New Property Tax System to Negatively Impact Vulnerable Residents

The Center for Economic Development Initiatives has studied the new property tax system being implemented.

According to the current legislation, buildings, structures, and land plots are taxed based on calculated cadastral values. The government is discussing a new version of the property tax and land tax legislation (to be presented as a unified real estate tax), aimed at revising the calculated cadastral values of real estate to bring them closer to market prices. This means that once the new law comes into effect, market value will be taxed at the market price.

Based on the market value approximated to the real estate market price, the Ministry of Finance of the Republic of Armenia currently plans to pass relevant amendments to the tax legislation in the framework of the ongoing second phase of tax reforms, expected in the second half of 2019, after the completion of the legislative work by the State Committee for Real Estate Cadastre.

The adoption of the project is expected to lead to an increase in revenues in the budgets of state and local self-government bodies. This means that an increase in the income generated from property and land taxes is anticipated, which will be paid by property owners (both individuals and legal entities) in Armenia.

According to the justification for the project, revenue increases can occur even in cases of decreasing existing rates and taxation thresholds, based on the base value. The formula for calculating market value will adopt a base, unified value of 700,000 AMD per square meter, replacing the previous amounts of 255,000 AMD (for masonry structures) and 230,000 AMD (for reinforced concrete structures).

On the other hand, the zoning coefficients for assessing the locations of buildings will mostly condition the market value of properties with uniform parameters, on which the amount of property tax will be calculated. The transition of property from one zone to another, the revision of zoning coefficients, and other factors will also affect prices regardless of the applied rates.

Based on the calculations performed by the Center for Economic Development Initiatives from the methodology presented in Appendix 5 of the decision draft, as well as existing taxation thresholds and rates, the following conclusions can be drawn:

1. According to the new methodology, the property tax amount for 2-3 room apartments located on the 2-3 floors of stone buildings in the Arabkir (3rd zone according to the new project) and Nor-Nork (5th zone per project) administrative districts will increase by at least 10 times (15 and more times for apartments in Arabkir and 13 and more for apartments in Nor-Nork). Therefore, the property tax for apartments in the third zone of the Arabkir administrative district will increase more than that of apartments in the fifth zone of the Nor-Nork administrative district, which is mainly explained by the zoning coefficients for property assessment.
2. Currently, owners of apartments with a cadastral value not exceeding 3 million AMD do not pay any property tax, but under the new methodology, owners of 2-room apartments in the Malatia-Sebastia administrative district (7th zone according to the new methodology) will pay about 7,000 AMD as property tax.
3. If zoning and coefficients are maintained, the change in property tax for similar apartments in the first zone of Yerevan will be less than the change in property taxes for apartments in other administrative regions.

It should be noted that the most significant changes in property tax will be recorded for apartments and private houses, as well as public buildings. In the case of industrial buildings, the tax change will be comparatively smaller, around 4-5 times.

The property tax for a shop with an area of 100 m² and a height of 3.5 meters in the center (2nd zone) will increase by 8.6 times, in Arabkir (4th zone) by 11.5 times, and in Shengavit (7th zone) by 11.8 times.

For industrial buildings located in Shengavit with a conditional area of 500 m², the property tax will increase by about 4.9 times. In the community of Jurvazh, similar buildings' property taxes will increase by about 4 times.

A family residing on the outskirts of the Malatia-Sebastia administrative district with a total income not exceeding 150,000 AMD currently does not pay any property tax, but according to the new changes, they will pay at least 7,000 AMD for a 2-room apartment, even if their income remains unchanged, in addition to higher taxes on excise goods.

Thus, the government's approach is as follows: if income is taxed under a flat rate model, then property should be taxed based on market value. In the implementation of this system, the entire negative impact of the changes will particularly be felt by the most vulnerable segments of society.