Tax harmonisation across the European Union (EU) would be an effective tool to stimulating further growth in the property investment market there, Nick Jacobson, managing director of Real Estate Investment Banking at JP Morgan Chase & Co in London, told the IPD/GPR European Property Strategies conference in Wiesbaden. “Tax laws are extremely complex in nature and differ enormously from country to country.”
He says that experts are often needed to help find solutions to cross border tax restraints and that moves to creating greater tax efficiency in Europe have become something of a “lightning rod” for criticism. “The impact of such moves has been discussed quite a bit but often too discretely.” He comments that, unlike the euro, there has been very little public debate about tax harmonisation, even though it has been high on the agenda in Europe for some time.
However, much of the debate continues to be done at national level and this is creating a stumbling block. “Basically, individual member states are reluctant to give up the right to set their own taxes and this political factor is having a big impact on the property market.”
He wonders if the harmonisation of property taxes could become reality or if people are seriously interested in such a concept, given the importance of revenue generated by taxes at local authority level.
Alan Evans, who is professor of environmental economics at the University of Reading, says that Europe is along way from establishing a federal type tax system, as in the US. “You have to first know how the system works in each country and you have to deconstruct before you can reconstruct. It would be an immeasurably complicated procedure.”
The question of capitalisation is also raised, says Evans, since land is immobile. “You can’t just move a piece of land from one member state to another, so you can end up with high taxes being capitalised into lower property values.”
Other problems include the fact that taxes “may not always be what they seem” and that land use policies often create implicit taxes, as well as the fact that different countries levy taxes in different ways and on different parties.
Evans is dubious that tax harmonisation can be achieved in Europe, but he is more optimistic about issues concerning tax efficiency. “In the political context of the EU, tax harmonisation would be extremely difficult, if not impossible to accomplish. However, tax efficiency is another matter and, with the right solutions, could be achieved.”
Matthias Roche, a partner at Arthur Andersen in Frankfurt, says that, harmonisation aside, there already exists a series of tax treaties in the EU which are designed to ease the burden of cross border fiscal charges. “The European Court of Justice has done a lot of lobbying to make sure that the treaties are upheld.”
He believes that part of the problem lies in the way the treaties are approached. “Investing in property across member states continues to cause headaches, since the way the treaties are interpreted and applied in accordance with national laws differs greatly, something that the treaties were designed to eliminate.”
Elsewhere Tony Key, who is research director at IPD in London, told the conference that property had now become the best performing asset class, with good returns across Europe over the last three years but that this wasn’t a fair picture. “If we look at the property investment market over 10 years instead, we see quite a different picture, since the 80s recession continues to have an impact. Property, in this respect, and particularly the UK indirect property investment market, shows poor performance levels, especially when compared to equities.” This is because the property market in the UK is largely driven by the economy, whereas other asset classes are not.
He says that there are now common characteristics across Europe. “In the longer term as a whole, across Europe, we find moderate rates of return in both direct and indirect investments.” The notable exception is Ireland, where rapid economic growth has distorted the normally stable property investment levels, which tend to grow in line with GDP.
Key says that IPD’s mission is to create European indices for the property investment markets. “We don’t yet have serious benchmarks across Europe. We need to cover more countries and get something set up at least in developed markets, such as the 15 member states of the EU.” He says that rapid expansion in this area had already taken place in Denmark and France, whilst IPD was undertaking evaluation studies in Norway, Spain, Portugal and Switzerland. He expects to see some development in these countries within the next 18 months. “Investors want to see indices, since it will allow them to benchmark their investments. Apart from in Scandinavia, nobody seems to know the real value of their stocks.”