Improving the VAT Treatment of Exempt Immovable Property in the European Union

The treatment of immovable property is one of the most difficult issues under the VATs in the EU. Ideally, rents and rental values should be taxed just like other consumer goods and services, but doing so would present formidable practical difficulties. Under a second-best approach, the value of newly created property is taxed as a proxy for the exempt flow of building services. This implies, however, that future increases (and decreases) in the value of the exempt property are left out of the VAT base. To remedy this defect, this paper recommends the replacement of the current transfer/registration and stamp duties on the sale of immovable property, which are highly distortionary, by a VAT on the increase (decrease) realized at the time of sale. Beyond that, the various VATs can be improved by applying the standard rate to all transactions in or related to immovable property, except the sale of residential premises.