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Recurrent Property Taxes in Africa:
Policy Issues and Administrative
Challenges
Prof Riël Franzsen
SA Chair in Tax Policy & Governance
Director: African Tax Institute,
University of Pretoria
Introduction
• Property tax – definition and terminology
• Property tax systems – international overview
• Property tax systems – African overview
• Key policy issues and administrative issues
• Country specific examples (if time permits)
• Tax reform
• Considerations for property tax reform
Property Tax, Rates and Land Rent
“Property tax” is (narrowly defined as) a recurrent
tax imposed by government on the ownership or
occupation of immovable property
“Rates” is the term used in many countries
(especially those with a British colonial heritage)
to refer to a property tax levied at the local
government level
“Land rent” (or “ground rent”) refers to a rent charged
(and collected) by government for the right to occupy
(and develop) government-owned land
Property Tax Options
• Simple per-unit (“flat tax”) systems
• Area-based systems
– Simple area (unadjusted) (m)
– “Calibrated” area systems (e.g., adjusted for location and/or use)
• Capital value systems
–
–
–
–
–
Land only
Land and buildings collectively
Land and buildings separately
Buildings only
Value-banding
• Rental value systems
– Land and buildings collectively
– Buildings only
Property Tax Systems
Land Value Only
Improved Value
Land & Buildings
Buildings Only
Banded Values
Annual Value
Area
Franzsen and McCluskey, 2005; UN-Habitat, 2011; Fjeldstad and Heggstad, 2012;
Franzsen and McCluskey, 2013; McCluskey and Franzsen, 2013b; Norregaard, 2013
Calibrated Area
No Property Tax
Map image: http://commons.wikimedia.org/wiki/File:BlankMap-World-v2.png
Colonial Africa in 1914
http://upload.wikimedia.org/wikipedia/commons/d/d5/Colonial_Africa_1914_map.png
Property Tax Systems in Africa
Land Value
Improved Value
Land & Buildings
Buildings Only (CV)
Annual Value
Buildings Only (AV)
Area/Calibrated Area
Flat Tax
No Tax
Map image: http://www.worldatlas.com/webimage/countrys/af.htm
Franzsen, 2014
Algeria
Angola
Benin
Botswana
Burkina Faso
Burundi
Cameroon
Cape Verde
Central African Republic (CAR)
Chad
Comoros
Congo
Côte d’Ivoire
Democratic Republic of the Congo
Djibouti
Egypt
Equatorial Guinea
Eritrea
Ethiopia
Gabon
The Gambia
Ghana
Guinea
Guinea-Bissau
Kenya
Lesotho
Liberia
Libya
Madagascar
Malawi
Mali
Mauritania
Mauritius
Morocco
Mozambique
Namibia
Niger
Nigeria
Rwanda
São Tomé & Príncipe
Senegal
Seychelles
Sierra Leone
Somalia
South Africa
Southern Sudan
Sudan
Swaziland
Tanzania
Togo
Tunisia
Uganda
Zambia
Zimbabwe
Languages versus Tax Base
Language
Afrikaans
Arabic
English
French
Portuguese
Spanish
Swahili
Other
Tax Base
Land Value
Improved Value
Land & Buildings
Buildings Only (CV)
Annual Value
Buildings Only (AV)
Area/Calibrated Area
Flat Tax
No Tax
Map image: http://geocurrents.info/place/subsaharan-africa/african-country-names-in-indigenous-languages
Franzsen, 2014
The Revenue Mobilization Model
Revenue
=
Tax
base
x
Policy variables
Tax
rate
x
CVR
x VR
x
CLR
Administrative variables
• CVR: Coverage ratio - the amount of taxable property captured in the
tax registry, divided by the total taxable property in a jurisdiction
• VR: Valuation ratio - the value on the valuation rolls divided by the
real market value of properties on the valuation roll
• CLR: Collection ratio - the annual tax revenue collected over total
tax liability billed
Kelly, 2000; 2013
Key Issues
Policy:
Revenue:
•
•
Importance?
Potential?
Tax base:
•
•
•
•
Area-based or value-based?
Single or multiple?
Broad or narrow?
Use?
Valuation:
•
•
•
Appropriate budgeting
Regular revaluations
Oversight and quality control
Tax rate:
•
•
•
National or local (with/without oversight)?
Annual?
Single or differential?
Tax administration:
•
Allow system maintenance
Administration:
Tax base:
•
•
Property identification
Property data management
Valuation:
•
•
•
•
Procurement
Regular revaluations
Objection and appeal
External quality control
Tax rate:
•
Differentiation
Tax administration:
•
•
•
•
Billing
Payment/collection
Enforcement
Continuous system maintenance
Revenue Importance and Potential
• The recurrent property tax is perceived to be an ‘ideal local tax’ (Bird
and Slack, 2004; Bahl, 2009; McCluskey and Franzsen, 2013a))
• In realty, revenue is poor or at best modest in developing and
transition countries; the property tax generates 0.3-0.6% of GDP for
developing and transitional countries and up to 2-3% of GDP for
OECD countries (Bahl, 2009; Norregaard, 2013)
• Property taxation has tremendous potential for mobilizing improved
revenue and equity, especially in transitional and developing
countries (Kelly, 2013; Norregaard, 2013)
• At metropolitan/city level, the property tax may, however, be quite
important (Africa: McCluskey and Franzsen, 2013a; Latin America:
De Cesare, 2012)
Importance of Metropolitan Property Tax in selected African Cities
Metro
Population
Country
(million)
Metro
(million)
Property tax
Metro % of
total
Country
total
Metro
Metro % of
total
Accra
25.2
3.9
15.48
3.73 (2007)
1.93
51.74
Cape Town
48.9
3.0
6.13
26.492
(2009)
3.241
12.23
Dar es Salaam
43.6
2.7
6.19
7.580 (2010)
4.212
55.57
Durban
(eThekwini)
48.9
3.5
7.16
26.492
(2009)
3.912
14.77
Johannesburg
48.9
7.5
15.34
26.492
(2009)
3.331
12.57
Kampala
35.9
1.7
4.74
43.30 (2008)
4.98
11.5
Pretoria
(Tshwane)
48.9
2.5
5.11
26.492
(2009)
2.257
8.52
McCluskey and Franzsen, 2013a
Tax Base: Choice and Coverage
• Diversity of tax bases: Benin, CAR, Côte d’Ivoire, Niger, Zimbabwe
• Limited in-country coverage: Angola, Botswana, Cameroon,
Lesotho, Liberia, Mozambique, Swaziland, Uganda
• Poor coverage within jurisdictions: Kenya (Nairobi and Mombasa),
Lesotho (Maseru), Tanzania (Arusha) and Uganda (Mbarara)
• Rural land and communal land generally not taxed (however, e.g.,
Namibia, South Africa)
• Extensive exclusions and/or exemptions: Egypt, Tanzania, Uganda
• Move to capital improved value as preferred tax base: Cameroon,
Mauritius, Mozambique, Nigeria (Lagos State), Rwanda, South
Africa
• Undeveloped/vacant properties taxed: Botswana, Côte d’Ivoire,
Namibia, Sierra Leone, South Africa
Valuation Issues
• Serious shortage of skilled and qualified valuers: All
countries, including South Africa
• Capacity to prepare and maintain valuation rolls: All
countries
• Accuracy and cost assessed values should bear an
appropriate relation to the eventual amount of the tax bill:
Tanzania, Malawi, South Africa
• Procurement of professional services: South Africa
• Lack of proper/any external quality controls: All countries
• Limited education and training opportunities for valuers
Valuation Services
• Valuation service providers:
– Government or government agency: Botswana, Côte d’Ivoire,
Lesotho, Malawi, Senegal, Uganda, Zambia
– In-house (i.e. municipality itself): Lesotho, Mozambique,
Namibia, South Africa, Tanzania, Zambia
– Private sector: Malawi, Namibia, South Africa, Swaziland,
Tanzania
– Self-assessment: Cape Verde, Liberia, Rwanda
• Recent changes in respect of valuation services
– Government to in-house: Lesotho
– Government to private: Botswana, Malawi, Uganda
– Self-assessment: Rwanda
• Increased utilisation of computer-assisted mass
appraisal (CAMA): Cameroon, Malaysia, South Africa
Cost of 1st Valuation Roll in relation to Revenue
in Four Rural Municipalities in South Africa
Municipality
(Province)
Total Number
of Properties
Total Cost
(Excl VAT)
Cost per
Property
Revenue for
2009/2010
Aganang (Limpopo)
24,258
R1,650,000
R68
R190,082
Umzumbe (KZN)
1,232
R1,440,357
R1,169
R510,309
Blouberg (Limpopo)
5,795
R2,300,000
R397
R484,582
Mutale (Limpopo)
1,255
R3,671,124
R2,925
R763,922
Source: Franzsen & Welgemoed, 2011
“Governance” questions:
• Procurement of valuation services?
• Quality control?
• Education of local councillors and officials?
Policy questions:
• Who should be responsible for valuations and valuation quality control?
• Should small rural councils have a value-based system?
• Is a property tax an option at all?
Which system has the competitive advantage?
Area-based:
Advantages:
•
•
•
•
Simplicity
Cost
Functions in less formal markets
Self-assessment
Disadvantages:
•
•
•
Lack of buoyancy
Fairness
Subjectivity if adjusted for
location, etc.
Value-based:
Advantages:
Area-based
Value-based
“Still, the unassailable advantage of the area-based approach is
that it enables the imposition of a property tax where there is no
property market – that is where there is no direct evidence on the
market value of properties. As such, it might be an appropriate
interim, if not long term, approach for a country while it waits for
its formal property market to develop.” (Bahl, 2009)
•
•
•
Buoyancy
Value reflects benefits received
Equity (if well-maintained)
Disadvantages:
•
•
•
•
Requires some market formality
Data intensive
Constantly changing
Costly to implement and
maintain
Tax Rates
• Fixed tax rates: Cameroon, Egypt, Rwanda, Tanzania
• Tax rates struck annually: Botswana, Namibia, South Africa
• Set nationally in some countries: Angola, Cameroon, DRC,
Egypt, Rwanda
• Set locally, but require national government approval: Botswana,
Namibia, Uganda
• Capping of rates: Uganda, or possible limitation of annual
increases in rate: South Africa
• Differential rates in many countries: Botswana, Lesotho, South
Africa, Swaziland, Tanzania
• In some instances too low to recover valuation and/or tax
administration costs: Tanzania, South Africa
Billing, Collection and Enforcement
• Problems with billing (e.g. manual systems, unreliable mailing
systems, lack of street names): Malawi, South Africa
• Inappropriate use of limited resources: Tanzania (e.g. In Dar es
Salaam valuers did billing (2002))
• Collection by (national) revenue authority: Tanzania (Dar es
Salaam: 2008-2013)
• Limited payment options: Kenya (as opposed to South Africa)
• Political interference: Kenya, Nigeria, Uganda
• Available enforcement mechanisms not used: Most countries
Egypt
• Property tax revenues less than 1% of total national revenues
between fiscal years 2001/2002 and 2009/2010
• 2008 Real Estate Tax Law to replace three property taxes:
– Real Estate Tax (since 1842); Agricultural Land Tax; Entertainment Facilities Tax
• 2008 law: To commence in ????
• Tax base: Net annual rental value
– Residential: gross rental minus 30%; Other use categories: gross rental minus 32%
• Tax rate: Uniform 10% across the country
• As a result of a LE500,000 (approx. US$88,000) value threshold, more
than 90% of properties will be excluded
• Valuation done by a committee; 5-year valuation cycle – with maximum
increases of 30% for residential properties and 45% for non-residential
properties in any one cycle
Kenya
• Almost a century of land-value taxation
• 2010 Constitution and new local government
dispensation (March 2013)
• Article 209(3) of the Constitution – meaning of “right
to impose property rates”
• Nairobi last revalued in 1982 and Mombasa in 1991
• Nairobi tax rates: Was increased from 17% to 34%,
but high court has annulled the increase (August
2014)
• Question: Is an ad valorem system achievable and
sustainable?
Rwanda
• Introduced: 1974; decentralized in 2002
• Tax base: used to be area and location (Kigali, urban
areas or towns, trading areas, rural) and use
(residential, business, agriculture)
• Tax rate: 0.2% (on hotels: 0.22%)
• Ground floors (100%), 1st floors (50%), 2nd floors
(25%), no tax on basements and third floors +
• Taxpayers obliged to annually report property changes
• Introduced ‘value’-based system with self-assessment
– Dec 2011…
• Question: Is an ad valorem system achievable and
sustainable?
South Africa
• Key policy principle: Uniformity
• Tax base: Market value for all use categories
• Valuation issues: Capacity and external quality
control
• Annually revised ‘rates policies’
• Question: Is an ad valorem system achievable and
sustainable in respect of all local municipalities?
Tanzania
• Dual system: Value-based (DRC of buildings) and
calibrated area-based taxes
• Poor base coverage in many jurisdictions
• Few valuers, costly valuations
• Low, static tax rates
• Problems with billing, collection and enforcement
• Political interference
• Question: Is an ad valorem system achievable and
sustainable?
Uganda
• 1979 Decree replaced by new legislation in 2005
• Tax base: Annual rental value
• Valuation: New valuation roll for Kampala City
Council (2004)
• The new system remains compromised as a result of
inappropriate legislation and capacity constraints
• Problems with billing, collection and enforcement
• Political interference and lack of support
• Question: Is an ad valorem system achievable and
sustainable?
Tax Reform (1)
“The best approach to reforming tax in a developing country – indeed in
any country – is one that takes into account taxation theory, empirical
evidence, and political and administrative realities and blends them with
a good dose of local knowledge and a sound appraisal of the current
macroeconomic and international situation to produce a feasible set of
proposals sufficiently attractive to be implemented and sufficiently robust
to withstand changing times, within reason, and still produce beneficial
results.”
Bird & Oldman Taxation in Developing Countries (1990) 3.
“Of course, no one wants to hear that it may take decades before they
are in a position to undertake this or that particular reform successfully,
whether in tax structure or tax administration... What people want to hear
is rather that they can simply bolt on this or that new feature to their
existing system without making anymore basic changes, and still get
good, quick, and preferably quantifiable results.”
Bird, 2013
Tax Reform (2)
“Tax policy is the product of political decision making, with economic
analysis playing a minor supporting role.”
Richard Holcombe (Holcombe, 1998)
“Good tax policies are worth very little if these cannot be implemented
effectively.”
Richard Bird (Bird, 2004)
“Tax administration is tax policy.”
Milka Casanegra de Jantscher (Casanegra de Jantscher and Bird, 1992)
“There is no single set of prescriptions - no secret recipe - that, once
introduced, will ensure improved tax administration in any country.”
Richard Bird (Bird, 2004)
“...[F]undamental strengthening of revenue collection will be largely a
matter of persistent and unspectacular effort ...”
Michael Keen (Keen, 2012)
Recent or Current Property Tax Reforms
Developed countries
Developing/transition countries
Franzsen, 2014
Map image: http://commons.wikimedia.org/wiki/File:BlankMap-World-v2.png
Property Tax Reforms
1991 – 2000:
Malawi
Swaziland
Zambia
2001 - 2010:
Cameroon
Cape Verde
Central African Republic
Congo
Egypt
Liberia
Madagascar
Mauritius
Mozambique
Namibia
Nigeria
Senegal
Sierra Leone
South Africa
Tanzania
Uganda
2011 – Current:
Ethiopia
Kenya
Nigeria
Rwanda
Somalia
Southern Sudan
Zimbabwe
Map image: http://www.worldatlas.com/webimage/countrys/af.htm
Fjeldstad and Heggstad, 2012; Franzsen, 2014
Contemplated:
Botswana
Ghana
Lesotho
Seychelles
Considerations for Reform (1)
• Appropriate constitutional, legal and institutional
environment
• Political commitment and community support are critical
prerequisites for whatever system is selected – i.e. proper
education/communication (Indonesia, Northern Ireland)
• Appropriate property tax policies (i.e. achievable and
sustainable goals)
• “Simpler can be better” as it could lead to –
– Improved base coverage
– Savings on the cost of assessment, objections and appeals, as
well as collection
Considerations for Reform (2)
• Reform: “Collection-led” (Indonesia) or “valuation-pushed” (Tanzania)?
– Dillinger (1992) states that “the low yield of the property tax is... the
combined result of inappropriate policy and poor tax administration”.
– Kelly (2013) states: “A major constraint to improving the property tax in
transitional and developing countries is weak administration, often a result
of political, institutional and capacity constraints.”
– All the integral parts for a successful system require attention (i.e. property
discovery, base coverage, valuation (where applicable), assessment,
billing, collection and enforcement)
• “Transitional” alternatives may produce a more equitable spread of the
tax burden in a more cost effective and sustainable (?) manner
– Market-calibrated area (e.g. India, Israel)
– Value-banding (e.g. Great Britain, Ireland)
• Migration (back) to a discrete-value system when capacity constraints
are met/revenue yield justifies it…
– However, “temporary” measures may become difficult to replace: Estonia,
Bangalore, India (Rao, 2008)…
References
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Bahl, R.W. 2009. ‘Property tax reform in developing and transition countries’ USAID Working Paper.
Bird, R.M. 2004. ‘Administrative Dimensions of Tax Reform’, Asia-Pacific Tax Bulletin (March) 134-150.
Bird, R.M. 2013. ‘Foreign Advice and Tax Policy in Developing Countries’, Georgia State University: International Center for Public
Policy Working Paper 13-07 (April).
Bird, R.M. and Oldman, O. 1990. Taxation in Developing Countries, Baltimore: The Johns Hopkins University Press, 3
Casanegra de Jantscher, M. and Bird, R.M. 1992. ‘The Reform of Tax Administration’ (eds.) Improving Tax Administration in
Developing Countries, Washington DC: IMF, 1.
Bird, R.M. and Slack, E. 2002. Land and Property Taxation Around the World: A Review’, Journal of Property Tax Assessment &
Administration (Vol 7, No 3) 31-79.
De Cesare, C. 2012. ‘Improving the Performance of the Property Tax in Latin America’, Policy focus Report, Cambridge MA: Lincoln
Institute of Land Policy.
Dillinger, W. 1991. ‘Urban Property Tax Reform: Guidelines and Recommendations’, Urban Management and Municipal Finance,
Washington DC: World Bank.
Fjeldstad, O. and Heggstad, K. 2012. ‘Local government revenue mobilisation in Anglophone Africa’, CMI Working Paper WP 2012: 6.
Franzsen, R.C.D. and McCluskey, W.J. 2005. ‘An Exploratory Overview of Property Taxation in the Commonwealth of Nations’, Lincoln
Institute of Land Policy Working Paper, (see http://www.lincolninst.edu/pubs/pub-detail.asp?id=1069).
Franzsen, R.C.D. and McCluskey, W.J. 2013. ‘Value-based Approaches to Property Taxation’ in McCluskey, W.J., Cornia, G.C. and
Walters, L.C. (eds.) A Primer on Property Tax: Administration and Policy, West Sussex: Wiley-Blackwell, 41-68.
Franzsen, R.C.D. and Welgemoed, W. 2011. Submission on Proposed Amendments to the Municipal Property Rates Act (MPRA),
Unpublished report for the South African Local Government Association (SALGA).
Holcombe, R.G. 1998. ‘Tax Policy from a Public Choice Perspective’, National Tax Journal (Vol 51 No 2), 359-371.
Keen, M. 2012. ‘Taxation and Development – Again’, IMF Working Paper, Washington DC: IMF.
Kelly, R. 2000. ‘Designing a Property Tax Reform Strategy for Sub-Saharan Africa: An Analytical Framework applied to Kenya’ Public
Budgeting & Finance (Winter 2000).
Kelly, R. 2013. ‘Making the Property Tax Work?’ Georgia State University: International Center for Public Policy Working Paper 13-11
(April).
McCluskey, W.J. and Franzsen, R.C.D. 2013a. ‘Property Taxes in Metropolitan Cities’ in Bahl, R, Linn, J. and Wetzel, D. (eds.)
Metropolitan Government Finance in Developing Countries, Cambridge MA: Lincoln Institute of Land Policy, 159-181.
McCluskey, W.J. and Franzsen R.C.D. 2013b. ‘Non-market Value and Hybrid Approaches to Property Taxation’ in McCluskey, W.J.,
Cornia, G.C. and Walters, L.C. (eds.), A Primer on Property Tax: Administration and Policy, West Sussex: Wiley-Blackwell, 287-305.
Norregaard, J. 2013. ‘Taxing Immovable Property – Revenue Potential and Implementation Challenges’, IMF Working Paper,
Washington DC: IMF.
Rao, U.A.V. 2008. ‘Is Area-based Assessment an Alternative, an Intermediate Step, or an Impediment to Value-based Taxation in
India?’ in Bahl, R.W., Martinez-Vazquez, J. and Youngman, J. (eds.) 2008. Making the Property Tax Work: Experiences in Developing
and Transition Countries, Cambridge MA: Lincoln Institute of Land Policy.
UN-Habitat, 2011. ‘Land and Property Tax—A Policy Guide’, Nairobi: United Nations Human Settlement Programme (Principal author:
Lawrence Walters).