A way to change the real estate tax through the IMF. Interviews with the leaders of the “Pan Ukrainian Association of Valuation Specialists”

A way to change the real estate tax through the International Monetary Fund. Interviews with the leaders of the “Pan Ukrainian Association of Valuation Specialists”. Stepan Maksymov, the head of the public organization Pan Ukrainian Association of Valuation Specialists, uniting more than 500 evaluators of Ukraine, Olexander Potimkov, the vice-president of the organization, former deputy of the State Property Fund of Ukraine (2005-2010), visited the editorial office of the Active Citizens news agency recently.

 

In their interview, they spoke about the details of the privatization of Kryvorizhstal and Odessa Port Plant, the weakness of valuation in Ukraine and the implementation of international valuation standards, the excessive rate in the valuation of real estate of citizens and touched on many painful issues in this area.

What is the role of evaluators in the modern economic environment?

-(Maksymov) It is clear that the modern economic environment is an environment in which prices are constantly changing, especially in Ukraine. This is due to the fact that inflation is high, our economy depends on the dollar exchange rate, because the hryvnia is an unstable currency. As a result, valuation is very important in Ukraine, both for privatization processes and for the processes of revaluation of fixed assets for collateral, when the property is deposited as collateral. Therefore, the role of valuation is constantly growing. We are evaluated by certified evaluators.

The role of evaluators is also increasing, but the requirements for the quality of valuation (transparency) remain unchanged. But nowadays, as the environment is unstable, the price may be changed depending on the date of the valuation, so the requirements for the quality of the valuation must be higher and higher. A self-governing organization is just the same, as it defines and regulates some of its own internal rules, such as a code of ethics.

-(Potimkov) I would like to add. It is difficult to manage without valuation specialists at all in the market economy, but Ukrainian law in some cases provides a mandatory valuation, and in other cases evaluators are intermediaries between seller and buyer who help them reach an agreement, transferring property from one owner to another.

When we met with you, you told that there were different mechanisms of approach to valuate big enterprises; this is what probably interests all Ukrainians today – how the valuation will take place during the privatization of big state-owned enterprises, as well as small property of average citizens. You said that no valuation is needed for big enterprises. Why?

 

-(Potimkov) I will explain: according to the current law “On Privatization of State and Communal Property“, all objects are divided into two groups: objects of big privatization and objects of small privatization. It has been determined for objects of large-scale privatization, that advisors are engaged in their preparation. If there is a need in evaluators, advisors hire them, but not necessarily, as it was before, the evaluator is not involved. But actually, if the privatization is organized and carried out absolutely on a competitive basis with free access of all comers, then in the course of such competition at the competition and the real market value will be formed. If we remember, in our past there was a unique case – a resale of the state object – “Kryvorizhstal”.The difference is that during the first sale there was an artificial limit of competition and the budget received 4 billion hryvnias, and during the resale with an unlimited number of participants, including world leaders in this industry, so the public auction price was 24 billion 200 million hryvnias. One may ask whether it was the market value of a particular Ukrainian capital asset at that time, because in fact at that time the subject of the struggle was not so much Ukrainian property as the first place in the global iron and steel market. But as a result of a public competition with an unlimited starting group of participants from all willing to participate, the price was such a huge figure (at that time the dollar exchange rate was less than 5 hryvnias).

-And there were no more such examples in our history?

-(Potimkov) There have been cases of competitive sales, but, unfortunately, in Ukraine more and more often there is a desire to buy in conditions of limited competition, and this applies not only to big enterprises, but also the lease of state and municipal property. We always have a desire to limite competition and for this, unfortunately, various variants of collusion and artificial prevention are used. By the way, the ProZorro system will not save here.

-(Maksymov) The fact that artificial conditions are being created is confirmed by the example of privatization of the Odessa port plant. About the object of the Odessa port plant: the social sphere was additionally involved. The plant itself was valued and listed for sale, but at the same time the responsibilities included maintaining the entire social sphere, and it is clear that investors who wanted to enter this market knew that the cost of their maintenance would be much higher than the cost of the plant itself.

-(Potimkov) In general, we had a pronounced approach to privatization, when a quite large package of investment conditions was formed, a mandatory part of which was the social factor. So, by the way, the owner of Kryvorizhstal, at that time, took on all this additional burden, but if we think about the Odessa port plant again, then it is possible to estimate taking into account additional obligations. So that means dividing the value into two parts – one is paid immediately and the other is saved for further investment. In general, the amount is formed from these two parts, but the problem was not so much the additional encumbrances of this Odessa plant, as the presence of trade responsibilities. And so the issue then, what investor do we want to attract – a professional investor is not a collector who knocks out debts, but it is engaged in chemistry, and one who is a professional collector is not a chemist.

-(Maksymov) And about the role of the evaluator, the law on privatization excludes in some way the evaluator from this scheme of privatization, exactly what Olexander Yurievich said that at big privatization the international advisor to decide, and at small – to sell the shares either at face value, or if it is property, then at its book value. And there are already examples when at the face value of purchased shares, the real price of this share is much higher than paid, because the financial investment includes shares of such entrepreneurs, whose price exceeds its own value. Of course, the State Property Fund makes some efforts to insert an appraisal there as a tool, as you can’t do without an evaluator and because in fact, the book value is a depreciated value, and with it bidding starts. And it’s no secret how bidding is organized, although through ProZorro, but many companies are sold at a price that does not correspond to the market.

-(Potimkov) You can give a specific example. A joint-stock company with a authorized capital of one million hryvnias, a share owned by the state – 50%, i.e 500,000 hryvnias of authorized capital, and the book value of the assets of this company – 30-40 million hryvnias. That is, at face value with some allowances during the auction hundreds of thousands are paid, and the property is obtained by tens of millions.

What is the global practice of regulating valuation and what should we adopt from other countries or other organizations in order for everything in our country to be as useful as possible for the state?

-(Maxymov) We need to start with the regulatory system. In our country, according to the law “On property valuation, property rights and professional appraisal activities”, in the first place state regulation, in the second – self-regulation, what is carried out by a self-governing organization of evaluator, including our organization. State regulation is carried out by the State Property Fund (SPFU). First of all, it comes down to the approval of evaluators’ curricula, the creation of an examination board that examinating, gives and revokes evaluators’ certificates and licenses, as well as before publishing certain regulations regarding the property appraisal itself. And the role in the legislative process. All laws related to valuation must be approved and the State Property Fund is a state regulator.

Self-governing organizations carry out self-regulation and may have their own standards of activity and their own code of ethics, internal certification, which estimates the quality of evaluators, provide them with certain knowledge, as a result of certification, this is our scheme. Olexander Yuriyovych was directly in a position related to the valuation and property and regulator of valuation in Ukraine as a whole.

-(Potimkov) State regulation is provided by the law regulating the basic moments of a valuation. Then there is a group of valuation standards, which are approved by resolutions of the Cabinet of Ministers, and there is a group of normative documents – methods and procedures, which are approved by the regulator.

There are some problems with standards, because the approval procedure by the Cabinet of Ministers is very complicated. I mean, let’s say, I have this experience, as there was one standard that we approved for two and a half years! Moreover, there is a practice in the world, as international standards, the valuation of which are developing more dynamically, and our national standards contain certain mistakes that are not easy to correct, because it is once again necessary to go through the procedure through the Cabinet of Ministers (CMU). As a matter of financial reporting, we have already switched to international financial reporting standards. The same step should be taken in valuation issues, i.e. to apply international valuation standards in Ukraine. International standards are applied in Ukraine to the extent that they do not contradict national standards. Nevertheless, I believe that international standards still have some advantages, because they are more important in the world, especially since the open economy is global and involves a constant flow of information and comparison of objects. And in order for the basis of comparison to be unified, foreign investors require the application of international standards, both financial reporting and valuation in accordance with international standards. And taking into account such importance, a quite historic event took place the other day: the World Association of Valuation Organizations accepted one of the Ukrainian valuation organizations – Pan Ukrainian Association of Valuation Specialists.

This is our window into the world of international recognition of valuation, and vice versa, because further implementation and recognition of Ukrainian evaluators at the level of world-famous ones is needed. Because, unfortunately, the professional activity of valuation suffers greatly from various attacks in Ukraine. And the evaluators themselves are to blame for this, because the quality of work of a significant part of evaluators is low, to put it mildly. Stepan Yosypovych talks about self-regulation, and I can say with the experience of state regulation that it has not been fully developed yet. I consider supervision of the activities of its members and punishing these members for their substandard work to be one of the main elements of self-regulation.

First, they may not know how to do their job properly, and then they need to be trained. But, unfortunately, the most risky option is the incorrect work of evaluators – a collusion that violates the principles of independence of valuation. I had suggestions for solving this problem. Introduce a mechanism for public protection of the report. That is, the valuation specialist who estimated the object, which has a certain social significance, initiates public defense of their reports.

-(Maximov) What is the regulation of valuation activities in our country and in the world? So, in our country the State Property Fund is a regulator, and first of all it is felt by evaluators because the permission for carrying out practical activity is given by SPFU. This is the issuance of a certificate of the subject of valuation activities. Self-governing organizations should control the quality of the valuation, but it is primarily conducted by the found. And if the valuation is poor, the fond has the right to deprive the organization or evaluator of the right to do this activity. But a self-governing organization does not have such a right. World organizations with that right play an important role, and here belonging to one or another self-governing organization is only a prestige. The partner of influential organizations is the International Valuation Standards Council. And the international council is fighting for all countries on the European continent to take international valuation as a basis.

-(Potimkov) Another aspect of the state regulation is the so-called peer-review. Ukrainian law provides for cases in which peer-review is mandatory in privatization bodies. This is a rather dubious tool, as in fact, the privatization body is a party to the agreement of sale or lease of state property and it also participates in determining the price, i.e the existing conflict of interest. Based on the principle enshrined in the law on the independence of valuation, there should be no such conflict. None of the parties to the agreement should have an influence on the determination of the price. If one of the parties to the agreement has an administrative influence on the determination of the price, this principle is violated. In addition, it is a certain risk of corruption. One idea is to deprive privatization authorities of the power to review valuation reports.

-(Maximov) On the other hand, the State Property Fund at this stage wants even more importance in the peer-review process. This means that the peer-review of the Fund was final, definitive and determinant. This is primarily the case for the the National Securities and Stock Market Commission of Ukraine. It is suggested that all valuations conducted for financial reporting in accordance with international standards should also be reviewed through the SPFU, at least in part of state-owned enterprises. On the one hand, it would strengthen state regulation, but it would also create a conflict of interest. It is no secret that the SPFU has now become more democratic and allows self-governing organizations to review. In addition, it is not able to provide a large number of peer-reviews on its own. If you are a member of a certain organization and the regulator receives a peer-review report, the Foundation directs to this organization.  

What other steps should be taken by your organization in order to implement international valuation standards in Ukraine?

-(Potimkov) They are applied, but they are not implemented. They have already been translated into Ukrainian, are known, but not even all evaluators reread national standards, and there are evaluators who do not have time to finish reading them. As it is the issue of training the evaluator himself and the severity of the exam, which gives the right to engage in valuation activities. Next, the market and the customer must decompose, but, unfortunately, we have a system where you can through accreditation or agreements to “win” the competition by restricting others. There are also such incorrect ways of struggle as artificial statements of law enforcement agencies.

I tried to convince the law enforcement agencies that when they make claims against evaluators, the basis for the claims cannot be the price determined by the evaluator, but there must be participation in a collusion with one of the parties to the agreement.This is a criminal offense. Determining the price may be wrong, this is a subjective opinion of the evaluator. If the valuation is incorrect, the evaluator should be sent for training. But this should not be considered a criminal offense.

– (Maximov) Regarding greater implementation. National standards are approved by resolutions of the Cabinet of Ministers. It is very problematic to get any changes in our national standards (there are only 4 of them), because the Cabinet of Ministers has a lot of acting responsibilities, the change of which requires reapproval. As the development of national standards requires significant economic and intellectual resources, large investments are also required. You just need to use international experience. I think it is possible, and together with the SPFU we will seek their implementation.

Certification of evaluators according to international standards will be known to the International Valuation Standards Council, for investors will be listed on the sites and will be responsible. Evaluators will be interested in getting on this register. Even at the European level, international standards are just beginning to evolve. The EU countries have standards that lag behind the world in their development.

-(Potimkov) I can cite another example of the difficulty of making changes to the adoption of international standards in Ukraine. You can see that our heads of central government change quite often. The procedure for changing the head involves obtaining new signatures, and the last standard has been prepared for more than two years. That is, if the leader changes during this time, it is necessary to reagree.

-So the new standard will appear no earlier than two years?

-(Potimkov) Yes, it is necessary to agree on application of the international standards. A striking example is the valuation provided by the Law on Joint Stock Companies – the valuation of shares for shareholders’ meetings, or so-called forced buyout or sale of shares. Ukrainian legislation does not regulate this type of valuation at all. That is, there are no approaches fixed at the level of the normative document. And this creates big problems for small shareholders in practical terms, because they forcibly select shares and they not always honestly pay monetary value. But this is covered by some evaluators. No one can officially prove it. To date, there is no body or approach that would objectively evaluate decisions. To do this, we are trying to convince the National Securities and Stock Market Commission that it is necessary to agree not on WHO will carry out the valuation, but on HOW to carry it out by issuing a normative document in the form of a joint order, which sets out basic approaches using international valuation standards. And then the situation will be resolved. And they demand to go by selection of who will carry out a valuation.

-What are the other Ukrainian’s problems related with the valuation?

-(Potimkov) You said that many or all were interested in the issue of large-scale privatization. It is rather strange that in Ukraine the average citizen is interested in the fate of, for example, national energy company Ukrenergo. And is a Ukrainian interested in what happens when selling his personal property? Do you know what’s going on there? So if you decide to sell your property, you will potentially receive income. According to our tax code, the income of individuals is taxed, the amount of this tax, according to the Tax Code, is determined by the amount specified in the contract, but not below the estimated value. So, the latest innovation in this legislation is the introduction of such electronic authorized platforms, which are private companies. No matter what you agree on, you need an independent evaluator’s report.

-(Maksimov) Because according to the then valid resolution №358 of the Cabinet of Ministers, the estimated value was determined as the market value. Now the resolution has been revoked, but on the basis of this resolution an order was issued by the SPFU that the estimated value is market, which is why the evaluator is mandatory. The report or information from the report must be transferred to the database of the regulator, where all the information is stored. The owner of this base is the State Property Fund. Notaries must go to a single database before certifying the transaction to make sure that the report has actually been submitted and that taxes have been levied at market value. And then everyone who alienates property pays taxes. Of course, this is unfair – to pay income taxes, you could buy a house and more expensive, but ended up selling it cheaper. That is already a loss. But by law, it is a luxury tax. 

-So, do we have to abolish this luxury tax?

-(Potimkov) We explained that the valuation necessarily accompanies each transaction of purchase and sale of property. But that’s not all, because the process of transferring information from the evaluator to the regulator of the Property Fund takes place in accordance with the approved law through an electronic platform. And this operation costs more than 2000 hryvnias ($72). Moreover, the price of the valuation is approximately 500-800 hryvnias ($18-28,5). This is a fairly simple valuation operation. But the procedure of information transfer costs 2300 hryvnas ($82)!

-So, who emplemented it in Ukraine?

-(Potimkov) Deputies of the Verkhovna Rada. But again, today, there are only four such entities that perform the function of information transfer. Allegedly, more are being prepared, but so far only four. And recently, the Anti-Monopoly Committee of Ukraine conspired these 4 entities and imposed a total fine of over 14 million hryvnias ($500 000).

– (Maximov) The difference is that ordinary citizens do not engage in privatization so often. Moreover, there is an inheritance, a gift, and, as a rule, then tax exempted from taxation, if the inheritance of the first priority. But there is still a military and pension fee.

– (Maximov) Why are they needed? Because this is required by Ukrainian law. But are they needed in terms of common sense? This practice exists only in Ukraine. The estimated value should not be market value, but, say, informational and indicative, which is used exclusively to determine the amount of tax. Today, there is simply a plate for cars, which is formed by the Ministry of Economy, and it is a reference for determining the collection of taxes when selling or buying a car.

– (Maximov) You asked if there is such a practice in the world. There is no such practice in the world, because our taxes are levied on income, and we still have to pay the amount of tax. If the state takes a tax in international practice, then it must determine the value. It has to organize the determination of the price at its own expense, and we pay for everything ourselves.

– (Potimkov) Taking this opportunity, I want to present an alternative, according to some experts. The state, which is the final recipient of taxes, determines the approximate level of the tax base as follows: every three years the over-estimate of typical types of property that are the subject of purchase and sale is determined. Three years, based on the fact that for the lease of real estate property revaluation changes every three years. This is beneficial for the state because it simplifies administration. Citizens get theirs, and the state gets theirs.

– (Maximov) We touched only on the issue of real estate transactions. And there is a real estate tax. Since no one determines the value of real estate, we have tied it all to the minimum wage. And the maximum rate is paid – one and a half percent per year for each square meter of the minimum wage. This suits many, especially those who have their factions in parliament. The State Fiscal Service should be interested in the correct collection of taxes, not the property owners themselves, but so far it has not shown initiative yet. Now the Ministry of Finance is interested in something completely different. Therefore, it is unclear what the next steps will be. In most countries, the real estate tax is 5-7% of Gross domestic product (GDP). And they are permanent, in contrast to privatization.

– (Potimkov) But I also have a suggestion on how to solve this problem. Make this one of the conditions for receiving the next tranche of the currency fund, i.e to introduce a fair system of real estate taxation and transactions with it. What is the International Monetary Fund (IMF) approach? The IMF does not fall to the level of small things of the state. They do not dictate small rules to us, but only say that the state must have a balance. And how we achieve it – must decide for ourselves. And if we force them to decide for us, price increase is proposed as the simplest solution. But if we are able to fill the gaps in our financial system on our own, then we are given such an opportunity. And with the help of the World Association of Valuation Organizations, we can go to the International Monetary Fund. The tax collection system should fill the budget, not private pockets.

Iryna Kovalchuk, Member of the Public Council at the Dniprovska District State Administration of Kyiv

Mikhailo Shivirov

Dmitry Perov , founder of the NGO “Green Minute”

Translated by Anastasiia Lytovka

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