Using Administrative Data to Assess Tax Gaps Preliminary – not for citation Daniel Ayalew Ali, Klaus Deininger Annual World Bank Conference on Land and Poverty 16 March 2016

Land administration information system (LAIS) Rwanda has implemented a land tenure regularization (LTR) program since 2006/07 to register the country’s estimated 11.5 million parcels The demarcation and registration phase of the program was completed in 2013, and It has now a functioning Land Administration Information System (LAIS) with a clear process to keep land records up-to-date Example: sales transaction with property values are being recorded Inter-department data sharing agreement with RNRA: RRA: land tax rates and payment details RDB: mortgage with loan amounts Ongoing effort to create a link with the Ministry of Justice’s dispute database, etc. After a series of legal and institutional reforms…

Current status (Feb. 2016) Total Kigali city Southern Western Northern   Total Kigali city Southern Western Northern Eastern Total no. of registered parcels 11,420,885 390,788 3,217,847 3,157,232 2,668,212 1,986,806 Residential Agricultural Commercial Forest Admin./science/social Not categorized Parcel size (ha) Residential land Agricultural land Share by claimant type Natural person 0.80 0.86 0.72 0.83 0.81 Non-natural person 0.05 0.02 0.09 0.03 Claimant not yet registered 0.16 0.12 0.19 0.14   Total Kigali city Southern Western Northern Eastern Total no. of registered parcels 11,420,885 390,788 3,217,847 3,157,232 2,668,212 1,986,806 Residential 1,341,467 134,203 227,046 419,683 147,693 412,842 Agricultural 7,344,802 198,262 1,997,104 1,919,423 1,951,886 1,278,127 Commercial 169,709 4,369 16,671 117,303 17,272 14,094 Forest 916,359 13,875 262,232 322,117 267,162 50,973 Admin./science/social 29,749 1,891 7,503 9,128 4,401 6,826 Not categorized 1,618,799 38,188 707,291 369,578 279,798 223,944 Parcel size (ha) 0.18 0.17 0.13 0.11 0.38 Residential land 0.09 0.15 0.16 Agricultural land 0.19 0.20 0.12 0.42 Share by claimant type Natural person 0.80 0.86 0.72 0.83 0.81 Non-natural person 0.05 0.02 0.03 Claimant not yet registered 0.14   Total Kigali city Southern Western Northern Eastern Total no. of registered parcels 11,420,885 390,788 3,217,847 3,157,232 2,668,212 1,986,806 Residential 1,341,467 134,203 227,046 419,683 147,693 412,842 Agricultural 7,344,802 198,262 1,997,104 1,919,423 1,951,886 1,278,127 Commercial Forest Admin./science/social Not categorized Parcel size (ha) 0.18 0.17 0.13 0.11 0.38 Residential land 0.09 0.15 0.16 Agricultural land 0.19 0.20 0.12 0.42 Share by claimant type Natural person Non-natural person Claimant not yet registered   Total Kigali city Southern Western Northern Eastern Total no. of registered parcels 11,420,885 390,788 3,217,847 3,157,232 2,668,212 1,986,806 Residential 1,341,467 134,203 227,046 419,683 147,693 412,842 Agricultural 7,344,802 198,262 1,997,104 1,919,423 1,951,886 1,278,127 Commercial 169,709 4,369 16,671 117,303 17,272 14,094 Forest 916,359 13,875 262,232 322,117 267,162 50,973 Admin./science/social 29,749 1,891 7,503 9,128 4,401 6,826 Not categorized 1,618,799 38,188 707,291 369,578 279,798 223,944 Parcel size (ha) Residential land Agricultural land Share by claimant type Natural person Non-natural person Claimant not yet registered   Total Kigali city Southern Western Northern Eastern Total no. of registered parcels 11,420,885 390,788 3,217,847 3,157,232 2,668,212 1,986,806 Residential 1,341,467 134,203 227,046 419,683 147,693 412,842 Agricultural 7,344,802 198,262 1,997,104 1,919,423 1,951,886 1,278,127 Commercial Forest Admin./science/social Not categorized 1,618,799 38,188 707,291 369,578 279,798 223,944 Parcel size (ha) Residential land Agricultural land Share by claimant type Natural person Non-natural person Claimant not yet registered   Total Kigali city Southern Western Northern Eastern Total no. of registered parcels 11,420,885 390,788 3,217,847 3,157,232 2,668,212 1,986,806 Residential Agricultural Commercial Forest Admin./science/social Not categorized Parcel size (ha) Residential land Agricultural land Share by claimant type Natural person Non-natural person Claimant not yet registered Incomplete information a concern, and some additional work is still needed fill in the gaps.

Registration of subsequent land transactions with transfer of ownership rights (2014/2015)    Total  Kigali city Southern Western Northern Eastern Panel A: Registered residential land Total number of transactions All 45,293 16,710 17,961 3,162 2,141 5,319 Sales 21,367 15,145 1,504 1,240 827 2,651 Others (inheritance, gift…) 24,120 1,665 16,487 1,963 1,319 2,686 Sale value ($/m2) 30.07 39.38 9.92 14.41 12.41 4.75 Percent of registered parcels per annum 1.69 6.23 3.96 0.38 0.73 0.65 0.80 5.65 0.33 0.15 0.28 0.32 Others (inheritance, gift, …) 0.90 0.62 3.63 0.24 0.45 Panel B: Registered agricultural land 22,849 6,635 3,996 2,390 3,993 5,835 14,497 6,087 2,178 1,234 1,971 3,027 8,509 609 1,855 1,180 2,032 2,833 4.45 6.65 3.70 3.57 3.91 1.47 0.16 1.68 0.10 0.06 0.23 1.54 0.03 0.05 0.12 0.11    Total  Kigali city Southern Western Northern Eastern Panel B: Registered agricultural land Total number of transactions All 22,849 6,635 3,996 2,390 3,993 5,835 Sales 14,497 6,087 2,178 1,234 1,971 3,027 Others (inheritance, gift…) 8,509 609 1,855 1,180 2,032 2,833 Sale value ($/m2) 4.45 6.65 3.70 3.57 3.91 1.47 Percent of registered parcels per annum 0.16 1.68 0.10 0.06 0.23 1.54 0.03 0.05 0.12 0.11    Total  Kigali city Southern Western Northern Eastern Panel A: Registered residential land Total number of transactions All 45,293 16,710 17,961 3,162 2,141 5,319 Sales 21,367 15,145 1,504 1,240 827 2,651 Others (inheritance, gift…) 24,120 1,665 16,487 1,963 1,319 2,686 Sale value ($/m2) 30.07 39.38 9.92 14.41 12.41 4.75 Percent of registered parcels per annum 1.69 6.23 3.96 0.38 0.73 0.65 0.80 5.65 0.33 0.15 0.28 0.32 0.90 0.62 3.63 0.24 0.45 Focus only on transactions with transfer of ownership rights… by region and land use type. Important for the sustainability of the land administration system… Total number and as percentage of registered land… Land value – variation by region and land use type..

Number of registered mortgages and loan amount Mean loan amount about US$ 50,000.

Land lease fees Leasehold is the most important tenure arrangement in Rwanda Rwanda Revenue Authority collects land lease fees There is a data sharing agreement between RRA and RNRA, and now an effort is ongoing to have a live link between the two databases Data from the two sources can, for example, be used: to estimate the gap in collection of land lease fees to explore the potential for additional tax collection (e.g., conversion of prime land in urban Kigali from agriculture to residential) to examine the potential for property tax vs. land lease fees (including estimation of a hedonic price function) Illustrate using data from Kigali city

Urban rural classification is one of the key factors considered in setting lease fee rates in Rwanda. This figure shows that a big chunk of the land in Kigali city is classified as rural land.

Another important attribute is land use Another important attribute is land use. This figure shows that the majority of the land in Kigali city is agricultural land. And agricultural parcels that are 2 ha or less are exempted from paying land lease fees.

All the blue shades are exempted from paying lease fees All the blue shades are exempted from paying lease fees. So, the bulk of the parcels in rural Kigali are exempted from paying land lease fees.

Greater Kigali: Gaps in land lease fees in 2015 Residential Agricultural Others Total amount declared at RRA (US$) 2,607,463 18,193 236,032 Number of parcels with declared amount 48,934 373 1,311 Total amount of lease fees paid to RRA (US$) 2,055,826 12,912 134,766 Number of parcels paying lease fees 39,898 282 1,083 Share paying lease fees (%) 30 16 23 Total lease fee to be collected (US$) 7,958,887 22,308 847,499 Number of parcels with lease fee obligation 132,472 1,759 4,701 Number of parcels exempted (area < =2ha) 209,432 A total 2.2 million USD was collected in 2015 of a total of expected 8.5 million USD 30% paid about 25% of the expected lease fees Almost all agricultural land is exempted from paying lease fees

People who are paying lease fees are pretty much located in urban Kigali.

Urban Kigali: Gaps in land lease fees in 2015 Residential Agricultural Others Total amount declared at RRA (US$) 2,444,347 14,774 205,640 Number of parcels with declared amount 44,985 245 1,130 Total amount of lease fees paid to RRA (US$) 1,947,081 10,215 122,046 Number of parcels paying lease fees 37,025 189 942 Share paying lease fees (%) 33 42 27 Total lease fee to be collected (US$) 6,742,827 7,548 743,042 Number of parcels with lease fee obligation 112,143 454 3,496 Number of parcels exempted (area < =2ha) 40,887 This table clearly shows that most of the revenue from lease fees comes from urban Kigali (95%). Even then about 33%, 42%, 27% 33% paid about 30% of the potential… There is room for increasing revenue from lease fees even within the current tax rate. Increase coverage…

Conversion: potential source of land lease fee Is it possible to increase revenue from lease fees through conversion of land use?

Conversion of agricultural land to residential land and potential lease fee revenue Number of parcels Total amount (US$) Parcels less than 230 sqm (below 25th percentile) 5,989 34,603 Parcels less than 460 sqm (below median) 12,222 150,820 Parcels less than 725 sqm (below mean) 18,732 363,136 Total conversion 41,341 4,688,497 Is there a possibility to increase revenue from lease fees? Results under different scenarios.. Total conversion will lead to increase in revenue from lease fees by about 50%.

Most of the land market activities are taking place in Urban Kigali involving residential land.

Hedonic price function Dependent variable: log(property price in US$)   Residential Agricultural (1) (2) (3) (4) Log of parcel area in sqm 0.433*** 0.452*** 0.548*** 0.556*** (0.110) (0.109) (0.023) Log distance from the village to the CBD in km -0.285*** -0.037 -0.184*** -0.136** (0.083) (0.091) (0.070) (0.066) Log number of workers at the cell level in 2014 0.309*** 0.295*** 0.211*** 0.142*** (0.039) (0.040) (0.026) (0.024) Ratio of urban population at the sector level 1.069*** 0.569*** (0.138) (0.081) Log of agricultural land at the cell level -0.068 (0.045) Share of commercial land at the cell level 1.171*** 1.518*** (0.451) (0.349) Log of residential land at the cell level -0.159*** (0.057) Year dummies included, but not reported Constant 5.160*** 5.932*** 3.574*** 4.436*** (0.671) (1.028) (0.264) (0.662) Number of observations 18,681 7,266 R2 0.114 0.144 0.235 0.273 note: *** p<0.01, ** p<0.05, * p<0.1 Is there an alternative to lease fees?? But no information on property characteristics (potential to use satellite imagery) Other variables to be included: distance to schools, distance to roads, etc.

Estimated total revenue Property tax simulation: using sales price (2013-2016) for residential land in urban Kigali Amount (US$) Only using residential parcels sold in 2013/16 Number of parcels = 14,821 Lease fee 765,593 Property tax (1%) 2,635,108 Property tax using estimated price (1%) 12,900,000 Estimated total revenue Number of parcels = 112,143 Total lease fee 6,742,827 PT (3*6.7 million) 20,228,481 PT (estimated price) Average lease fee rate as percentage of property value is 0.7% A flat rate of 1% increases tax revenue substantially Total property tax will be 3 times revenue from lease fees Back of the envelop calculation 3*6,742,827 = 20,228,481 What will happen if lease fees are replaced by property tax?

Simulation of property tax (1% of property value): residential land in urban Kigali

Conclusions There is a significant gap in the collection of land lease fees Conversion of prime land in urban Kigali could contribute in increasing revenue from lease fees. However, total conversion is needed for it to make meaningful impact. There is potential for property tax, but need to increase the predictive power of the hedonic price model Distance to tarred road Distance to school and health centers Extract basic attributes from high resolution satellite imagery, e.g. built up area, roof type, level of informality, etc.