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IMF Country Report No. 22/198

ROMANIA

TECHNICAL ASSISTANCE REPORT ON IMPROVING REVENUES FROM THE RECURRENT PROPERTY TAX

June 2022

This technical assistance report on Romania was prepared by a staff team of the International Monetary Fund. It is based on the information available at the time it was completed in June 2022.

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Title Page

FISCAL AFFAIRS DEPARTMENT

Romania

Improving Revenues from the Recurrent Property Tax

Martin Grote and William McCluskey

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Technical Report

June 2022

The contents of this report constitute technical advice provided by the staff of the International Monetary Fund (IMF) to the authorities of Romania (the "TA recipient") in response to their request for technical assistance. This report (in whole or in part) or summaries thereof may be disclosed by the IMF to IMF Executive Directors and members of their staff, as well as to other agencies or instrumentalities of the TA recipient, and upon their request, to World Bank staff and other technical assistance providers and donors with legitimate interest, unless the TA recipient specifically objects to such disclosure (see Operational Guidelines for the Dissemination of Technical Assistance Information—http://www.imf.org/external/np/pp/eng/2013/061013.pdf). Disclosure of this report (in whole or in part) or summaries thereof to parties outside the IMF other than agencies or instrumentalities of the TA recipient, World Bank staff, other technical assistance providers and donors with legitimate interest shall require the explicit consent of the TA recipient and the IMF’s Fiscal Affairs Department.

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This technical assistance (TA) was provided with financial support from a multi-partner COVID-19 Crisis Capacity Development Initiative

Contents

• ABBREVIATIONS AND ACRONYNMS

• PREFACE

• EXECUTIVE SUMMARY

• I. REVENUE IMPORTANCE OF TAXES ON PROPERTY

• A. Background

• B. Tax Structure and Enhancing Revenues

• C. Revenue Importance of Property Taxes

• D. Fiscal Decentralization Framework in Romania

• E. Transfer Taxes, Notary and Cadastral Registration Fees

• F. Previous TA Advice

• II. THE CURRENT PROPERTY TAX FRAMEWORK IN ROMANIA

• A. Tax on Buildings

• B. Tax on Land

• C. Tax Rate Structure

• D. Tax Exemptions and Other Tax Relief

• III. PROPOSED PROPERTY TAX REFORMS FOR ROMANIA

• A. The Benefits of a Recurrent Property Tax

• B. Design Options for a Buoyant Property Tax

• C. Tax Base—a Review of International Practices

• D. Proposal for Romania: Transition to a Market Value Base

• E. Setting the Statutory Rate

• F. Property Tax Relief

• IV. WOULD PROPERTY MARKET EVIDENCE AND VALUATION CAPACITY SUPPORT A VALUE-BASED PROPERTY TAX?

• A. Administration of the Current Land and Building Tax

• B. The National Cadaster and Land Registration System

• C. The Property Tax Base

• D. Is there Enough Real Estate Market Evidence to Support a Value-based Property Tax?

• E. Data for Property Tax Purposes

• F. The Importance of Key Actors in the Real Property Market

• G. Property Tax Valuation for Non-residential Buildings

• H. Policy Choices in Valuation Administration

• I. Reform Options for the Recurrent Property Tax in Romania

• J. Self-declared Value Banding

• K. Automated Valuation Using Computer-Assisted Mass Appraisal

• REFERENCES

• BOXES

• 1. Select Key Recommendations in the 2011, 2013, and 2020 IMF TA Reports

• 2. Revenue Efficiency: The Potential for the Property Tax

• 3. Bangalore: A Pragmatic Approach to Property Tax

• 4. Examples of Sale Price Registers in Other Countries

• 5. Self-declared Banding Scheme in Ireland

• FIGURES

• 1. Revenue Structure by Type of Tax, 2008 - 2020

• 2. EU-27+: Recurrent Taxes on Immovable Property, Percent of GDP, 2020

• 3. Romania: Taxes on Property

• 4. Taxes Received by Level of Government, (Percent of Collections), 2008 - 2020

• 5. Revenue Importance of Local Government Taxes, 2008 - 2020

• 6. Revenue from Property Transfer Taxes (million lei), 2017-2021

• 7. Distribution of Registered Land and Building by County, 2021

• 8. Residential Owner Occupancy Rates in Selected EU Countries

• 9. Romania: Index of Residential Property Prices

• 10. Number of Property Transfers

• 11. Building Valuations, 2016 – 2021

• 12. Definition of CAMA System – A Market Valuation

• TABLES

• 1. Summary of Recommendations

• 2. Revenues from Local Taxes and Fees in Select Cities, Average 2016-2019

• 3. Prescribed Amounts Associated with Residential Buildings

• 4. Coefficient Matrix for Location

• 5. Level of Land Tax for Urban Land

• 6. Land Tax on Agricultural Land Located within an Urban Area

• 7. Coefficients to Reflect the Rank of the Locality

• 8. Land Tax on Land Located Outside of Urban Areas

• 9. Level of Local Building, Land, and Vehicle Taxes in Key Municipalities

• 10. Tax Expenditures, Including Property Taxes, 2020-2024

• 11. Considerations for Selecting Property Tax Bases

• 12. Basis of Property Tax in Selected Countries

• 13. International Practices with Property Tax Rates

• 14. Select European Countries’ Property Tax Rates

• 15. Number of Registered Properties

• 16. Brasov and Constanta: Number of Buildings and Land Parcels

• 17. Market Valuations Undertaken in 2020

• 18. Responsibility for Valuation in Selected Countries

• 19. Comparison between Tables-based Assessment and Market Prices

• 20. Banding Regimes for England, Scotland, and Wales

Abbreviations and Acronynms

Preface

At the request of the Romanian Minister of Public Finance (MoPF), a technical assistance (TA) mission remotely engaged from March 28 to April 11, 2022 with the authorities in Bucharest to evaluate design options for a revenue productive recurrent property tax. The mission of the International Monetary Fund’s (IMF) Fiscal Affairs Department (FAD) comprised Martin Grote and William McCluskey (both FAD external experts). This TA report contains the mission’s findings and recommendations.

At the MoPF , the mission met with the Minister, Mr. Adrian Câciu; Secretary of State, Mr. A. Chitu; Director-General: Macroeconomic Analysis, Mr. D. Matei; the Director-General: Tax Legislation, Mr. I. Ardeleanu; and the Deputy Director-General, Ms. E. Iordache.

The mission discussed property tax reforms with the Director-General, Mr. I. Ilie of the Local Taxes Directorate, Sector 3, in Bucharest. At the National Agency for Cadaster and National Registration (ANCPI), the mission reviewed with the Director, Mr. V. Grigorescu the progress with property registration and the sharing of cadaster information. At the Ministry of Regional Development and Public Administration (MoRDPA) the mission discussed with Mr. D. I. Marinescu (Director-General) and advisors planned legislative amendments to the building and land taxes.

The mission reviewed the process of property valuations with the National Association of Authorized Valuers in Romania (ANEVAR), represented by its President Mr. R. Timbus and Vice-President Mr. A. Vascu. Reform options and cost-effective administration of property taxes were discussed with the Country Manager Mr. D. Bumbăcea and Mr. D. Anghel (Head: Tax Consulting) in PWC; and Mr. V, Boeriu and Ms. A. Smedoiu (Partners in Deloitte). The mission exchanged information on local government finance with the World Bank Office in Bucharest: in particular with Ms. A. Akhalkatsi (Office Country Manager), Messrs. C. Pauna and M. I, Heroiu. To gain insight into the practical side of property tax administration, the mission met with senior staff in the revenue departments of a selection of big cities (Bucharest, Brasov, Cluj-Napoca) as well as with the association of small rural villages. The mission discussed with the National Union of Public Notaries (UNNPR) the key role of notaries in property transfers and their sharing of the property value grids with many stakeholders in Romania. Finally, the mission met with the Romania National Institute of Statistics on construction price indices.

The mission would like to express its gratitude for the excellent collaboration that was extended by the authorities. Furthermore, the mission is grateful to Mrs. Carmen Balasoiu (General Director: General Directorate for Strategy and Monitoring Processes, National Agency for Fiscal Administration, ANAF) and Mr. Elian C. Diculescu (Chief of Reform Unit, ANAF) for their sterling support in the planning of meetings, providing data resources, and the general execution of the mission. Finally, the mission would like to thank the interpreters, Mrs. Daniela Ionescu and Mrs. Silvia Statescu for their excellent translation support.

Executive Summary

The current area-based property tax system in Romania is inefficient, producing revenue below its potential, while the taxable value determination is inequitable and complex. Indeed, the property tax only generated 0.6 percent of GDP in 2021 vs. the average of 1.8 percent of GDP in the OECD economies, or 0.9 percent of GDP in EU-27. Meanwhile, significant scope for improving both buoyancy and efficiency of the property tax system exists, not least through the elimination of multiple exemptions, addressing the current inadequate and fragmented self-declaration system of residential buildings that translates into incomplete fiscal cadasters.

The best guiding principle for the property tax reform is to remind taxpayers that a property tax is in the first instance a benefit tax—i.e., those consuming local public services should make a reasonable contribution to defraying their cost. Consequently, the authorities could as a first step, without changing the property value appraisal method, stop the erosion of the integrity of the property tax by minimizing exclusions, exemptions, or lower rate differentiations. A broad-based property tax, raised at modest rates, has the potential to make a bigger contribution to local authorities’ own source revenues, which currently represent 3 percent of total consolidated government revenues—one of the lowest values in the EU.

Comprehensive property tax reform is complex, requiring both political and technical coordination, informed by realistic timelines. The property tax reform program should be based on five pillars: (1) simplicity in design and implementation; (2) centralized valuation with uniform standards underpinned by a centrally-created and managed legal cadaster and improved coordination and oversight over decentralized tax administrations with their respective fiscal cadasters; (3) the rationalization of central government agencies responsible for property registration, legalization, valuation and, most importantly, adhering to strict data sharing protocols that enable meticulous capturing of property sales price evidence; (4) careful preparation, sequencing and public communication of transition towards a market value-based property tax for residential buildings; and (5) a bolder rationalization of tax expenditures granted to commercial telecommunication structures, pipelines, or linear infrastructure improvements.

In respect of a recurrent property tax, there are two broad approaches to determine a taxable amount (i.e., assessing the tax base). The first approach—value-based assessment—utilizes methods and techniques that rely on market transactions to inform the value of property. The tax base is the combined capital value of land and improvements, or market value in short. The second approach—non-value or area-based assessment—utilizes methods that calculate the taxable amount with reference primarily to the size of the land and/or buildings. Romania’s current residential building tax is area-based. It is generally agreed amongst experts that where it is possible to use the market-value approach in practice, since it provides the better, more buoyant, and more equitable tax base. A value-based assessment tends to better differentiate the tax burden between low-income and high-income households—accounting better for ability-to-pay or vertical equity.

Given these different tax bases, the authorities have expressed interest in a more comprehensive modernization program of the real property tax by reflecting market value within the valuation process. This reform will require a couple of years for preparation and introduction. Residential buildings and all types of land are currently assessed through the application of prescribed values and adjustment coefficients included in several tables contained in the Fiscal Code (FC). Non-residential buildings are assessed on the basis of construction costs. A key recommendation of the Mission is to view land, and the buildings constructed on the land, as a single property unit. The property market already recognizes residential and commercial property as a single tradeable unit. The various property indices that the National Institute for Statistics compile are based on market transactions reflecting land and building as a single property.

Following on from this is to consider the valuation implications in combining land and buildings. Currently, authorized valuers undertake the valuations of non-residential buildings ignoring the land component of the property. From a valuation perspective including the land would make the valuation more market value orientated and, hence, remove the artificiality of separating the value of buildings from that of the land, which is the value appreciating element of a property.

The challenge for residential dwellings and apartments is related to the scale of the problem given there are some 9 million properties. The current property tax is an administrative complexity as land and buildings are considered separately resulting in approximately 18 million assessments. Therefore, combing the land and buildings would ease the overall municipal administration. A further challenge must address how to introduce a market value based system that would not over-burden the local administration. The solution being suggested by the Mission is to move towards a self-declaration of property value by the owner. Under the present system owners are well used in having to self-declare information on their property to the municipal authorities. In support for this approach is the fact that the residential property market is very active generating a significant number of sales annually. There would be ample evidence to allow the owner to estimate the value of their property. In fact, the “Grid” system used by the Notaries Public would be an invaluable resource in identifying market value given it have been developed by authorized valuers for that very purpose. It is also designed to give granular property prices at small locational levels.

The self-declaration methodology being suggested is that of using a range of value bands. As valuation is not an exact science the use of bands gives the owner more confidence in being able to allocate their property to the correct band. This valuation approach is currently used in several countries including England, Scotland, Wales, and the Republic of Ireland. There are several advantages that should be noted: (1) the approach can be implemented quickly; (2) there would be minimal administrative costs; (3) as self-declaration is used there would be no appeals against assessed market values; and (4) given the use of value bands, the need to renew a self-declaration could be on a 5 to 10 years cycle.

International practice would tend to support the levy of property tax on large scale trans-national enterprises such as telecommunications, energy generation and other privatized utilities. They too are users of municipal services and therefore the argument would be that they should make a contribution to cover their costs. Their valuations are challenging, and examples adopted in other countries recognize the role of national government in determining the market value of these properties. Apportionment of the market value to respective municipalities provides a potentially important source of revenue.

Importantly, the granular reporting on property tax expenditures can significantly improve transparency and accountability in identifying budget support given through tax reductions and expose them to the same scrutiny as expenditure programs. The mission therefore recommends that the individual costs of the more pertinent property tax exemptions for technology parks, forestry activities, war veterans, non-government organizations, and state-owned buildings and structures should be carefully analyzed and reported. This could trigger an evaluation by the MoPF of whether the underlying policy purposes could best be achieved through other tax reliefs or direct expenditures.

The Report’s main recommendations are recorded in Table 1. In the absence of granular real estate data, the potential revenue impact of only select recommendations was assessed. Under a conservative scenario, moving assessed property values closer to their market values could yield an additional 0.4 percent of GDP. Similarly, conservatively estimated yield from the rationalization of tax expenditures could afford an additional 0.1 percent of GDP.

^{Table 1.}

Summary of Recommendations

^{Table 1.}

Summary of Recommendations

Current Property Tax Framework

The definition of building in the Fiscal Code should be simplified to remove the need for a building to have walls and roof

Proposed Property Tax Reforms—Transition to a Market Value Base

Extend the use of market values to both residential and non-residential property

Agricultural land to continue to be taxed on adjusted area basis and prescribed value levels

Single Taxable Property Unit

Combine land and buildings for residential and non-residential in the same ownership into a single property unit

Setting Property Tax Rate

Guarantee an element of fiscal autonomy to Administrative Territorial Units by setting a single property tax rate but which can be selected out of a centrally determined range of property tax rates

If commercial and residential properties benefit from the same level of municipal service, no rate differentiation in favor of residential properties is advised

Do not reintroduce progressive property tax rates for multiple properties owned by individuals

Property Tax Exemptions

Romania should limit exemptions to an absolute minimum

Property rates relief for low income households, the elderly and those in hardship should be granted on application, reviewed annually, and be means-tested

In the case of the elderly and only, if necessary, allow for the mortgaging of arrears of property rates which will get settled when the property is finally sold or bequeathed

Seek to provide separate revenue forgone (tax expenditure) estimates for some of the property tax incentives such as for tourism-linked real estate, linear infrastructure, incubators, and technology parks in order to debate their costs and benefits as they are coming up for an evaluation

The National Cadaster, Land Registration and Broadening the Property Tax Base

Record the number of properties by property type such as residential, non-residential. It would be advisable to collect more granular data on property type, e.g., dwelling house, retail, office, factory, hotel, etc.

Reconsider the re-introduction of the property tax on large private sector infrastructure entities, such as telecommunications and energy infrastructure

Data Capture for Property Tax Purposes

Make it mandatory that all official databases holding real property information should record the unique cadastral number so that information can be shared among different platforms

Develop protocols for the sharing of data between government entities such as the municipal fiscal cadaster and the national cadaster

Establish a Sales Price Register within the National Institute of Statistics

The National Institute of Statistics to consider the development of a residential property based Automated Valuation Model

Property Tax Valuation for Non-Residential Buildings and its Administration

In respect of non-residential property, the land and the buildings constructed on the land should be valued to market value comprising a single property unit

Non-residential property valuations should be undertaken at the same date of valuation

The larger municipalities should consider the benefits of an in-house valuation department

Self-declared Value Banding

Conduct analytical studies to calibrate more closely to the market the value tables and adjustment coefficients contained in the Fiscal Code

Evaluate the potential of introducing a value banding methodology for the residential property tax

Consider the option of Romanian residential property owners self-declaring the band they believe corresponds to the market value of their property

View Table

^{Table 1.}

Summary of Recommendations

Current Property Tax Framework

The definition of building in the Fiscal Code should be simplified to remove the need for a building to have walls and roof

Proposed Property Tax Reforms—Transition to a Market Value Base

Extend the use of market values to both residential and non-residential property

Agricultural land to continue to be taxed on adjusted area basis and prescribed value levels

Single Taxable Property Unit

Combine land and buildings for residential and non-residential in the same ownership into a single property unit

Setting Property Tax Rate

Guarantee an element of fiscal autonomy to Administrative Territorial Units by setting a single property tax rate but which can be selected out of a centrally determined range of property tax rates

If commercial and residential properties benefit from the same level of municipal service, no rate differentiation in favor of residential properties is advised

Do not reintroduce progressive property tax rates for multiple properties owned by individuals

Property Tax Exemptions

Romania should limit exemptions to an absolute minimum

Property rates relief for low income households, the elderly and those in hardship should be granted on application, reviewed annually, and be means-tested

In the case of the elderly and only, if necessary, allow for the mortgaging of arrears of property rates which will get settled when the property is finally sold or bequeathed

Seek to provide separate revenue forgone (tax expenditure) estimates for some of the property tax incentives such as for tourism-linked real estate, linear infrastructure, incubators, and technology parks in order to debate their costs and benefits as they are coming up for an evaluation

The National Cadaster, Land Registration and Broadening the Property Tax Base

Record the number of properties by property type such as residential, non-residential. It would be advisable to collect more granular data on property type, e.g., dwelling house, retail, office, factory, hotel, etc.

Reconsider the re-introduction of the property tax on large private sector infrastructure entities, such as telecommunications and energy infrastructure

Data Capture for Property Tax Purposes

Make it mandatory that all official databases holding real property information should record the unique cadastral number so that information can be shared among different platforms

Develop protocols for the sharing of data between government entities such as the municipal fiscal cadaster and the national cadaster

Establish a Sales Price Register within the National Institute of Statistics

The National Institute of Statistics to consider the development of a residential property based Automated Valuation Model

Property Tax Valuation for Non-Residential Buildings and its Administration

In respect of non-residential property, the land and the buildings constructed on the land should be valued to market value comprising a single property unit

Non-residential property valuations should be undertaken at the same date of valuation

The larger municipalities should consider the benefits of an in-house valuation department

Self-declared Value Banding

Conduct analytical studies to calibrate more closely to the market the value tables and adjustment coefficients contained in the Fiscal Code

Evaluate the potential of introducing a value banding methodology for the residential property tax

Consider the option of Romanian residential property owners self-declaring the band they believe corresponds to the market value of their property

In Chapter I, the Technical Report analyzes the revenue importance of property taxes in Romania over time and compares these in the European context. Chapter II discusses the design shortcomings of the present building and land tax regimes, also highlighting the revenue forgone costs from the extensive range of property tax exemptions. Chapter III outlines the property tax reform agenda with special reference to available tax base options, tax rate choices, and measures that could broaden the tax base. Chapter IV provides an analysis of whether available property market transaction evidence exists in an accessible format, that would facilitate in the case of residential buildings a transition to a value self-declaration system and, henceforth, basing the recurrent property tax on a measure that is close to market values. The chapter reviews the availability and quality of property transaction data and discusses needed efforts to address the overly fragmented data information platforms in Romania.