Tax experts of all kinds and the Minister of Finance have been repeating to anyone who will listen that the 2024 Finance Law does not introduce any new taxes. They forgot that taxation is a minefield and that old texts must always be subjected to a metal detector to detect the various taxes that have been planted like anti-personnel mines over the years, sometimes, as in the case of VAT, deliberately! We could almost advise anyone planning to buy a house to do so now. It’s not insider information, it’s just forgotten information!
An anti-purchasing power tax that will explode in 2024
The general public and anyone planning to buy what Tunisians call “the last home of life” may have forgotten about it, but it won’t be long before they pay the price. Property developers, who will apply it to their prices, have not forgotten that every buried corpse will soon rise again and will frighten their customers into looking elsewhere.
VAT on all purchases of residential property, paid by the buyer to the developer who passes it on to the government, was 7%, had risen to 13% and will now rise by 6 basis points to 19%. It was due to be applied in 2020, but has been postponed until 2024, and there was nothing in the Finance Bill 2024 to suggest that it had been abandoned or postponed, as some tax experts had suggested at the last meeting of the Higher Council of Taxation with the Minister of Finance, before the government agreed on this version of the Finance Bill 2024, which has now become final.
Deferring it, as these tax experts suggest, would be tantamount to blowing a small hole in the budget’s revenue forecast, something that State Treasurer Sihem Nemsia seems unwilling to do. A refusal that could well cost her money in corporate income tax from developers when she realizes in retrospect that she has put an end to the recovery of the property development sector.
The impact on the end buyer’s VAT bill
In Tunisia last October, according to the “Mubawab” rental tensiometer, average rental prices rose by +5% in the period from January to June 2023 compared to the same period the previous year, and the average surface area of rented apartments fell by 5%. Renting in Tunisia is becoming increasingly expensive. And the experts will tell you that this is the supply-demand effect and that this effect can only be regulated by increasing supply, by more construction by PIs (property developers).
However, as the PwC study notes, “although the number of property developers increased between 2010 and 2017, the number of homes built did not keep pace”, as the graph shows.
Some tax experts, backed by the finance minister, said that the purchasing power of Tunisian citizens would not be affected. They were clearly trying to lull the population to sleep, for many of whom the dream of owning a home will become even more unbearable.
In the general price index (IPC), which is compiled every month by the INS, the group “housing, water, gas, electricity and other fuels” represents the second largest weighting after the group “food and drink”, which accounts for 26.2%. The weight of housing in the composition of the index and inflation is 19% (coincidence or convergence?).
Parallel market and rising rents
In a few months’ time, for example, a house costing TND 150,000 today would be burdened with TND 19,500 in VAT. On January 1, 2024, it would have to pay 25,500 DT in VAT, not counting registration fees and other charges. And what will happen is that the customer will resort to the ‘parallel market’ in real estate, and it does exist. PwC also notes that “out of a total of 79,000 homes built each year, only 44,800 thousand (56.7%) have received planning permission, of which 11,000 are built by private and public developers, representing a small share of 14% (1/2)”.
Fewer new homes built by the sector’s regulars with the help of the tax system means higher selling prices and rents, which will be affected by the fall in supply in the face of demand boosted by urbanization and population growth, according to experts in the sector. Fewer homes built by those who pay the tax also means a very likely flight of buyers to the parallel market, which pays next to nothing!
So much for that!
The forthcoming 6 basis point increase in VAT on anything built for residential use looks like a cash grab by a budget desperate for tax revenues, and the PwC study provides the proof. “In a CGE model (computable general equilibrium model), which is a practical tool for simulating the impact of changes in economic or fiscal policy, a change in a tax applied to real estate has a direct impact on the price of that real estate, and therefore on demand, and has an impact on the behavior of customers and the performance of real estate developers (and consequently on the tax revenues of the state),” states a sector study on real estate in Tunisia carried out by PwC (PricewaterhouseCoopers) in March 2021.
The firm says: “This model shows that the measure to subject residential property to 13% VAT (Finance Act 2018) has had a negative impact on the sector and the Tunisian economy, generating only 3.2 MTD in additional VAT revenue from the real estate sector (…). This model shows that the measure to subject residential property to 19% VAT from 2024 (Finance Act 2020) will have a negative impact on the sector and the Tunisian economy, and would have generated only TND 1.5 million in additional VAT revenue from the property sector.