Speech: Managing the challenges of rapid urbanisation: A review of the existing property tax system in Myanmar

Park Royal Hotel 19th December 2017Lachlan McDonald and Arkar Hein, Renaissance Institute

Myanmar is a rapidly urbanising country. For several decades, growth in the urban population has been faster than total population growth. In 2014, the urban population stood at around one third of the total (Graph 1).

Since then the urban share is only likely to have increased.

Urbanisation has been broad based, occurring in Yangon, but also in other cities across the country.

It is a pattern that is not likely to slow down. Yangon is projected to grow faster than most other Asian cities, while continued patterns of migration means that other cities should continue to grow quickly as well.

Cities can be the engines of economic and social development. They promote closer links between people, markets and ideas.

Graph 1

But rapidly growing cities also present big governance challenges: increased congestion, pollution, poverty, and increased pressure on public infrastructure and services.

If not adequately managed, the costs of cities can outweigh their benefits.

Yangon is a good example. It accounts for around one third of Myanmar’s total economic activity but the city is creaking under the strain of its large population.

If Myanmar is to manage the challenges of rapid urbanisation, then strong urban governance will be required. Critically, municipalities will need access to resources and authority to spend them on waste disposal services, drainage, sidewalks and parks – the very things that make cities safe and productive.

In Myanmar, municipalities are unique. In an otherwise highly centralised state, they are the most autonomous and decentralised arm of government, accountable only to state and region governments.

Indeed, YCDC, MCDC, and Development Affairs Organisations (known as DAOs) elsewhere in the country can collect revenues and have the authority to spend them on a wide range of duties and responsibilities.

This means that municipalities potentially have many of the tools they need to manage the challenges of rapid urbanisation.

But the full potential of municipalities in Myanmar has not yet been realised. Their mandates are generally little understood by the public or by policymakers, budgets are small and urban services have not lived up to people’s expectations.

Local government officials also believe that there is little they can do to fix this – we regularly hear from them that citizens are fiercely resistant to tax increases.

These challenges are clear in the way that municipalities collect their revenues.

These pie charts show the share of total municipal revenue in two cities, Hpa-An and Taunggyi, for the previous financial year (Graph 2).

Graph 2

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Citizens are clearly asked to contribute only a small amount of the municipal budget via taxes.

Instead municipalities rely heavily on non-tax revenues, mainly fees collected from businesses. Much of this comes from the auctioning of licences for monopolies.

License revenues have number of advantages for municipalities: collecting them requires little effort and limits contact with citizens. They also provide cash flows up-front.

But these monopolies have been shown to harm economic growth by reducing business investment. Further, they impose a hidden cost on customers because businesses pass on these costs through higher prices, which unfairly penalises the poor.

Further, municipalities’ main strength is also a weakness. Being wholly accountable to state and region governments means that they have no ministerial representation or champion in Nay Pyi Taw, where reform efforts have traditionally been focused.

The work of Renaissance Institute, alongside The Asia Foundation, is focused on working with municipalities to support them improve urban governance and strengthen the social contract.

This has involved regular engagement with officials at all levels, including Ministers; State/region offices; executive officers of DAOs; and lower level staff too.

We’ve focused on three key areas: revenue, service delivery and public communication. Three legs of the same stool of urban governance.

A number of reform options are presently being explored. What I’m here to talk to you about today is property tax.

We’ve identified that Myanmar has an existing property tax system but it is small, little understood and not always fair. However, we believe that it has the potential to play a much stronger role in urban governance and help cities to more effectively, equitably and sustainably manage their financing challenges.

But first a bit on what exactly property taxes are.

Property taxes are regular and compulsory payments made by owners (or occupiers) of property based on an estimate of the property’s value.

They are often thought of as the price that urban residents pay for the benefit of receiving urban services.

In cities all over Myanmar, municipalities regularly collect property taxes from urban residents. These payments are different to other taxes and charges paid on property, which are either paid to the Union government and/or triggered upon the sale of a property.

Cities around the world rely on property taxes to fund urban services. Properties are easy to identify so tax evasion is hard. And they provide cities with a growing source of revenue as the value of properties tends to increase over time raise.

Economists, like me, love them because they are an efficient tax – they raise revenue across a wide tax base and have little impact on investment decisions – and because they are an equitable tax –the tax burden is well targeted at those that directly benefit from the local services.

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However, despite their advantages, property taxes are renowned for not reaching their full potential in developing countries. They require considerable amounts of information and admistrative skill, which are not always available.

The obviousness of property tax payments also tends to make them unpopular with citizens. Unlike other taxes, which are rolled into prices, or withheld by employers, people know exactly how much property tax they are paying and are reminded each time there is a payment.

Our research is an attempt to build a common understanding of property tax, as an initial step on the path to reform. You can’t reform what you don’t know.

We wanted to examine the nuts and bolts of the existing property tax system, with the aim of offering concrete, practical and evidence-based recommendations for making it stronger.

Our work focuses on five cities: Yangon and the capital cities of four other states and regions: Bago; Hpa-An; Taunggyi; and Pathein.

This breadth of locations allows us to identify common trends, as well as understand the way things work in smaller cities, which (as I showed earlier) are growing rapidly.

We relied heavily on actual tax collection data and interviews with officials. In particular we benefited greatly from the Myankhon mobile application, developed by Koe Koe Tech in partnership with The Asia Foundation.

For the rest of the talk I’ll provide some observations about the existing property tax system in Myanmar, including how it is structured, and how much revenue is collected. I’ll then conclude with a suite of recommended reforms to make the existing property tax system both stronger and fairer.

The structure of property tax in Myanmar is guided by state and region-level Development Affairs Laws. Common across these laws is that property tax is disaggregated into four eligible components.

These include a component for buildings and land, plus components names after street lighting, water and garbage removal.

Urban households in each township must pay each component that is charged by their respective municipality. The value of each component is calculated as a percentage of the assessed value of each property

Property values are expressed as an “annual rental value” (or ARV). This is supposed to be an estimate of the rent that could be charged on a property for one year in the open market. It is an approach to property valuation that is common to former British colonies.

The individual components are usually bundled together and collected as a single payment.

The revenues are then pooled in the general municipal budget, which means they are used to fund all capital and current spending.

In some cities, in particular YCDC and Taunggyi, we observed that households are charged a fee based on their consumption of water or garbage. In these instances, the payment is not a tax, but rather a user fee.

The revenues are usually used to fund the cost of providing the specific service and are not pooled as general revenue.

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So, in sum, getting a handle on the property tax system in Myanmar requires careful examination and some judgement.

But as a general rule, when a payment is compulsory, based on the property’s value, collected by municipalities and pooled as general revenues, then we have considered it a tax.

On the flipside, when we have determined a payment was a user fee, we have excluded it from the analysis.

The state and region governments, in collaboration with municipalities have discretion over which tax components are collected in each city and what tax rates are applied (Table 1).

As you can see, all cities we studied collect the building and land and the street lighting components of property tax. However, they charge different tax rates. Hpa An and Bago charge 10 per cent – the maximum rate allowable for DAOs under the Development Affairs Laws.

Table 1

YCDC charges less than its maximum allowable rate for buildings and land under the present YCDC law, but charges the maximum allowable rate for the street lighting component.

Only a few cities include the water and garbage components, and there is variation in these tax rates applied to these as well.

The reasons behind the specific rate setting in each location are not clear. But in aggregate, all cities charge less than the maximum allowable rate of tax under the law.

In our view, the structural characteristics of the existing property tax system in Myanmar are generally strong.

It has features that are similar to many former British colonies as well as other countries in the region.

The legal framework is clear in assigning almost all property tax revenues to municipalities, which use them to fund essential services and infrastructure. State and region governments also have full control over policy and administration.

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Many of the administrative tasks are delegated to municipalities.

Generally – at least outside of Yangon –administration is fairly straightforward and well suited to the existing capabilities of municipalities.

There are few formal exemptions built into the system. which means that most properties, including residential, commercial and government properties are liable to pay taxes.

However, the big issue is that the property tax system plays a much smaller role in urban finance than it could.

We know this for two main reasons: the first is that the tax take is much smaller than other middle-income countries in the region.

Government budget data from 2013 show that property tax accounted for only 0.03 per cent of GDP. This is one third of the size of Cambodia, and one tenth of the size of Indonesia (Graph 3)

Of course, 2013 is a long time ago and a lot has changed in Myanmar since then. However, one thing hasn’t changed is the small size of property tax.

We couldn’t get updated national data, but actual tax collection for 2016/17 – the year just finished – clearly shows that cities in Myanmar are collecting much less property tax than other cities in the region (Table 2).

Graph 3 and Table 2

The second reason is that the actual tax payments of individual properties are objectively small.

In Yangon the median tax payment for residential properties is less than a single cup of tea paid every six months; in Taunggyi it is the equivalent of two cups of tea and in Hpa-An it is eight cups.

In fact, data from YCDC Assessors’ department shows that 82 per cent of residential properties in Yangon pay 350 kyat or less every six months.

These results help explain why property tax plays a small role in total municipal revenues, accounting for between 5 per cent and 7 per cent in most cities and only 3 per cent in Taunggyi (Graph 4).

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Graph 4

These are much smaller shares than tend to be observed internationally.

In addition to being small overall, our results also indicate that the existing property tax system is not always applied fairly. Four issues stand out:

First, a substantial share of eligible properties simply missing from the tax record. Consequently, they are not paying their fair share of tax.

It’s hard to say with precision how large this issue is, because there is no formal count of the number of properties. However, comparing tax records with Census information and electricity connections, we think the gaps are large – potentially up to one third of properties in some cities and maybe even more.

Second, many properties are informally exempted because municipalities can’t access the necessary information from township administrators and other government departments to keep the records updated.

For example, when land is sub-divided, municipalities must sometimes continue to charge one single property tax bill, despite the fact that tax collectors know that there are now multiple properties on that land.

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Further, municipalities sometimes don’t have information on who owns a particular property – sale contracts aren’t shared or owners are absent or have refused to declare their interests. In these instances, tax payments can’t be collected – even if tax collectors know there are people occupying the property.

At the moment municipalities are dependent on property owners volunteering their information to keep the records updated.

With rapid urbanisation, new migrants and new properties, are exacerbating these informal exemptions.

Third, current valuation approaches can also create inequities between the rich and poor. In the absence of the market information needed to calculate annual rental values, all cities currently rely on non-market mass-appraisal systems for valuing properties.

In particular, spot values are allocated to observable physical characteristics of properties (such as the quality of building materials and the number of floors).

For example, a reinforced concrete, one story property in Hpa-An is valued at 27,000 kyat, 80,000 in Pathein, and 100,000 kyat in Bago.

This is a simple, which is easy to administer. It is therefore broadly appropriate for Myanmar’s stage of development.

But the simplicity comes at a cost. It’s a blunt instrument that only accounts for a limited number of differences between properties. When features that would ordinarily determine a property’s value are ignored, it can create inequities.

- For example, in Hpa-An and Bago valuations ignore a property’s location. This means that properties in downtown areas are given the same value as properties on the outskirts of town.

- Hpa-An, Pathein and Bago also ignore the size of a property, which means that large and small properties are given the same value.

There is variation in valuation methods, however, and Taunggyi and YCDC are two positive examples. In these cities, they account for both location and size.

But the valuations are still low across all cities, as evidenced by the low property tax payments.

And even in Yangon, which has one of the more sophisticated valuation approaches, there is still very limited variation between the different parts of the city.

This graph shows the median annual rental values for residential properties across the 33 individual townships of the city.

As you can see, apart from a few townships, median values are basically the same across YCDC, despite the fact that market values are likely to vary considerably from place to place (Graph 5).

Note Bahan, which is where Golden Valley is located, is among the lowest valued townships in the city.

Graph 5

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The fourth major inequity specifically relates to Yangon. The tourism and manufacturing industries bear a disproportionate burden while most residents pay almost no tax. This is an issue which I’ll return to later.

Clearly then, the property tax system is not working as effectively as it could. There are clear administrative weaknesses in the system that undermine its effectiveness and make it inequitable.

However, a stronger, fairer and more sustainable property tax system in Myanmar is possible. No constitutional change is required nor do new tax systems or national laws need to be established.

Rather the focus should be on improving the existing system. Most of the building blocks are in place, and it’s already the responsibility of the states and regions. These strengths should be retained.

The Union government has a role to play but we believe it should be limited to providing strategic policy direction. It should definitely not look to centralise any functions, like appraisals of the value of land and properties.

Implementation should be left to the states and regions.

From our research we propose eight recommendations, split across three themes. These are all technically feasible, deliberately sequenced, and start from the bottom up.

The aim is to progressively improve the tax system, with each change building on the previous one to create a stronger, fairer and more sustainable system overall.

First, focus on improving awareness about municipal governance broadly and property tax. This should begin immediately; indeed, this research is the first step on that path

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Second, focus on strengthening administration at the municipal level to widen the tax base and improve compliance. This can also begin immediately, however, entrenched ways of working mean that changes will probably take time.

Third, focus on adjusting policy at the state and region to make the property tax system fairer, more sustainable and more effective. Good policy reforms are likely to be most fruitful if they are built on a platform of evidence, public engagement and strong administrative systems. They therefore should be planned over several years.

The eight recommendations are discussed in turn.

First, awareness of municipal governance and urban finance should be built across levels of government.

Whole-of-government engagement, whether in the form of a select committee or a broad caucus, could help improve policymakers’ understanding of the issues affecting municipalities and help set in place a new vision for urban governance.

Building awareness across government should, at the very least, help to mitigate the risk that policy decisions at the Union level will be made without adequate regard for their impact on urban governance.

Second, awareness should also be built between municipalities. Cities have a unique freedom to experiment with new ways of working and attempt reform.

Lessons can be learnt from cities that exhibit better practice as well as the successes and failures of experimentation and pilots.

Our work has shown that there are a number of examples of good practice from across valuation, record keeping and tax billing. These, and others, should be shared between municipalities in a forum or learning workshops.

Third, ultimately, property tax reform is impossible without public support for change.

Municipalities need to be more effective communicators with the public; providing information on their mandate, how they collect their revenue and how they are spent.

Specifically, the public should be educated about the taxes and charges that they are already paying.

Property tax is clearly different to other fees and taxes – but these are being conflated at the moment, and creating confusion.

The media has a role to play here, being more precise with language and in not simply referring to every tax imposed on property as a “property tax”, when in fact it may be stamp duty or capital gains tax.

Tax billing is can also be improved. The bill provided to tax payers is one of the key communication tools at the disposal of municipalities.

At present, all cities apart from YCDC separately specify the individual components of property tax on the bill.

This is creating unnecessary confusion among tax payers as it links in people’s minds payments with the provision of specific services despite the fact that no link exists and funds are actually pooled.

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YCDC has recently changed expressing property tax as a single line item. Other cities should follow suit.

Fourth, a wide tax base is essential to ensuring the property tax yield is as high as it can be given the existing policy parameters in a location. Key to this is good record keeping.

Digitising tax records is an obvious first step. Despite some progress, all cities that we examined keep paper records to some extent.

Improving the accuracy of existing cadastral records is also important. We couldn’t evaluate the accuracy of the existing records in our research, though evidence from other countries suggests that these risks should not be discounted.

Small occasional random audits of property records could help establish the accuracy of the existing record keeping system.

Formal counts of the number eligible properties in each city would help to establish the size of any coverage gaps in the tax records.

The process for updating tax records should also be streamlined. Instead of relying on property owners volunteering their information to update records, municipalities should automatically receive updates from relevant government departments whenever a change occurs in land use or ownership.

Tax records should then be straightforward to update, and not get bogged down in lengthy bureaucratic processes.

Fifth, municipalities should identify ways to encourage compliance through a mix of incentives, penalties and sanctions that work in the local context.

Voluntary compliance should be encouraged though incentives such as public notices or certificates of appreciation.

Tax payments should also be easy to make. Electronic payments, say from a mobile phone, could be trialled used that to make paying tax more straightforward.

Municipalities also need better enforcement capabilities and modern, well-targeted sanctions.

At present, municipalities rely on the penalties outlined in the 1890 Revenue Recovery Act. This is obviously outdated and is no longer relevant.

Cities can use the courts to enforce payments, but all cities indicated that the collection amounts were too small to justify the hassle.

Non-legal sanctions, such as the withdrawal of electricity, skynet or other essential services, could be used against properties on the record that are non-compliant, or are known to be avoiding being added to the tax records.

Sixth, valuation methods should be improved.

Properties are clearly undervalued for tax purposes, and the current valuation approach creates inequalities.

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Generally speaking, fine accuracy should not be the objective for valuation systems for countries like Myanmar. Rather, the system needs to strike a balance between simplicity and fairly accounting for differences in property values.

An obvious place to start is to account for location, size and land use in property valuations across all cities.

The spot values given to individual property characteristics in the current non-market appraisal system should also be periodically updated.

As cities develop, the relative values of different physical characteristics in each city will change. The property tax valuation system needs to change with them.

Reviews could look at a sample of the market rents or sale prices for equivalent properties in different parts of the city as well as different types of properties in the same parts of the city.

The primary aim of any review would be to ensure that valuations remain equitable between properties.

Spot values should be indexed to a relevant measure of inflation to maintain the real value of property tax collections each year. At present, the spot values are static, and if a change does occur it tends to be sudden and unpredictable – and not in any way linked to an objective measure of value.

Modest incremental revaluations may be more preferable to sudden changes. However, indexation should not be seen as a substitute for periodic revaluations.

In the more medium term, there are potentially opportunities to experiment with shifting the valuation system toward a more market-based valuation approaches.

Because of the data requirements and the political challenges, initial trials should focus on areas where the benefits are likely to be the greatest.

The wealthiest areas of YCDC, such as Golden Valley, would be a good place to start.

Presently, in Bahan, which includes the wealthy area of Golden Valley, residential properties pay a median tax payment of 254 kyat. Yes, 254 kyat. The median annual rental value across the township is 3000 kyat That’s just way too small.

Seventh, municipalities should have some guidance on common administrative functions. At the moment, each municipality administers a common structure in their own way, with varying levels of effectiveness.

Standard operating procedures could be drawn from the best administrative practices in Myanmar and internationally, and provide guidance on identifying the tax base, digitizing record keeping, adding properties to the tax records, and good valuation techniques.

Guidance could also be provided on how to treat the individual components of property tax. For example, whether to charge the water and garbage components as a tax or a user fee and the relevant factors to consider.

Eighth, and last, the tax mix in YCDC should be reviewed. Presently, a small number of accommodation businesses and factories in the city bear a disproportionate burden of property tax – accounting for almost three-quarters of the total tax collected.

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In contrast, ordinary residential properties, which account for 95 per cent of total taxpayers, account for only 3.5 per cent of total revenue, largely because (as we’ve seen) residents pay almost no tax.

A key element of this is the way these commercial properties are valued. The approach is overly mechanical and leads to high effective tax rates as a function of profits.

A review of residential valuations should be accompanied by a review of the way commercial properties are valued.

For example, factories must include the value of machinery in the valuation of their properties. This is clearly against the spirit of property tax, which is to tax “immovable land and buildings” and should be removed.

So, in conclusion, Myanmar’s cities must prepare for big challenges ahead brought about by rapid urbanisation.

Property tax is a good tax to support urban governance, providing a steady stream of own-source revenue to fund urban services that is efficient and equitable.

Our research has shown that Myanmar has a functioning property tax. But it doesn’t work as effectively as it could. Tax collections are small – way smaller than in comparable countries. And it’s not always fair.

But, as we’ve shown, a stronger, fairer and more sustainable property tax is possible, with state- and region-led reforms to the existing system.

Reforms will take time, but they will be worth it. In particular a stronger property tax offers:

- a pathway forward for municipalities, helping them make cities more liveable as they become more important;

- a pathway forward for sustainable and inclusive economic development by cultivating cities’ role as engines of growth; and

- a pathway forward for forward for tax reform in Myanmar more generally. It’s precisely because property tax is so small and under the authority of states and regions it’s the juicy low-hanging fruit of tax reform in Myanmar.

Of course, reform won’t be easy. And if international experience is anything to go by, there will likely be public resistance.

That’s why we are careful to focus on awareness raising among policymakers and the public. And it’s why we are also working closely with the Asia Foundation and municipalities to improve service delivery.

Undeniably, though, as urbanisation gathers pace in Myanmar more good-quality public goods will be needed. This research, we hope, can provide policymakers with roadmap for taking the first steps toward this goal by improving their revenue base.

Thank you.

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