In response to a request from the Indian G20 Presidency, the Organisation for Economic Co-operation and Development (OECD) has undertaken a critical examination of the state of tax transparency pertaining to foreign-owned real estate.

The recently published OECD report sheds light on the current state of affairs in tax transparency, emphasising the need for enhanced information sharing to ensure tax compliance in the realm of cross-border real estate ownership and income. This article explores the key findings of the report and delves into the implications of increasing foreign ownership of real estate worldwide. 

The drive for enhanced tax transparency

The OECD report underscores the immediate benefits of enhancing tax transparency in the real estate sector. By equipping tax functions with the necessary information, it enables them to ensure compliance with tax obligations related to cross-border real estate ownership and income.

The report recognises the potential for improvement in tax transparency, drawing insights from existing frameworks such as the OECD/G20 Common Reporting Standard and the Financial Action Task Force's beneficial ownership initiatives. 

The global trend of foreign real estate ownership

One of the prominent trends highlighted in the report is the rising rate of foreign ownership of real estate. Indications suggest that non-residents continue to increase their holdings of real estate assets in various countries.This trend can be partly attributed to the introduction of the OECD/G20 Common Reporting Standard (CRS), which has led some individuals and entities to invest in real estate as a means to circumvent CRS reporting requirements. 

A case in point is Thailand, which has emerged as one of the largest markets for holiday homes in Asia. Thailand's efforts to attract foreigners as long-term residents, particularly in the wake of the COVID-19 pandemic, have contributed to this trend.The country introduced a long-term resident visa program in the second half of 2022, targeting wealthy individuals, pensioners, remote workers, and highly skilled professionals. 

Divergent approaches to real estate taxation

Countries around the world adopt varying approaches to taxing real estate. In some nations, gains from real estate transactions are categorized as "capital" and are not subject to taxation, as is the case in Singapore.

Conversely, in countries like Thailand, such gains are treated as taxable income, similar to other business or investment income. Additionally, countries may employ different taxation methods for rental income, transfer taxes on real estate transactions, and wealth or inheritance taxes. 

Double tax agreements also play a role in shaping a country's tax treatment of income derived from foreign sources. For instance, Thailand has over 60 double tax agreements, which can modify its tax treatment under local tax laws. To combat underreporting of income, Thailand employs strategies such as withholding tax on rental income and collecting taxes and fees at the time of real estate transfer registration. 

Increasing visibility on cross-border transactions

A significant concern highlighted in the OECD report is the limited visibility tax administrations have over cross-border real estate ownership and income. There are mounting concerns that real estate investments are being used to conceal undeclared assets that would otherwise be subject to CRS reporting. Studies referenced in the report have indicated that cross-border real estate holdings are frequently underreported, posing risks of unpaid taxes related to real estate transactions. 

The report outlines key domestic and international features necessary for a successful tax transparency framework. It also identifies potential short-term and structural improvements to the existing architecture. Enhanced visibility on cross-border transactions in the real estate sector holds the potential to benefit not only tax administrations but also regulatory bodies, anti-money laundering authorities, and law enforcement agencies.

Spotlight on the UK

The Register of Overseas Entities entered into force on 1 August 2022 through the Economic Crime (Transparency and Enforcement) Act 2022. Overseas entities who want to buy, sell or transfer property or land in the UK, now have to register at Companies House and identify their beneficial owners. These rules also apply retrospectively and give the UK tax administration visibility and enhanced transparency on cross-border transactions.   

There have also been a multitude of recent tax changes affecting foreign ownership of UK property. These include:   

• Purchase: A Stamp Duty Land Tax (SDLT) surcharge, adding an extra 2% to all residential rates of SDLT. 
• Ownership: An Annual Tax on Enveloped Dwellings (ATED) for companies owning residential property. Withholding tax on rental income (an application can be made to receive rent gross). 
• Disposal: Capital gains tax on sale (up to 28%), including on the transfer of property rich companies (entities that derive at least 75% of their value from UK land).  
• Death: Inheritance tax (up to 40%) on all UK residential property interests regardless of ownership structure.  

These scope of UK taxes mean that non-UK residents seeking to invest into UK property (residential or commercial) must navigate a complex tax landscape, where tax can apply throughout the property ownership lifecycle.

In a world where real estate investments are increasingly international in scope, tax transparency has become a paramount concern. The OECD report serves as a crucial step toward addressing these concerns. As countries grapple with the challenge of enhancing tax transparency in the real estate sector, the potential benefits extend beyond tax administrations to encompass regulatory, anti-money laundering, and law enforcement authorities. The report provides a comprehensive framework for governments and international organisations to collaborate and ensure that the global real estate market operates with transparency and integrity.

How HLB can help

Businesses with international plans and operations need to be fully informed of their tax duties. They need tax professionals who can provide a combination of local attention and global capabilities.

HLB’s global team of tax professionals can provide you with the necessary proactive advice and support. If you would like to learn more about this OECD report and how it may impact your business, contact HLB to speak with one of our tax advisors today!