Land Tax Should not Be an Instrument of Land Use Regulation

On August 1, 2013, nearly a month before opening of the autumn session of the State Duma the Government of the Russian Federation submitted for the debates in the lower house of the parliament an initiative as regards specification of the rates of the land tax1.

An attempt was made to involve the tax system as an instrument which motivates owners of agricultural land to use that land in accordance with its designation. To achieve that goal, it was proposed to apply a higher rate of the land tax in case the taxpayer fails to involve land of agricultural designation in agricultural business.

It is to be reminded that at present Article 394 (1) of the Tax Code of the Russian Federation provides for two rates of the land tax - 0.3% and 1.5% -- within which limits the existing tax rates are set at the local level. The latter rate, that is, the higher one is the standard rate as it is applied in respect of all the types of land to which the former one is not applied. The reduced rate has a limited sphere of application and is applied, including but not limited to lands of agricultural designation, as well as such lands in the composition of zones of agricultural use at populated areas as are utilized for farming purposes.


The authors of the draft law proceed fr om the fact that it is unjust to levy a tax on land of agricultural designation at a reduced rate in case the owner of that land fails to use it in accordance with the designation of that land. In fact, it is proposed to charge a tax depending not on the category of the land, but the line of actual utilization. According to the concept of the authors of the draft law, application of the higher tax rate will take place provided that the tax authorities have got information that the land of agricultural designation is not used; such information is to be provided by the Federal Service of State Registration, Cadastre and Cartography (Rosreestr) and its territorial agencies.


At present, the Tax Code of the Russian Federation does not include the principle of charging of the land tax depending on the mode of utilization or non-utilization of land; taxation is based on attribution of lands to one or another category which is determined, in particular, by the Land Code of the Russian Federation. Such an approach conforms the main objectives and quality parameters of the tax system, that is, regulation of land use in accordance with designation of land is beyond the limits of tax legal relations and in addition to the above establishment of dependence of tax liabilities on the line of utilization of land may complicate a great deal administration and fulfillment of requirements of the tax legislation.


Within the frameworks of the existing approach, application of a higher rate of the land tax is justified only in case of assignment of land into another category to which that rate is applied.


At the same time, non-utilization of land of agricultural designation is recognized as administrative violation in the Russian legislation. According to Article 8.8 (1.1) of the Code of Administrative Violations of the Russian Federation, a penalty for such a violation is paid by individuals and legal entities in the amount of Rb 2,000 to Rb 5,000 and Rb 80,000 to Rb 100,000, respectively. In addition to the above, in case of non-utilization of a land plot in accordance with its designation (that is, for farming purposes or carrying out of other activities related to farming) for three and more years running the land plot is withdrawn fr om its owner by enforcement (Article 6 (4) of the Federal Law No.101-FZ of July 24, 2002 on Turnover of Land of Agricultural Designation).


So, if one proceeds fr om the position of the authors of the draft law that land of agricultural designation which is not properly used should not be taxed at a reduced rate it would be expedient to follow the line where negative tax consequences in the form of a higher land tax rate may arise only after the above sanctions have been imposed on the land owner. In particular, in Chapter 31 of the Tax Code of the Russian Federation a mechanism can be envisaged to permit applying of a higher land tax rate to the taxpayer for the past periods (but no more than three years) if the taxpayer is made accountable for non-utilization or improper utilization of the land plot. Though such an approach requires identification of mechanisms of information networking between tax authorities and agencies which are authorized to apply the above sanctions (including the cases wh ere the land owner appeals against a decision in accordance with the established procedure), but it leaves ambiguous issues of land utilization beyond the sphere of tax administration and, thus, does not vest in tax authorities the functions which are not specific to them.


At the same time, the approach proposed by the authors of the draft law leaves many questions regarding tax administration unanswered. So, there are such factors which exist beyond the control of the taxpayer as may result in non-utilization of land plots in accordance with their designation. Such circumstances, for example, may include natural disasters due to which it is impossible to use the land, but tax is to be paid at the standard rate; bad financial standing of the taxpayer; temporary labor shortages or failure to receive a loan. Proceeding from that, it will be needed to divide such instance in to those wh ere such non-utilization was an abuse and wh ere it was justified by objective factors. The fact that the taxpayer did not willfully use land plots is to be proved. It will complicate administration, increase administration-related costs and require from Rosreestr's offices and/or tax authorities to carry out additional supervising procedures. Cooperation between the taxpayer and offices of Rosreestr for establishment of objective reasons for which utilization of agricultural lands in accordance with the land's designation was prevented and, consequently, handling of the issue of provision of the information to the tax authorities are fraught with possible emergence of corrupt practices.


In addition to the above, the draft law provides for calculation of the tax on the basis of a higher rate during the entire taxable period (it amounts to a year) irrespective of the fact during which period in the year the land was not actually used in accordance with its designation and whether that situation was corrected.


In principle, the draft law provides for responsibility of Rosreestr's offices to report to the tax inspectorate at the place of location of the land plot the information on elimination of a violation related to non-utilization of the land plot in accordance with its designation. However, this year (within the frameworks of the fiscal period) the above measure will be of no importance to the taxpayer as recalculation of tax liabilities in case of elimination of the violation is not provided for in the draft law and the tax is to be paid at a higher rate at least for the year. The above information will be important in order not to apply that rate next year.


So, the tax policy should not be used for regulation of those relations which do not relate to its sphere, while the land tax is not to be turned in the instrument of a land use regulation. It appears that without upsetting of efficiency of taxation a higher land tax rate can be applied, in principle, only to taxpayers on whom respective sanctions provided for by the Code of Administrative Violations of the Russian Federation and the Law on Turnover of Land of Agricultural Designation have been imposed.


Т.А. Malinina, Head of the Tax policy Department,
V.V. Gromov, Researcher of the Tax policy Department


1 See draft law No.325481-6 On Amendment of Article 85 of Part I and Article 396 of Part II of the Tax Code of the Russian Federation.