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The impact of new Land and Building Tax Law on Thai property

EIC sees the new Land and Building Tax Law coming into effect on January 1st, 2019 having both negative and positive effects on Thai property developers.

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Under the new Land and Building Tax Law the income-based method previously used in tax calculation will be replaced by an assessment based on a property’s appraised value to improve the clarity of future tax calculations

The Land and Building Tax Law will introduce two major changes to tax calculations, which are 1) A shift to a cost approach assessment and 2) Levying tax based on land use.

Firstly, tax calculation using the cost approach under the new law is a transition from the previous income approach that heavily depended on officers’ assessment views.

Under the new scheme, tax determination is based on the appraised value of the property, calculated from the sum of standard land and building prices set by the Treasury Department.

Highlight

  • Appraised value of property deriving from separate standard prices of land and buildings will also help to minimize officers’ discretion in the assessment process, whilst the different land use purposes will have varying implications on tax treatment for property.
  • EIC sees the new Land and Building Tax Law coming into effect on January 1st, 2019 having both negative and positive effects on Thai property developers.
  • Overall, the new law will likely cause greater disruptions to those are renting property than those involved in selling property.

 

This approach separates the valuation of land and buildings, whereby the price of the latter varies with the type of construction. The renewal of both land and building costs are adjusted at four year intervals.

Secondly, land use categories will be considered under the new tax module. Previously, tax rates were considered based on the annually appraised value of the asset. However, under the new tax law the same building may be imposed with different tax rates depending on the functions it serves.

A two-story building used as a store on the ground floor and as a residential area on its upper level, will be levied with a commercial and residential tax rate per the share of area each occupies.

Land use purposes are defined into four categories:

1) Agriculture, 2) Residential, 3) Commercial and industrial, and 4) Un-utilized land (Figure 1). In sum, these adjustments to calculations will help standardize tax assessment procedures, whilst separate tax treatment for the different land use purposes will enhance the clarity and fairness of tax measures for both property owners and government.

Land use purposes are defined into four categories

Land use purposes are defined into four categories

Nevertheless, the transition will impact property developers differently. The varying effects on developers renting property as opposed to those selling property will be discussed here.

The developers involved in selling property will likely bear higher tax burdens on property under construction and unsold completed units.

The old Local Maintenance Tax Law have levied a low tax rate based on median prices of land  on property under development or unsold units. The old model would apply a ceiling tax rate of 70 baht per rai on land valued below 30,000 baht per rai.

However, under the new tax law the same property will be subject to a commercial tax rate of 2% of the asset valuation. This is regardless of whether the development project is for housing, for which the tax ceiling rate is 0.5%.

Nevertheless, while land is under construction tax rates will be discounted down to 0.05% for the first 3 years (Figure 2), implying that a property on land valued below 30,000 baht per rai will be levied a tax rate of only 15 baht per rai.

Thus, the new tax law will likely have a small impact on the cost of property development, with the tax reduction period allowing enough time for project completion. Furthermore, even though details of the appraisal methodology of land under construction have yet to be released, it is expected that taxes will be levied based on areas with completed construction at the end of each tax period. Hence, EIC views the overall impact on property under development to be minimal.

Author: Teerayut Thaiturapaisan 

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