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.
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Daily Links

• Academic piece: China, Japan and the Strait Dilemma
• Mark Stokes' excellent testimony on Taiwan as a core interest before the US China Economy and Security Commission
• Dr. Tsai's announcement of her presidential run (video)
• China Brief piece says Russia is helping Taiwan build subs
  

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