There has been huge uproar against Lagos state’s recent move to raise land use charge, from various stakeholders, demanding clarity and accountability.
According to a recent report published by PricewaterhouseCoopers (PwC), a multinational tax consulting firm headquartered in London, since the Land Use Charge Law 2018 was passed into law, social media has been agog with commentary. It has become one of the most topical issues and other issues such as the Champions League and Big Brother Africa have taken a back seat.
Land Use Charge (“LUC”) discussions are standing shoulder to shoulder with Black Panther in terms of intrigue and entertainment. Here are some of the topical areas in the law.
There are two contentious issues that have been highlighted on social media being (1) the rates and (2) the tax base being market value. Below is a comparison of the LUC rates and tax base in some selected countries:
Using market value for LUC is not unique to Lagos State. Some other jurisdictions may however use land value alone, or could adopt fiscal value (which is at the discretion of the tax authority) or market rental value. However, when they do so, the rate of property tax is usually higher than where the charge is based on market value. Based on the resultant tax payable, the Lagos State LUC does not appear to be inordinate when compared with other countries.
In fact, for a city that has a huge infrastructure deficit estimated at over US$50b, it is not difficult to see the need for a review of the LUC. In the absence of ‘vibranium’, Lagos has to resort to taxes to achieve an economy similar to the fictional Wakanda.
However, it would be ideal for Lagos to further consolidate the various property taxes into one single council tax rather than charge separately for waste disposal and business premises levy.
Some reports state that LUC rates have increased by 200 percent to 500 percent. This is not exactly correct in all cases, based on the rates alone. In some critical economic and social areas, rates have dropped as shown in the table above.
Despite the drop in rates, there may still be an increase in the LUC since the assessments are now based on market value. Some commentary have stated that a N50m property would have to pay N38,000/annum (if owner occupied) or N380,000/annum (if rented out). It appears that some property owners have received assessments which did not consider the annual reliefs (e.g. general relief of 40 percent) and depreciation rates (e.g. for 0 to 5 years, 1 percent). It is the responsibility of the property owners to claim these reliefs if the assessors have not granted them.
The easiest assumption, without any data or understanding of economics, is to assume that landlords will pass the cost to tenants through increase in rent. This would be the obvious result for a finite number of properties with high occupancy rates.
But commercial rent is dependent on willing buyers and willing sellers. Economics dictates that if a landlord could charge x amount on top of his current rent today, he would have already done so.
A tenant in Banana Island probably has enough resources to own his own home in Lekki Phase 1 and a tenant in Lekki Phase 1 can opt to live in Agungi or Osapa London if the rent is increased. The way the rates are skewed in favour of residential property may lead to more encouragement for personal home acquisitions.
Introduction of LUC on vacant properties in the new law (which was not there previously) would encourage the use of the land since nobody would want to pay LUC without getting any commercial benefit on the land. This could lead to more supply of property for rentals and a tenant’s market.
It is therefore unclear whether the new law would lead to increase, decrease or stability. The only certainty is that rent would depend on market forces and the wiser landlords would be cautious in passing on the LUC to tenants.
STEPHEN ONYEKWELU
