Tax experts weigh in on 5% levy on property transfer

Charging 5 per cent on sale or free transfer of immovable property will be a burden to home owners and may discourage new buyers from entering low cost property market, tax experts have warned.
Workers at construction site in Kimihurura. File.
Workers at construction site in Kimihurura. File.

Charging 5 per cent on sale or free transfer of immovable property will be a burden to home owners and may discourage new buyers from entering low cost property market, tax experts have warned.

A new government proposal to charge 5 per cent on sale or free transfer of immovable property such as houses and land has ignited debate and lawmakers have sought more explanations on why such a tax should be imposed and what would be the right modalities to introduce it.

The levy is provided for under a proposed law governing income tax, which is being debated by the parliamentary Standing Committee on National Budget and Patrimony.

The Minister for Finance and Economic Planning, Claver Gatete, has said that some people have been selling homes and making money out of it without paying any taxes while it’s a matter of principle that any country in the world must collect taxes on capital gains.

But some tax experts who talked to The New Times this week, indicated that the right way to tax capital gains on immovable properties shouldn’t be collecting taxes on sales.

Paul Mugambwa, an Associate Tax Director with PriceWaterHouseCoopers (PwC) Rwanda, said that it’s wrong that the RRA has called the proposed levy a “Capital gains tax” yet it proposes to levy it on sale price.

“Capital gains tax is not computed this way. Instead, the capital gains must first be determined,” he said.

The expert explained that the government should consider that some people live in the country and own homes for purposes of residence and may not necessarily be making money and hence have no gains to make.

“There is a big difference on a capital gain on houses built for investment purposes by individuals or organisations compared to a family home in which an individual is resident. The latter should be exempted from this tax, especially if they were residing in the home at the time of sale or transfer,” he said.

Mugambwa also suggested the government should consider lowering the suggested 5 per cent rate if it is going to collect what he called stamp duty on sale of homes because the proposed rate is high at the moment and might hurt taxpayers who would otherwise be willing to pay taxes.

“By setting up a lower rate you get the public to accept to the principle of paying the tax,” he said.

As a suggestion to the government and lawmakers, the tax expert indicated that the proposed threshold of Rwf30 million for the immovable property needs to be pushed up while the list of exempt persons for the tax should also be extended to family homes and homes based in rural areas.

“You don’t want to prevent new buyers from entering the lower level property market by levying a large tax on smaller value houses. Combined with the current high interest rates on mortgages, the houses market is likely to stagnate in the short term. So push-up the threshold, lower the ‘’stamp duty” rate, extend the list of exempt persons to include family homes and also restrict the “stamp duty” to urban areas,” Mugambwa advised.

Angello Musinguzi, Senior Manager for Tax Services at KPMG Rwanda, also challenged the notion that the proposed tax is a “capital gains tax”, explaining that that kind of tax is normally not based on sales value but computed gains.

“This is not how capital gains tax is computed in other tax jurisdictions. It should be called another name because capital gains tax is not computed as a percentage of sales price, instead it is a percentage on the gain after removing all the expenses and considering other factors such as inflation,” he said.

He advised that the proposed tax should be called a sales tax or be given another name because it falls short of definition of capital gains tax as some sellers even incur a loss in the process of sale due to several reasons.

“It may lead to undervaluation of assets if not managed properly by the tax administration. Dishonest sellers may connive with their clients to undervalue the asset, thus paying less tax. In addition, the law should clearly state how the value will be estimated in case of disputes on the value and it should also be clear on who will estimate the value in case of a dispute,” he said as he mused about the proposed tax.

He suggested that, while capital gains tax (CGT) is a good source of government revenue charged by most countries, it should be charged basing on principles of CGT.

“Charging 5 per cent upfront on sales regardless of whether the seller made a gain or not is not in tandem with the principles of CGT. I find the current law (number 16/2005) on direct taxes on income where a tax of 30 per cent is levied on the gain on sale of immovable or movable property capturing the rationale for capital gains than the proposed 5 per cent on sale,” Musinguzi said.

The Income Tax Bill, if enacted into law, will replace Law no16/2005 of 18/08/2005 on direct income taxes and all prior legal provisions in the country that will be contrary to its provisions.

The parliamentary committee currently analysing the bill has agreed to work closely with government representatives to put all the needed details into the draft law so it can be tabled in Parliament for approval before the end of the month.