State shifts responsibility for land tax onto local authorities

Toomas Mattson | 11/27/2012 | 11:13 AM

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TALLINN, 27 November 2012 - The audit recently completed by the National Audit Office indicated that a landowner cannot be certain that the amount of land tax the state charges them is correct. The National Audit Office found calculation errors in all local authorities, which resulted in landowners having to pay more or less land tax than was correct. Land tax has been miscalculated due to mathematical errors or different interpretations of law, but the incorrect amounts have not caused significant damage to the state. However, some landowners have received unjustified discounts whilst others have had to pay more than necessary.

Pursuant to the Land Tax Act and its implementation acts, land tax is calculated by the Tax and Customs Board on the basis of the data submitted by local governments. The National Audit Office analysed the activities of 13 local authorities in submitting the data required for land tax calculation to the Tax and Customs Board and investigated whether the state has organised the land tax system in such a manner that lawful calculation and collection of land tax is guaranteed. The National Audit Office found that the Tax and Customs Board does not perform its legal duty to check the land tax data submitted by local authorities, and the Ministry of Finance is aware of this. Responsibility for calculating land tax correctly has been shifted onto local authorities. Although the entire revenue generated by land tax is transferred to the budgets of local authorities, land tax is still a national tax and the state should be responsible for its collection. The state has not provided local authorities with a joint database or any applications for calculating land tax. The costs that local authorities incur because of this are not reimbursed by the state.
The Land Tax Act stipulates that a large part of land subject to nature conservation restrictions must be fully or partially exempt from land tax. The Ministry of the Environment and the agencies in its area of administration have created map applications that should help ascertain the existence of restrictions and their extent, but the data is not always accurate. Irrespective of whether these applications are used, most local authorities have made a number of errors in calculating the tax exemptions or incentives that arise from nature conservation restrictions.
The tax exemption on land under homes that enters into force in 2013 creates a considerable amount of extra work for cities and municipalities. The draft act that regulates this tax exemption was developed in haste by the Riigikogu. There was no analysis of the applicability of the act in its planned form, or of the expenses it would bring about. The act cannot be implemented in the intended form on the basis of national registers, because the registers are not harmonised enough to guarantee that the application or non-application of tax exemption on every piece of land is automatically reflected in the registers. The Land Board has been assigned the task of developing a web-based information system, which must be ready by the end of 2014 for use starting in 2015. Until then, every local authority must find ways of identifying landowners whose place of residence according to the Population Register is on land that is subject to tax. They must then ascertain whether there is a building on the property that has the elements of a dwelling. Only then can they begin calculating the tax exemption. In many cases this requires spending money on IT developments which will become useless after the national information system is launched.
The Tax and Custom Board system for submission of land tax data does not provide an option to use existing data to calculate how much money local governments lose due to land tax exemptions. Also, nobody knows how much time and money it takes municipalities and cities to calculate the incentives and how much money could be saved on administrative expenditure if local authorities were relieved of this obligation to compare register data, which is complicated and often done by hand.
Calculation of each tax exemption or incentive has turned land tax into one of the most expensive taxes in Estonia in terms of administration. The National Audit Office finds that the state should consider making the administration of land tax simpler and rearrange the tax in such a manner that the Tax and Customs Board obtains the data required for land tax calculation automatically from national registers. The only data the Tax and Customs Board should request from local authorities is information about the tax rates they have established and local tax incentives.
The National Audit Office also looked at payment of land tax for land that does not have an owner or a known user. The Ministry of Finance pays land tax for such land on behalf of the state. Calculation of land tax for land without an owner or user has not been regulated, which means that the tax amount cannot be checked. The Ministry of Finance has never sought to discuss the calculation of land tax on such land with local authorities, but always agreed with the submitted calculations.
As a result of the audit, the National Audit Office made recommendations to the Minister of Finance, the director general of the Tax and Customs Board, the Minister of the Environment, the Association of Estonian Cities and the Association of Municipalities of Estonia. In their responses, the ministers and the Tax and Customs Board focussed on the MAKIS information system being created by the state, which will be launched in 2015 and which should solve some of the problems highlighted in the report. However, the important activities required for the calculation of land tax (incl. calculation of the homeowners’ tax incentive from 2013) remain the task of local authorities, and the data that the state needs about the tax will still be incomplete.
Land tax is the second biggest source of revenue for municipalities and cities after personal income tax. The average amount earned by municipalities and cities from land tax from 2007-2011 was 46.9 million euros, which comprised 4% of their total revenue and 7% of tax revenue.

Toomas Mattson
Head of Communication Service, National Audit Office
+372 640 0777
+372 51 34 900
[email protected]

  • Posted: 11/27/2012 11:13 AM
  • Last Update: 11/10/2015 5:30 PM
  • Last Review: 11/10/2015 5:30 PM

Land plots with the same intended purpose of use can be taxed in a very different way. In spite of the fact that both plots of land are used for playing golf, Rae rural municipality has designated business as the intended purpose of the use of the land under the golf course, whereas Otepää rural municipality has designated it as publicly used land with a considerably lower tax rate.

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