for less than two years within one year of buying a new one.

Owners would also be exempt when they sell property that was inherited or given to them and when they are forced by banks to dispose of property used as collateral to secure a mortgage or pledge.

Lee said the draft act also entitled the Ministry of Finance to make exemptions in certain cases as long as the transactions are made in accordance with the principles of “rationality, normality and non-voluntary transfer.”
It isn't difficult to imagine how exemptions could be obtained quite easily: I gift my gazillion dollar property to my son, who promptly sells it and transfers the funds back to me. Intrafamily transactions are common ways to avoid regulations in Taiwan. Law-evading tricks are the meat and milk of the real estate market, as I blogged on a few months ago. The Taipei Times had a nifty commentary the other day that outlined how the government makes it easy for developers and real estate traders to evade taxation:

As far as dealing with high real-estate prices is concerned, the proposed “luxury tax” is no more than a stopgap measure. The key problem behind the unsound market and soaring real-estate prices is that the tax base is not determined according to market prices.

The tax base for land value increment tax is the rise in the price of land based on the current value of land as announced once a year by the government.

The deed tax, house tax and taxes levied on income from property transactions are all based on the assessed current prices of housing.

Land value tax is based on the announced price of land.

None of these are market prices.

The process of setting these prices tends to be divorced from reality and influenced by artificial adjustments. They are called “current prices,” but they are quite far removed from the market prices.

In addition, the fact that these price announcements are made at fixed intervals results in the strange phenomenon of short-term transactions not being subject to land value increment tax. The costs involved in real-estate speculation are therefore very low, so of course house prices keep going up.

Read the whole commentary; the excerpt only gives a taste. The luxury tax is no more than a nuisance, as the Taipei Times reported the other day. Despite the proposed tax developers are proposing a record volume of development projects this year.
Housing Monthly said the total value of new housing projects put forward in the so-called “golden period” for property deals reached NT$261.6 billion, about NT$39.6 billion more than the 2008 figure for the same period, even though the Cabinet approved a “luxury tax” draft bill earlier in the day meant to curb speculative real estate transactions.
It is clear from data like this that complaints from realtors that the new tax would depress the market are, at best, overwrought.

The real purpose of the bill is right out there in the first paragraph: to address public discontent. It is entirely cosmetic, and will probably have little effect on the housing market in Taipei. Famed Japanese economist Kenichi Ohmae pointed out the external wild card that is pressurizing the real estate market here in Taiwan:
However, the problem soaring land prices in Asia is contagious, Ohmae argued. "China, Hong Kong and Macau have been infected. The price craze is just like influenza," he told Taiwan media at a press conference on the sidelines of the forum.
The luxury goods makers and agents here in Taiwan stated that the tax would not affect their business since the wealthy can afford to pay a little more for quality.

Once again, cosmetics where plastic surgery is necessary.
Daily Links
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Anonymous said...

Stupid. The only thing that will solve over priced housing is to increase the supply. You only need to look at developer-friendly Chicago and Houston compared to anti-everything New York and San Francisco.

In Taiwan, this means allowing buildings, even forcing them, to rise much higher, so that there is plenty of good quality housing available and reducing pressure on the remaining open land.

Michael Turton said...

There is already an oversupply of housing. In Taichung more than 1/3 of homes stand empty. Taipei is probably not a whole lot less. The problem lies more with the tax structure and the restrictions on sales, as well as cultural preferences coupled to massive inflows of cash.

Anonymous said...

Russian subs.....Wow.

Although anything would be nice by this point, and I'm sure there are certain benefits to having Russian subs - i.e., a Taiwanese submarine of Kilo build could go "Lone Wolf" and immerse itself among a Chinese PLAN fleet of similar Kilo types, and be essentially free to fire at everything in sight, whereas the Chinese would have an immensely difficult time determining which Kilo type was theirs and which was Taiwan's.

- Fox

Anonymous said...

Maybe Taichung has a problem with oversupply, but I doubt the same is true of Taipei. Yes, there are many empty apartment buildings on the outskirts based around speculation but in economically-efficient areas, there are way too many impediments to building, especially *building tall*.

Michael Turton said...

Sorry, if you search Google for "empty houses Taipei" or "empty residences Taipei" soon many articles and comments will come up asserting that. Never seen figures, but large numbers of empty residences are the norm in Taipei.

But you're right about the height restrictions, which are insane and a chief cause of Taiwan's stupid infrastructure.

Okami said...

Russians building subs for Taiwan. Sounds like a scam to me, sort of like Russians build aircraft carrier for India. It's almost impossible to make this stuff up.

As far as the luxury tax, it's just for show as usual on Formosa. It's a shame, too.

Readin said...

The Daily Links had some good articles. I haven't finished the one about Japan China yet, but that appears to be especially excellent.

Anonymous said...

From what I understand, the Luxury Tax will be based off of market price and should be much more than just a stopgap measure.

Anonymous said...

Probably should have listened to the Realtors seems a bit more than "little effect"...40% drop?