Underdeclaring Property

Thailand Property

You can almost see that finish line just a few yards away. All those hours of painstaking research in locating that perfect holiday home in the sun is about to come to an end. No more stressful negotiations, no more restless nights. Relief is on the way and all that remains is the official transfer of the property at the provincial Land Office.

A day before the transaction with the seller, your estate agent gives you a call and tells you that the money for the stamp duties and registration, which you are to be paid in equal shares with the seller, are just one-tenth of what you thought they were. Things just can't seem to get any better. You're getting the house of your dreams with bargain transfer fees to top it all off. But just before you unwind that cork on your bubbly, there may be a final detail left to consider.

Value Types in Thailand

The value of a property in Thailand can be classified into three categories:

  1. The assessed value,
  2. The registered value
  3. The market value.

1. Assessed Value

The assessed value:

  • Is the price calculated by the province's Treasury Office.
  • This land appraisal is conducted once every four years in each province and serves as the basis of the Land Office's ‘assessed' value.
  • The Land Office further assesses this value by taking into consideration other factors such as the structure or other improvements on the land.
  • These government land appraisals are normally one-tenth or less than the actual price you are paying to the seller. In other words, it doesn't reflect the true market value of the property.

This in itself is not unusual as market prices tend to be more sensitive to variables and other price factors. Property markets across the globe in fact experience similar conditions. What is unusual is perhaps the large discrepancy between the two values.

Some provinces have been reluctant to raise their assessed value due to the immense pressure it would cause to the local property market. Thus, the main reason we see a prevalence of under-declaring prices with authorities turning a blind eye. In some better developed markets such as Phuket, however, the assessed value is more in line with the actual market value of the property.

2. Registered Value

Registered value is simply the price that is recorded on the transfer documents as the price paid for the property. The term registered value and assessed value is used interchangeably.

  • The assessed value is often used as the registered value recorded on the transfer documents.
  • The registered value cannot go below the assessed value but should in fact reflect the actual market price paid for the property. This is also the value in which the stamp duties, transfer fees and other relevant taxes are calculated from.

3. Market Value

The market value is simply the actual price you are paying for the property.

  • This is probably also the money you have brought into the country which is recorded on the foreign remittance form at the local bank here in Thailand.
  • This amount reflects the true price of the property and is the most crucial value used to determine your investment.
  • This actual value is probably also the least likely of all the values to be recorded on the transfer forms at the Land Office.

Why People Under-declare?

The practice of under-valuing the price of a property is not an isolated phenomenon. Many countries around the world such as Spain, Bulgaria and other popular foreign property markets have been doing this for decades.

  • Authorities have a challenging goal of balancing sustainable growth in prices versus the actual exponential growth caused by heated foreign investment.
  • Property markets can very easily burst its bubbles if prices are not kept in line with the rate of growth in the country's per capita Gross Domestic Product (GDP) rate.
  • Another aspect to consider is the PPP or Price Purchasing Parity in line with the GDP. This measures the buying power of locals within the market. If property prices become too high, local citizens would find it difficult to afford a house.

These are just some of the many issues economists and bureaucrats have to consider.

Economics aside as to the reason why individual parties under-declare:

  • To reduce the tax burden.
  • Sellers often insist on using the assessed value because they will end up paying less tax on the transfer, particularly if they also have to pay a Specific Business Tax for owning the property for less than five years, something similar to a capital gains tax.
  • You may think this is not such a bad deal because your share of the tax burden is significantly reduced as well.

So the question remains, does the fact that it is common practice make it a good practice?

Political Climate

Your estate agent or seller will most likely tell you that this is just how things are done in Thailand. The person who sold the property to them did it and now they're doing it and in the future, you would do it too. The cycle just continues. But what if the cycle ends with you?

Thailand is undergoing some serious tax amendments following the 73.3 billion baht sale of Shin Corp to Temasek Holdings in 2006. There were a number of allegations regarding tax fraud which hitherto had been largely acceptable and practiced widely. Public opinion on the matter has shifted widely since and the courts also have an obligation to take public policy into account.

Imagine the government begins to clamp down on under-declaring prices next year so when you sell your property in the future you can only declare the true value. Your capital appreciation would be quite substantial and even though Thailand has no capital gains tax per se, the appreciations are calculated as part of your income with progressive rates of up to 37%. You may just find yourself short-changed at the end of the day.

Legal Implications

If that's not enough, under declaring the value of a property may have some legal implications. Tax attorneys anywhere will tell you that there is a fine line between tax avoidance and tax evasion. That is largely true and probably why they get paid so much.

Under the Revenue Code of Thailand, it defines tax evasion as

  • the act of making a false statement
  • giving false answers
  • producing false statements with the view of evading payments of tax

Although no precedents exist for the false declaration of the price on property transfers, it could only be a matter of time.

Section 104 of the Land Code also aims to curb this practice. In it, it states that any persons recording any rights with regards to land for the purpose of paying the fees shall show the true value in accordance with the market price at that time. It also allows the competent official the power to assess this by obtaining any relevant witnesses and evidence required. Under both codes, fines and imprisonment may ensue if proven.

Is It Worth It?

There are a few considerations involved.

  • If you opt to go with common practice, you may be able to save yourself some money at the start.
  • There is also the mentality which may be difficult to change. Local sellers, for example, may insist on using the assessed value and would not go ahead with the deal otherwise.
  • It may take some time for this to change but it is perhaps only a question of time.
  • At the end of the day, it is a question of risk. Is the fact that it is common practice reason enough for you to do it or do the legal and financial implications in the future outweighs any benefits you will gain in the short term?
  • Whether to accept the cultural and dominant practice or insist on following the letter of the law is a delicate choice for any foreign buyer. However, for any astute buyer, it is always considered wise to follow the legal procedures, even if the locals don't think it's necessary. It's just a simple matter of protecting your own interest.
Kert Stavorn
Kert Stavorn is a partner with Thailand's Largest Legal Network: Siam Legal International with offices in Bangkok and Phuket. Kert's practice primarily focuses on real estate, construction and corporate matters.
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