19.05.09

At a meeting with advisors, Russian President Dmitri Medvedev spoke out in favor of a change in taxation on real estate that would increase tax rates on luxury items.

“The real estate tax has been a heavily discussed topic. A legislative restructuring is entirely possible regarding the real estate tax based on the cost of the property, so that, for instance, the largest class of citizens that have property or real estate, the middle class, would not suffer financially. At the same time, inordinately expensive real estate – in essence, luxury items – would fall into a different tax bracket. But again, I emphasize: if this is undertaken, it must be done with the utmost care while taking into account the current economic situation,” Medvedev stated.

Russian Prime Minister Vladimir Putin ordered his subordinates to act quickly because he believes the new tax will fill municipal budgets, which are swiftly depleting due to the economic crisis. His hopes are well-founded: revenue from the new tax would increase collections at least ten-fold. But whether this measure will offset the affects of the crisis at the level of individual municipalities remains a central question.

The new tax could affect the price of real estate. The tax on the market value of property will stimulate more rational behavior when it comes to the purchase of homes. An apartment in the center of Moscow can cost $1 million, but its value according to property assessors at the Bureau of Technical Inventory (BTE) is not more than 1 million rubles. This means that even at the current exchange rate, instead of 5000 rubles, buyers will have to pay $5000. As a result, this could discourage people from investing in apartments and, thus, rents could be driven up.

The Vice-President of Best Real Estate agrees that the new tax will hit apartment owners in prestigious areas the hardest. He says that“if there aren’t going to be any discounts or deductions, many people will have no choice but to move.”

But as soon as the tax increases, so will the number of people who will try to evade it, says one tax official.It will become very disadvantageous to remain the owner of an expensive apartment. Tax evasion schemes will appear. In particular, if property is inherited in the form of rationed investment stocks such as trust funds, then it will not be clear who must pay the tax on it.

Tax consultants point out that tax inspectors may, in the hopes of collecting more taxes, groundlessly accuse apartment owners of avoiding taxes.

It is worth mentioning that the project was accepted in the first reading at the end of 2004 but work on it was stalled due to a lack of agreement on the taxation rates and the calculation of a tax base.

Evgeny Bushmin, Head of the Federation Council’s Budget Committee, believes that during a time of crisis, it is not advisable to introduce a new property tax which would replace the existing land and property taxes.

Commenting on the government’s plans to put the new tax into effect in 2010, the deputy said, “I think that introducing the tax earlier than 2011 or even 2012 will be difficult.” Bushmin says that postponing the introduction of the tax is essential for the most effective functioning of the new taxation system, because it affects all Russians.

Translated by Alinga Consulting Group.

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Source: «ВСЛУХ.RU», Российский налоговый портал