A.V.Pylaeva, Chief Scientific Officer, Institute for Territorial Development, Autonomous Non-profit Organization (www.irt.su), Ph.D. in Economics (Nizhny Novgorod)
A.V. Pylaeva. INSTITUTIONAL SPECIFICS OF TAXATION AND CADASTRAL VALUATION OF REAL ESTATE
The article covers the issues of taxation and cadastral valuation of real estate from the point of view of institutional methodology. We have investigated the functional imperatives of taxation and their reflection on tax policy and methodology for cadastral valuation of real estate, as well as mutual expectations and role relations between the interacting participants. It is suggested to monitor the real estate market the mandatory use of the results of which will lead to the coordination of the positions of taxpayers and tax recipients and to ensure a sustainable development of the institute of taxation and cadastral valuation of real estate.
Key words: institutional economic theory, functional imperatives, taxation of real estate, cadastral valuation of real estate, institute of taxation and cadastral valuation of real estate, methodology for cadastral valuation of real estate, contestation of cadastral value
One of the fundamental principles of the institutional economics – the historicism principle – suggests that the social system, as a complex of social relations, represents a particular historically developing unity, in other words culture.
According to the definition given in the Great Soviet Encyclopaedia, culture is a
―historically determined level of development of a society and an individual expressed in types and forms of organizing human life and activities, as well as in
tangibles and spiritual values created by them‖. To each stage of development of a society its own culture corresponds: politics is responsible for the shaping of the ideology to ensure the system functions of goal setting and goal achievement, while economics is responsible for idea implementation methods. Goal setting is phrased by the means of functional imperatives. ―The systemic approach to the problems of the social world leads inevitably to the requirement of search for a critically important set of functional imperatives upon the realization level of which the survival, integration and development of a society depend‖ (1, p.66).
Let us consider taxation and cadastral valuation of real estate from the perspective of the institutional approach: let us identify the functional imperatives that are implemented by way of them as an institute, and mark the institutional specifics of taxation and cadastral appraisal of real estate.
Functional imperatives of real estate taxation and real property cadastral appraisal methodology
Since the time of the real estate taxation experiment conducted in 1997 in Veliky Novgorod and Tver the creation of conditions for the introduction in the Russian Federation of the real estate tax based on cadastral value has been repeatedly emphasized as a strategic objective of the taxation policy. The Russian President’s message to the Federal Assembly (2) states: ―...I also believe that in order to strengthen the regions’ own taxation base we need to grant them the right to switch over to real estate taxation on the basis of cadastral value, starting from as early as 2014‖. The main focal points of the taxation policy of the Russian Federation for 2013 and the planning period of 2014 and 2015 bear evidence thereof as well.
If we define the mission of real estate taxation as the ensuring of sustainable development of a territory by means of fair establishment of the main tax elements, it follows that the functional imperatives of real estate taxation are social fairness and territorial development. The functional imperatives of taxation are embodied in the methodology of cadastral appraisal of real estate (Table 1).
The determination of cadastral value is a complex process associated with the preparation, processing and presentation of a huge volume of data, the substantiation
and application of appraisal methods, as well as decision taking and making of generalizations and assumptions. Thus, for instance, the Methodological Recommendations for the purpose of valuation of the real property items which are subject to governmental cadastral appraisal contain directions for the application of assumptions at almost each stage of the appraisal process. These are both general assumptions and limitations, and assumptions and limitations relating to information about comparable items; information about subject property items; qualitative and quantitative characteristics of subject property items; grouping of subject property items; modeling; appraisal results (3, p.4).
The assumptions made by an appraiser are based on the goal setting aspect of the property tax, and the principles of a country’s taxation policy. For instance, to valuate capital construction projects the classifier normally applicable to the land category ―lands of inhabited localities‖ was used as the basis for the classification of residential and non-residential property items, which contains 17 subject property classes (4). In the context of valuation this classification is excessive; however, the selection rationale was based on the principles of the institutional economic theory – continuity and historical succession – because the great bulk of residential and non- residential property items are concentrated in inhabited localities. Land plots and real property items located thereon usually have the same functionality (purpose of use) which forms the basis for property classification for appraisal and taxation purposes.
Functional imperatives of taxation and real property cadastral appraisal methodology Real property taxation mission:
ensuring of sustainable territorial development by way of fair establishment of the main tax elements
Functional imperatives 1. Territorial development
- tax base and taxable capacity of the territory - infrastructure development
- territory budget pumping up - investment appeal
2. Social fairness - progressive tax - benefits
- social and standard deductions - wealth and luxury tax
Economic theories of valuation for tax purposes description Labour theory of value Market theory of
Worth theory – linked with the functional imperative of
taxation principles Return on investment Principle of the best
and most efficient use
Assessment of actual use
result Value as a standard rate Value as an indicative rate
Value as a worth Methodology of cadastral appraisal of real property
- is determined using cost function;
- is determined as an individual market value
Item type designs Value as the function of parameters of location, item features, real estate market segment, time
Clearly defined cost function in methodology
- decisions are taken as to value where there is
insufficient data to determine cost function Tax assessment standard - regulation of methodology application
The same approach can be found in application of principle of the best and most efficient use of the subject property. The best and most efficient use of a particular subject property may be the use thereof which corresponds to the goals and objectives of its owner but conflicts with the public interest. Here we can see a conflict between economic theories and two models of an individual – ―economic man‖ and ―social man‖ (Table 2).
Table 2 Culture and functional imperatives of a society Epoch/
Culture Perception of social
Politics (functional imperative)
Economics, cost Model of an individual Plato,
Fairness is ethical justifiability
Public weal is promotion of good will
Ethical justifiability of price
Moral/philosophic and legal principles of natural law
Private ownership and self-profit from the perspective of public weal
Mercantilism, natural rights theory
Mercantile, entrepreneurial man
XVIII century, Adam Smith
Private ownership and self-profit from the perspective of economic effectiveness
System of natural freedom
Market theory of value
Entrepreneurial, economic and rational man
XX century, T.Veblen J.Schumpeter
Creative, innovative Public weal is being thoughtful of others
Theory of innovations Economic sociology Value theory
Creative and social man
The institutional economic theory put a ―live‖, not ―economic‖, man in spot light of the research and tried to find out what factors impact his behaviour in the market (1, p.62). It is known that the economic theories of the nineteenth century, especially as regards marginalism in science, reasoned implicitly or explicitly in their construction from the assumed existence of ―economic man‖ the emergence of which in economic analysis is associated with the name of A. Smith. This means a man with his own independent preferences who strives to maximize his own benefit and knows exactly what such benefit consists of. However, a distinctive feature of the representatives of institutionalism is that when interpreting socio-economic phenomena they judge from the defining role of group psychology, not individual psychology (as in classical political economics). This is the reason why the actual use of a subject property is adopted as the most efficient use in the determination of cadastral value for tax purposes, determination of the market value of a land plot or property item for the purpose of entering such value in the national cadastre of immovable property.
The reflection in the methodology of cadastral valuation of the functional imperatives of real estate taxation demonstrates the modeling method based on specific indicators of cadastral value (3). The modelling based on specific indicators of cadastral value applies the comparative approach and suggests modelling of the cost of a subject property on the basis of certain calculated specific indicators of a related group (subgroup) of property items. The method is utilized in the event of insufficient information about subject property items, and uses minimum values of specific indicators of cadastral value per cadastral unit, municipal district or constituent entity of the Russian Federation. The tax burden is quite heavy (5, 6), hence, the reason for the application of minimum values is to take a decision on the taxable value of a subject property in the context of insufficient information from the perspective of protection of taxpayer’s interests (7).
Mutual expectations and role relations
The institute of taxation and cadastral appraisal of real estate (TCARE) is in the focus of expectations on the part of numerous economic entities and forms counter- expectations in the course of functioning (Table 3).
Table 3 Mutual expectations of economic entities
Interacting entities (IE) Expectations of IE from the institute of TCARE
Expectations of TCARE from IE Legislative bodies Mission implementation Legislative support of activities Ministry of Economic Development,
Ministry of Finance
Regulatory and legal support of real property taxation activities
Coordination of activities
Federal Tax Service Tax base Support of activity infrastructure
Authorities for governmental keeping of records on real property items (Federal Service for State Registration, Cadastre and Cartography)
Record-keeping characteristics for the purpose of archiving in the national cadastral register
Complete and non-controversial list of property items for the purpose of cadastral appraisal
State administration agencies of federal and regional level, local self- government bodies
Adequate monetary characteristics of property items forming the base for property tax which serves the territorial development objectives
Most up-to-date information about the territory
Shaping of taxable capacity of the territory
Informed decisions regarding tax rates
Courts Obtaining of advice and expert
Adoption of adequate resolutions regarding tax base values
Continuity of and clarifications as to resolutions
Commissions for pre-judicial dispute resolution
Participation of representatives of the institute in the work of commissions
Implementation of the process of pre-judicial resolution of tax base related disputes
Taxpayers Clarifications as to the appraisal.
Comparability of value
Taking of important factors into account during appraisal Application of benefits and deductions
Possibility to contest appraisal results
Understanding of mass scale appraisal mechanisms
Individual appraisal to set the market value of property items as a tax base
Appraisers Appraisal methodology for taxation
Determination of cadastral value Appraisers, tax advisors Involvement in the activities of the
Professional activities Self-regulatory organizations, trade
Compliance with professional standards
Methodological and information support
Public organizations, political parties
Transparency of activities and clarifications as to results.
Understandability of motives for taken decision
Approval of decision taking methods
Insurers against cadastral appraisal risks
Quality of work performance Insurance against work related risks
The process of determination of the tax base for property tax involves legislative and executive bodies, government agencies, self-regulatory organizations of appraisers, appraisers, courts and commissions for pre-judicial dispute resolution, taxpayers. The organizing of the process of formation of a database of property items
for taxation purposes is the responsibility of the Federal Service for Registration, Cadastre and Cartography. Activities in connection with the governmental cadastral valuation of real estate are initiated by executive authorities of each constituent entity of the Russian Federation, as well as local self-government bodies. It is also these bodies which select work performers – appraisers constituting members of self- regulatory organizations of appraisers. The duty of control over the self-regulation of the appraisal activities is imposed upon the Ministry of Economic Development. Self- regulatory organizations of appraisers carry out expert examinations of works in connection with the determination of cadastral value; the Federal Tax Service applies in the taxation of property items the cadastral value determined in the course of the cadastral appraisal of real estate (10).
Judicial and pre-judicial contestation of cadastral value as the indicator of the level of maturity of the institute of taxation and cadastral valuation of real estate.
The main antagonistic roles whose opposition serves as a driving force for the development of the institute are taxpayers and tax recipients. This has found its way into the statutory definition of cadastral value: ―... by cadastral value the value is meant which is determined as a result of a governmental cadastral appraisal or a consideration of disputes regarding the results of a cadastral appraisal in a court or commission for consideration of disputes regarding the results of cadastral value determinations‖ (9). These values differ significantly: An individual appraisal detects all distinctive features of a subject property which impact the value formation; during a governmental cadastral appraisal an appraiser makes a generalization of subject property items and valuates in fact a whole class of subject property items. A governmental cadastral appraisal is performed at the instigation of tax recipients, whereas it is contested by taxpayers. Taxpayers order services in connection with an individual valuation of the market value of the property item owned by them which is taken as equaling to the cadastral value in the event of a successful contestation and becomes a tax base.
The judicial contestation of cadastral value has become a common practice. For instance, the total number of actions of contestation of cadastral value of land plots considered by courts in Tatarstan reached 297 by August 2012. In the meanwhile there had been only 162 of them in April 2012; the increase over three months amounted to 83%. The aggregate contested cadastral value of land plots made 82 billion Roubles. Entrepreneurs demanded in courts a total reduction thereof down to 18 billion Roubles, i.e. by 4.5 times. The aggregate loss in the budgets of the Republic’s municipalities made 450 million Roubles over the year 2012. A big portion of this amount is accounted for by Kazan (RUB 379 million), Naberezhnye Chelny (RUB 45.1 million) and Nizhnekamsk (RUB 6 million) (http://www.business- gazeta.ru/article/65089/).
One of the momentous developments in the legislation in the field of appraisal activities was in 2010 the possibility to change the cadastral value of real estate not only by way of litigation, but also by referring to special-purpose commissions in charge of consideration of disputes regarding cadastral appraisal results. Such commissions were extensively formed in 2011 and started their practical work in 2012. According to the Federal Service for State Registration, Cadastre and Cartography, more than 1,700 applications were filed with the commissions concerning 2,361 items of real property. In terms of the quantity of such filed applications the Krasnodar Territory (861), the Republic of Bashkortostan (99), the Omsk region (198) and the Ulyanovsk region (470) are in the lead (5).
Approaching the taxation and cadastral valuation of real estate from the prospective of the institutional methodology enables the managing of their development in an inseparable unity and reciprocal influence. The introduction of pre-judicial methods of resolution of disputes regarding cadastral values is the next stage in the development of the institute of taxation and cadastral appraisal of real estate. It suggests the availability and a certain level of maturity of information resources the use of which helps to substantiate a conclusion on a cadastral value.
The availability for a taxpayer of a statutorily permitted opportunity to determine the
tax base independently and in their own advantage may result in the ambiguousness and instability of the taxable capacity of a territory, and absence for municipalities of the possibility to plan budget income and expenditure (5). The question comes up of protection of the interests of tax recipients. The precision of results of mass scale and individual appraisals may be ensured by way of real estate market monitoring on an on-going basis in the territory of the country the results of which must be binding for the purpose of appraisal for taxation purposes (9).
From the viewpoint of the institutional economics this will lead to consistency of the positions of taxpayers and tax recipients and ensure a stable development of taxation and cadastral valuation of real estate. ―The importance of the institutional aspect of the vital activity of the society and the subsystems comprising it follows from the requirements of the value integration of the social whole that the society truly is. It is the more integrated, the more the combination of individual and organizational actions into system-wide processes relies upon common sense and understanding between society members, and not upon sanctions of legal and political nature‖. (1, p.79)
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