copy the linklink copied!Chapter 2. Cross country comparison of taxation in agriculture
This chapter provides an overview of taxation in agriculture comparing general systems and special tax provisions for agriculture among 35 OECD countries and emerging economies. This cross-country comparison covers a wide range of tax areas: on income, profits and capital gains; on corporate income; on property; on goods and services and fuels; environmental taxes; and on incentives for research and development and innovation.
The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.
copy the linklink copied!2.1. General observations
The typology of concessions from the OECD 2005 report (OECD, 2005[1]) was used to structure this section, which offers comparative analysis between countries. Comparisons of tax provisions for agriculture are qualitative only and all the information is based on that provided by countries and contained in the country notes. Comparison of general tax rates come from the OECD tax database.
Where it has been provided, tax expenditure information is included, in particular to highlight the significant value of fuel tax concessions to the sector. Data on tax concessions included in the OECD database on agricultural support indicators (PSE database) have been included for the analysis of the fuel tax concessions.
As noted in the literature review there is limited transparency concerning the estimated costs of the differential tax treatment of agriculture in terms of revenue foregone. In many instances there is no information available to be able to quantify measures and make comparisons between countries.
Lack of transparency of tax expenditure generally remains an issue. Countries that provided information on revenue foregone from tax measures for this study were Australia, Belgium, France, Germany, Ireland, Korea, and the United States.
This is consistent with findings from Redonda and Neubig (2018[85]) who compared the tax expenditure reporting of 43 developed G20 and OECD countries against good practice criteria. From their analysis, the following nine countries are assessed as having comprehensive and publicly available tax expenditure reports: Australia, Austria, Canada, France, Germany, Italy, Korea, the Netherlands, and Sweden.
copy the linklink copied!2.2. Agricultural tax policy changes since the early 2000s
For many countries tax measures that target agriculture remain largely unchanged, for example in Australia, Canada, New Zealand, and the United Kingdom. It should be noted, however, that observations are limited to tax measures that target agriculture rather than tax reforms that countries have carried out more generally.
New or enhanced tax concessions for farmers have been enacted in some countries. For instance, as a result of its agri-taxation review undertaken in 2014, Ireland’s use of the tax mechanism has been boosted with many measures having been implemented or enhanced in 2015. Tax measures are being used to deliver policy objectives including to increase the productive use of land, assist with farm succession, increase investment, encourage the entry of young farmers to the sector, and to respond to income violability.
Reforms to the Mexican Tax Law in 2014 saw Mexico establish its Agriculture, Forestry and Fisheries Regime (AGAPE) offering tax exemptions and reduced rates to taxpayers engaged in the sector. Before that, farmers were included in a so-called Simplified Tax Regime for small taxpayers.
As a result of major reforms initiated in 2015, France has changed how taxable income of farmers is treated. It has replaced the estimation method of calculating taxable income (régime forfait collectif) with the micro-BA scheme in 2017. Farmers with average turnover of less than EUR 82 800 (USD 97 700) can reduce their taxable incomes by 87% for tax purposes. Although similar to schemes applying to other sectors, farmers have a higher rate of abatement, i.e. 87% as opposed to 72% and 34% for other businesses.
In Italy, tax reforms implemented in the last ten years have further lowered farm taxation compared with other sectors. In particular, the Stability Law 2016 exempts farmers from having to pay the regional tax on economic activities (IRAP) and the municipal tax on land property (IMU).
Other countries have removed special tax treatments previously available for the agricultural sector. As part of a wider reform of its tax system, in 2004 the Slovak Republic ended all the tax treatments for farmers so that now there are virtually no specific tax exemptions. From 2009 onwards, farmers in Lithuania have been required to pay personal income tax, which previously was not the case.
Greece has made changes to the way it taxes personal and corporation income from the agricultural sector. Up until 2013, personal income from farming was assessed using an estimation method, afterwards income was calculated like other business income but was taxed at a flat rate of 13% and since 2015 farm income faces the same progressive tax rates as other sectors. Additionally, income derived from agricultural co-operatives and producer groups was exempt from corporate income tax until 2012, then in tax year 2013 income from these entities was taxed at 26%, and since 2014 a reduced corporate tax rate of 13% applies (compared with the usual rate of 28%).
In terms of taxes on inputs, the Slovak Republic removed its tax rebates on fuel for agriculture in 2011, with Austria and the Netherlands taking this approach in 2013 (although the latter maintains a reduced energy tax rate for gas used for heating greenhouses).
In some countries, tax rates for agriculture may have changed to reflect the changes in general tax rates, but further investigation is needed. Prompted by the administrative ease of online tax filing, since the beginning of 2018 farmers in the Netherlands are now subject to the usual VAT rules.
To encourage farm transfers Norway changed how it taxes capital gains on farmland sold to people outside of the immediate family in 2016. This is now taxed at the standard rate of 22%. Prior to this, the combined capital gains taxes were up to 50%, seriously disincentivising the turnover of farmland.
Given the variability of farm income, countries have added tax measures for income smoothing. In 2019, both Austria and Belgium have implemented new carry back schemes to reduce farm income volatility. In 2019, France replaced two programmes, the deduction for unforeseen circumstances (la déduction pour aléas) (DPA) and tax deductions for investment (DPI) schemes, with an annual tax deduction for precautionary savings (déduction pour épargne de précaution) (DEP).
Implemented in 2018, the United States’ Tax Cuts and Jobs Act (TCJA) 2017 has made extensive changes to the federal income tax system. As highlighted in the literature review in Section 2, according to research by Williamson and Bawa (2018[8]), the biggest impact for farmers from the TCJA comes from the reduced marginal income tax rates reducing their effective income tax rate.
Several countries have put in place carbon or energy taxes to price CO2 emissions (Canada, the Netherlands, Switzerland, and the United Kingdom). Counter intuitively in some cases, these same countries retain discounted excise taxes on fuels used for agriculture.
In some countries (Netherlands and Sweden), nutrient taxes were eliminated because cost-effectiveness was deemed insufficient. Similarly, the Netherlands abolished a groundwater tax at the end of 2011 (Section 2).
copy the linklink copied!2.3. Overview of special tax provisions for agriculture by countries
From Table 2.1 below it is evident that all countries offer differential tax treatment for their agricultural sectors under their tax regimes. The following sections outline and discuss these tax measures in more detail.
Based on typology of concessions from the OECD 2005 report (OECD, 2005[1]) and the order of questions from the initial questionnaire the following kinds of differential tax treatments will be covered in the ensuing pages:
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Preferential treatment in taxes on income, profits and capital gains
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Ability to use cash accounting rather than accrual methods
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Simplified accounting with taxable incomes calculated on the basis of standard or notional income and expenses
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Taxes levied on income from real estate instead of actual farm activities
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Tax exemptions
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Special allowances
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Tax exemptions for small or low-income farmers
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Tax exemptions for subsidies
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Tax exemptions for income from particular products
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Tax exemptions for income from particular regions
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Tax exemptions for income from young farmers’ activities
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Tax exemptions averaging, income smoothing, deferrals and income offsetting schemes
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Valuation of livestock for tax purposes
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Special treatment of capital consumption estimation (depreciation) in calculating income, in particular accelerated rates or write-off
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Capital gains exemptions
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Preferential treatment in taxes on corporate income
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Preferential treatment in taxes on property
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Exemptions from paying land taxes
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Valuation of land for tax purposes that is lower than its market value
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Discounted tax rates for property taxes
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Discounts on land taxes to discourage land abandonment and encourage farming practices
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Exemptions from paying local or regional business taxes
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Transfer/acquisition and stamp duty concessions
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Inheritance and gift tax concessions
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Preferential treatment in taxes on goods and services and fuels
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Environmental taxes and related concessions in agriculture
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Tax incentives for R&D and innovation and the uptake by the agricultural sector
copy the linklink copied!2.4. Taxes on income, profits and capital gains, and related concessions in agriculture
The most common business structure in the agricultural sector is an owner-operator family farm (unincorporated business) which is subject to personal income taxation.
General tax rates from the central government on personal income vary by country, income level and number of marginal tax rates (Figure 2.1). For example, among countries with low marginal taxation rates (below 15%), Switzerland and Luxembourg have multiple rates, while the Czech Republic, Estonia, Hungary and Latvia have a unique rate, whatever the income level. Similarly among countries with a higher upper tax rate, Germany only has two rates, and the United Kingdom and the Netherlands have three, while Israel and Austria have seven rates. One might expect agricultural tax concessions to be associated to high general rates (and vice versa), but the evidence suggests that this is not necessarily the case. For example, Switzerland does not offer tax concessions to farmers because general tax rates are very low. At the same time, Czech farmers benefit from income tax concessions in spite of low income tax rates. At the opposite end of the scale, Dutch farmers pay the general tax rate, which is relatively high and do not benefit from personal income tax concessions.
Note: See thresholds for marginal rates in Table A B.1.
Source: OECD (2019), OECD Tax Database, http://www.oecd.org/tax/tax-policy/tax-database.htm (extracted April 2019).
To enable cross-country comparisons, the main forms of concessions for farmer’s personal income taxation are discussed in the subsections below and summarised in Table 2.2. It is evident from the comparison of Table 2.2 and Table 2.3 that tax concessions are more frequent under personal income tax regimes (only two countries report no preferential treatment) than under corporate income tax regimes (18 of the 35 countries report no preferential treatment). While these concessions generally reduce the tax base and thus payment of farm households, some aim to alleviate specific issues, such as reducing income variability, compensating for higher costs in certain regions or for young farmers, reducing the administrative burden for small farms by allowing cash accounting, and exempting (part of) capital gains to facilitate farm transfers. However, as noted in OECD (2005[1]), low income problems could be more effectively addressed using the general tax and social security system. This would require that all of a household’s actual income is known, but due to sector specific exemptions many farmers fall outside of the tax system altogether. Furthermore it is generally observed that households supplement farm income with income from other sources. This is another argument for actual income from all activities being registered via the tax system.
Ability to use cash accounting rather than accrual methods
Frequently, countries offer special tax treatment for farmers by allowing them to use cash accounting (or not requiring them to keep accounts) when other businesses are generally required to use the accrual method of accounting for tax reporting. Cash accounting recognises revenues and expenses at the time physical cash is actually received or paid. This gives farmers flexibility on when to report revenue and expenses for tax purposes. Farmers with turnovers below certain thresholds in Canada, France, Germany and the United States are able to use cash-based accounting. It should be noted that the thresholds are typically high. In Germany, the threshold is turnover less than EUR 600 000 (USD 708 100), making one-third of German farmers eligible in 2016. In the United States, farm sole proprietors, farm partnerships, small business corporations and corporations with gross cash farm income receipts of less than USD 25 million are able to use a cash-based method.
Simplified accounting with taxable incomes calculated on the basis of standard or notional income and expenses
Keeping accounts is not necessary for farmers when calculations of taxable income from agricultural activities are based on valuation or estimation methods rather than being determined by actual income. While simpler, this system does not provide farmers with reliable information on which to base business decisions. As noted in (OECD, 2005[1]), this special approach for calculating taxable farm incomes dates back to when bookkeeping in agriculture was rare. Although now in many countries taxing farm income is treated in the same manner as taxing other self-employed, benefits from the simplified methods are still enjoyed by a significant number of farmers within the OECD area.
Taxable income is calculated on the per unit basis set by the relevant authorities. Per unit bases are usually lower than market prices (lower than actual – real income). Presumptive income estimations lessen the tax burden for farmers by reducing administration through not having to keep accounts and by reducing the tax base. OECD countries offering this tax calculation to their farmers are: Austria, Belgium, Chile (offered to low-income farmers as well as to miners and transporters), Croatia, Czech Republic, France, Germany, Norway, Slovenia and Spain. A significant number of farmers are using estimation methods. For example, 80% of farmers in Belgium, more than 95% of farmers in Slovenia, and 94% of farmers in Spain.
Eligibility for using simplified accounting via an estimation method can be restricted to small or low-income farmers. For instance, in Germany, farmers with less than 20 hectares or 50 livestock units are eligible to use a flat rate calculation.
Similarly, expenses can be estimates applied as flat rates to determine taxable incomes. In Austria, the concept of “assessed value” on the productive capacity of a farm determines farmers’ eligibility to use cash accounting and flat rates. Farms with an assessed value of less than EUR 75 000 (USD 88 500) have taxable incomes of 42% of that assessed value, while farms with an assessed value between EUR 75 000 and EUR 130 000 (USD 153 400) can deduct 70% (or 80% for livestock activities) from taxable income as expenses.
Taxes levied on income from real estate instead of actual farm activities
Income from farming activities is sometimes not even calculated on the activity itself. In Italy, income from agriculture and forestry is defined as income from real estate properties. Income is determined by registered assigned yields (on a cadastral basis) and not on actual yields. Yields in the land register are estimated as average values of land and are very low. This results in a preferential tax treatment. In Poland, 95% of farmers are exempt from paying income tax and instead pay agricultural property tax calculated on area multiplied by the value of a set number of hundredweights of rye per hectare.
Tax exemptions
Exemptions for tax purposes are common in OECD countries’ treatment of agriculture. Special allowances can be granted to farmers that reduce their tax bill. Exemptions are also granted on income from: small and low income farmers, subsidies, products, unfavourable regions, small or young farmers starting out. These are examples whereby the tax system is being used to address low income households via sector specific tax measures.
Special allowances
In Norway, farmers with income from agriculture of up to NOK 90 000 (USD 9 800) can deduct 100% of this from their taxable income. Income above NOK 90 000 can be reduced by 38% until the maximum tax deduction amount of NOK 190 000 is reached, at an income level of NOK 353 000 after which the tax deduction is held constant at NOK 190 000 giving a maximum tax saving of NOK 42 000 (USD 4 580). German farmers can deduct EUR 900 (USD 1 062) (or EUR 1 800 (USD 2 124) for married farmers) as an allowance if gross income is below EUR 30 700 (USD 36 232) (or EUR 61 400 (USD 72 463) for married farmers).
Tax exemptions for small or low income farmers
Tax exemptions for small or low income farmers are common. In Hungary farmers earning less than HUF 600 000 (USD 2 220) are exempt from paying tax. For more profitable but still small-scale Hungarian farmers, there are various standard cost taxation options offered. These measures reduce the tax burden for all small-scale agricultural producers who earn less than HUF 8 million (EUR 29 600) and who account for 89% of all farmers.
Farmers earning less than EUR 3 000 (USD 3 541) do not pay income tax in Latvia and in Croatia farmers are only taxed if their earnings are more than HRK 80 500 (USD 12 817). Mexico offers tax exemptions and reduced tax rates and farmers earning less than USD 64 341 are exempt from personal income tax.
Tax exemptions for subsidies
Concessions in the treatment of agricultural subsidies in income tax exist in countries covered in this report. In Belgium, EU subsidies are taxed separately at a reduced rate of 12.5% for direct support payments and 16.5% for other EU support measures. Subsidies paid to farmers under the Rural Capitalisation Incentive (ICR) in Colombia are not included as income for tax purposes. Coupled aid above EUR 12 000 (USD 14 162) is included as income as is all basic aid and green payments in Greece, but investment support and other Pillar I payments are not. Latvia exempts all state provided agricultural subsidies and all EU agricultural and rural development support, as does Lithuania. While in the Netherlands, payments for woodland and nature programmes are excluded for tax purposes.
Investment support granted in Norway for farm building construction projects in less favoured areas are included in the book value of the asset providing the basis for depreciation. Spain excludes from the calculation of taxable income certain EU agricultural subsidies (some of which are no longer granted). Those included are then adjusted by a corrective multiplier applied to all farm income effectively reducing the tax paid by Spanish farmers on the subsidy.
In Japan, crop farmers receiving direct payments under the Law on Farm Income Stabilisation introduced in 2007 are allowed to accumulate their payments and deduct them from the declared farm income. Accumulated payments must be used to expand farmland or farm assets within five years. In Croatia, self-employed farmers may deduct from the tax base any employment incentives, state aid for education and training, and incentives for research and development.
Tax exemptions for income from particular products
Tax exemptions for the income from specific products is another concession. The support this provides has implications for production distortions and product specific subsidies. For example, in Korea income from grains and other food crops are exempt from taxation and income from plant cultivation is not taxed if the revenue is less than KRW 1 billion (USD 862 890).
In some instances, the production of certain products is liable for income tax when other farm systems are exempt or taxed differently. Farms in Poland producing the following products are liable for income tax: greenhouse production, poultry, mushrooms, bee keeping, silkworm production. As a result, only 2% to 5% of all the farms in Poland are liable for income taxes.
Tax exemptions for income from particular regions
Income tax exemptions can be applied to farmers in certain regions. Farmers (and all other tax payers) from regions in Croatia experiencing difficult economic conditions can benefit from tax reliefs (50% exemption rate in Group I areas and complete exemption from personal income taxes for taxpayers from the Vukovar region).
Tax exemptions for income from young farmers’ activities
To facilitate structural changes in France, beneficiaries of the young farmer settlement aid are able to reduce their taxable incomes for the first five years they are farming (this tax option also applies to tradespeople and craftspeople who are starting out). Ireland offers 100% stock relief for income tax for certain young trained farmers to enable investment in livestock.
Income averaging, income smoothing, deferrals and income offsetting schemes
Income averaging, income smoothing, deferrals and income offsetting schemes are popular tax tools used by OECD countries to support producers’ income risk management.
The following countries have income averaging measures for their farmers: Australia, Canada, France, Germany (introduced in 2016), Ireland, New Zealand, Norway (available only for furskin production which will be banned from 2025), the United Kingdom, and the United States. A similar system exists in the Netherlands but it is not specific to agriculture.
Australia and Ireland have recently made changes to their programmes to enable flexibility. From 2017, Australia allowed farmers who opted out of the scheme 10 years ago or earlier to re-join. Farmers in Ireland have the flexibility to opt out of averaging for a single year, and from 2019 onwards the 50% of Ireland’s farm households that have off-farm income can join the scheme.
Australia’s popular Farm Management Deposit (FMD) scheme is an example of a tax deferral measure where taxation is partially put off to a later period, improving liquidity and lower tax progression. Under the scheme, farmers can claim deductions for farm income deposited in an FMD account in the year it is earned with the deposited FMD monies included in taxable income in the year it is withdrawn. As of June 2019, under the FMD there were 53 790 accounts with AUD 6.8 billion (USD 4.6 billion) deposited. In 2016, Australia doubled the maximum limit on deposits to AUD 800 000 (USD 597 615).
As of 1 January 2019, France has implemented its new annual tax deduction for precautionary savings scheme (DEP). Similar to Australia’s FMD scheme, farmers can make tax deductions provided that the income deducted is placed in a savings account (although unlike Australia’s scheme French farmers are only obligated to deposit between 50% to 100% of the money deducted). Savings can be used in the following ten years on all business expenses, at which point they become taxable.
In the event of exceptional circumstances in some countries, tax deferrals measures are available for farmers. For example, farmers in Australia, Canada, Ireland and the United Kingdom can defer income received from the destruction of livestock as a result of livestock disease. In Canada, income from the sale of livestock as a result of a climatic event can be deferred, as can income from the sale of early shearing double wool clips in Australia. In Japan, farmers can defer losses of agricultural assets due to a natural disaster for three years.
Policies of offsetting losses, either carrying forward or back, to reduce farm income volatility are offered to farmers in Canada, Costa Rica (for two years longer than non-agricultural businesses), Japan, and Korea. Austria and Belgium have recently implemented offsetting measures also.
Valuation of livestock for tax purposes
Tax concessions are provided in the valuing of livestock and changes in livestock numbers over a tax period. In New Zealand, farmers can use one of two methods for tax purposes – either the natural standard cost method (a cost of production approach) or the herd scheme (whereby livestock are capital assets and only changes in livestock numbers are assessable income not changes in stock values). The United Kingdom allows for livestock kept for the sake of the product (e.g. milk or eggs) or offspring (breeding livestock) to be treated as capital assets rather than trading stock, meaning farmers can benefit in terms of allowable deductions.
Stock relief is offered in Ireland whereby the value of the trading stock between the beginning and the end of an accounting period is reduced by 25% to 100% and then deducted from taxable income.
Under certain conditions, income generated by the sale of livestock is not subject to income tax and is instead taxed as capital gains or losses in the United States. To be eligible livestock must be held for a minimum amount of time (the required holding period).
Special treatment of capital consumption estimation (depreciation) in calculating income, in particular accelerated rates or write-off
Accelerated depreciation and write-offs are offered by governments to promote capital investment in certain areas such as improvements towards environmental sustainability. The following countries allow accelerated depreciation or write-offs of certain on-farm expenditure: Canada, New Zealand (for farm improvements), and the United States. Ireland offers capital allowances for tax purposes in lieu of a deduction for the depreciation of certain expenditures on farm buildings, fences, farm roadways and other works.
Farmers in some countries are able to deduct certain costs from income taxes, which under general rules would be depreciated. In New Zealand, costs associated with planting trees for soil erosion can be deducted from income tax, as can expenditure to prevent erosion in the United States. Costs associated with breaking in new land in Norway can be deducted, and in Slovenia farmers can claim 40% of the amount invested in agricultural machinery and investments in plantations.
Costs for developing certain farm assets in the tax year when the costs are incurred can be deducted in the United States. Examples of pre-productive development costs include raising dairy, draft, breeding, or raising livestock to their age for mature use, caring for orchards and vineyards before they are ready to produce crops, and clearing land and building long-term soil fertility by applying fertiliser.
Capital gains exemptions
Many countries offer special tax treatment for capital gains generated in the agricultural sector. To encourage farm succession and restructuring, and ultimately the productivity of the sector, capital gains are either excluded from income taxes in some countries, or else only a proportion is taxed. Farms are sometimes valued in such a way that the gain is zero. As with all tax instruments economy-wide these special tax concessions can actually reduce agricultural output when speculators purchase farmland as part of their wealth maximisation strategies through tax offsetting, increasing land values.
Capital gains on farmland are exempt from taxes in Korea and in the Netherlands capital gains are exempt from personal and corporate income tax (under certain conditions). In Hungary and Latvia, the capital gains tax exemptions are conditional on the farmland remaining in agricultural production.
Frequently the special treatment is linked to the land being sold to a descendant who will continue to farm the land, as is the case in the Czech Republic. Canada excludes a proportion of the capital gains income when the farm is sold to direct descendants, provides averaging capital gains income from farm transfers over a number of years, and allows capital gains to be offset by restricted farm losses. Ireland also offers a capital gains tax relief scheme.
Some countries exclude a proportion of the gain from capital gains tax. In Japan this approach is used to incentivise farmland consolidation; eligible land transfers receive a special tax deduction of JPY 8 million (USD 72 400).
Capital gains in Switzerland are automatically zero when farmland is sold to a family member at a price set at the capitalised earnings value (a price much lower than the real estate market price).
copy the linklink copied!2.5. Taxes on corporate income and related concessions in agriculture
Increasingly, farming businesses are organised as corporate businesses, and thus are subject to corporate taxes on profit. In some countries, farm business can also be organised as agricultural cooperatives and producer organisations. Tax rates on corporate profits range between 9% in Hungary to 48% in India. However, most countries tax corporate profits at rates between 20-30% (Figure 2.2).
There has been a general decline in corporate tax rates of profit since 2000, when more than half of countries considered had rates equal to or above 30%. Chile is the only country where tax rates increased from 15% to 25% between 2000 and 2019, but additional countries increased tax rates between 2010 and 2019 (Greece, Iceland, India, Korea, Latvia, Portugal, the Slovak Republic, and Turkey).
Notes: See Table A B.2.
* 2018 for non-OECD countries.
1. Basic combined central and sub-central (statutory) corporate income tax rate given by the adjusted central government rate plus the sub-central rate.
2. Netherlands: applies to taxable income over EUR 200 000.
Source: OECD (2019), OECD Tax Database, http://www.oecd.org/tax/tax-policy/tax-database.htm (extracted August 2019).
Various countries offer special corporate income tax treatments for agriculture structures organised as corporate entities (Table 2.3). These are less widespread and diverse than concessions on personal income tax for farmers. For example, while the flexibility to use cash accounting for taxation purpose is frequent for family farms, only Austria and the United States allow companies producing agricultural goods to use cash accounting, which deviates from the usual tax treatment of companies.
The corporate income tax concession may vary depending on business size, location or activity. For example, Mexico applies tax exemptions and reduced tax rates for agricultural corporations depending on their scale under its Agricultural, Forestry and Fisheries Regime (AGAPE). To encourage regional development, new businesses established in one of the Zones Most Affected by Conflict of Colombia benefit from tax relief, while corporate farms located in Croatian less favoured areas benefit from lower tax rates. In Korea, income earned from crops for human consumption is exempt from corporate income tax (this product specific tax concession is aimed at rice).
Preferential taxes or exemptions are applied on income from agricultural cooperatives in the following countries: Austria (partial tax exemptions), Israel (tax holiday for five years), Italy (exemptions), Japan and Lithuania (reduced tax rates). In Greece, agricultural co-operatives and producer organisations are taxed at a rate that is half of the usual corporate income tax rate.
copy the linklink copied!2.6. Taxes on property and related concessions in agriculture
Land is the biggest asset of farmers in comparison to other similarly sized businesses. As such, capital taxes can have a significant impact on farmers. In recognition of this, almost all OECD countries provide tax concessions on annual property taxes for farmers. Special tax treatment is also provided for the transfer of farm properties by sale or inheritance to family members to address structural issues associated with entry to and exit from farming (Table 2.4). As highlighted in (OECD, 2005[1]) the relative effectiveness of tax measures to encourage structural change may be offset by the resultant increases in land prices making it more difficult for new entrants, apart from those from farming families, to enter the profession. Moreover, farmland may be purchased as part of wealth maximisation strategies for inheritance tax. In such cases farms may be run as hobby farms or lifestyle units. All these tax treatments on land are capitalised into land values.
Land taxes are usually set and levied by municipal governments within bounds directed by central governments. Farm land location can influence the coefficient applied by the municipality to the valuation of agricultural land determined by the cadastre (or land registry). Therefore, tax rates and rules applying to the sector can vary across a country and within regions.
To illustrate the complexity, in the case of Canada different provinces take the following different approaches to farmland taxation: exemptions of some properties, such as farm dwellings and farmland; assessments of farm properties that are less than the fair market, actual value; rebates by provincial governments on some of the taxes paid by farmers; deferral of taxes due unless the use of the farmland changes to non-farm use; and lower maximum tax rates that can be paid by the agriculture sector.
To enable cross-country comparisons, the main forms of concessions for property taxation are discussed in the subsections below.
Exemptions from paying land taxes
Farm land in the following countries is exempt from land or property taxes: Australia, Canada (in some provinces), Finland, Italy, Japan, Slovenia (except agricultural buildings and farm housing), Sweden, and the United Kingdom.
In the following countries, buildings used in agricultural production are exempt from property or land taxes: Australia, Canada (in some provinces), France, Hungary, Latvia, Lithuania, the Netherlands (greenhouses), Norway, Poland, Slovenia, and Ukraine.
Exemptions can be production or crop specific. In the Czech Republic, arable land, hop gardens, vineyards, fruit orchards and permanent grasslands may be exempt from taxes or pay two to five times less tax.
Valuation of land for tax purposes that is lower than its market value
Alternatively, farmers in some countries pay taxes on the basis of a lower valuation of the land than its market value. Often the value is the cadastral value of land. This is the case in the following countries: Austria, Belgium, Chile, Costa Rica, Canada (in some provinces), Denmark, Japan, Latvia, Switzerland and the United States. In 2018, foregone federal estate tax revenue from the “special use valuation” programme for farmers in the United States is estimated as being USD 59.7 million.
Discounted tax rates for property taxes
Farmers are charged reduced property tax rates on farmland and farm buildings in the following countries: Belgium (where there are also tax credits for small properties), Canada (in some provinces), Chile, Colombia (applying to small rural properties), Czech Republic, Denmark, Estonia (landowners), France (agricultural land receives a 20% reduction on the property tax on non-developed land), Korea (where the property tax on farmland is set at a very low flat rate tax instead of the usual progressive tax), Slovak Republic (on agricultural buildings) and Ukraine.
Chilean authorities assess the value of agricultural land. A reduced tax rate is charged on agricultural land in comparison to other land. Increases in land taxes paid by farmers as a result of a re-assessment of the land values cannot exceed 10% cap.
Discounts on land taxes to discourage land abandonment and encourage farming practices
Exemptions or discounts on land taxes are sometimes offered for not abandoning farmland. Landowners in Korea do not pay property taxes if they belong to the farmland pension programme and are actively farming their land (until 2021). In Japan, taxes are used as incentives for landowners to lease land through a Farm Land Bank. From 2017, leasing landowners pay only half the real estate tax while tax rates on idle land that is not cultivated or leased out have been increased by 1.8 times. Lithuania offers a discount of 35% on land taxes for cultivated land while discounts are withheld if any abandoned land areas are found within the land holding.
To encourage certain farming practices, some countries offer discounts on property taxes. Soil conservation practices earn farmers in Costa Rica a 40% discount on land taxes. In the Czech Republic, no property taxes are paid on reclaimed agricultural land for five years and for 25 years on reclaimed forest land. Land in conservation areas is excluded from taxes in Latvia.
Young farmers can be charged reduced property taxes for time limited periods while they are starting out. In France, young farmers are eligible for a 50% rebate on property tax on non-developed land for the first five years. Land acquired to establish a new family farm is exempt from paying property taxes for three years in Lithuania.
Exemptions from paying local or regional business taxes
Farmers in France and Italy are exempt from paying other local or regional taxes or company property taxes. In Greece, agricultural land is excluded from calculations of the supplementary tax paid by taxpayers with property and buildings valued over EUR 200 000.
Transfer/acquisition and stamp duty concessions
Purchases of farms and agricultural buildings are exempt from paying the usually applicable transfer/acquisition taxes or stamp duties in many countries. The exemption is often conditional on ongoing agricultural production in order to encourage business continuity.
The following countries do not charge taxes on transfers: Colombia, Greece, Hungary, and the Netherlands (conditional on the land remaining under commercial cultivation). In France and Japan, reduced or discounted tax rates apply for the acquisition of farmland.
Transfer taxes can also be charged on agricultural land valued at a price lower than the market price. To support the continuation of family farm enterprises in Austria, the tax base for transfers is the lower assessed value (i.e. the farm’s capitalised value which is lower than the farm’s likely annual income) taxed at a concessional tax rate.
Exemptions or reduced rates can apply when agricultural land is transferred to a family member or professional farmers who will run the farm business. Such special treatment is offered in France, Ireland, Italy, Korea, Poland and Spain.
In France, Finland and Ireland, young farmers pay reduced transfer taxes or are fully exempt.
Farm land acquired in Korea by a person who is taking up occupancy in a rural community as an urban returner is charged 50% less on the acquisition tax.
In Slovenia transfers of farmland within the agrarian bond operations are exempt from transfer taxes, and in Korea purchases of farmland by agricultural corporations for farming purposes within two years of the registration of the incorporation are also exempt until 2019.
Inheritance and gift tax concessions
Countries exempt or apply reduced inheritance taxes rates on farms inherited by family members usually on the condition that the farming activities continue. The policy objectives of these measures are to ensure that farms remain viable and undivided. This approach is taken by the following countries: France (partially exempt donation or inheritance charges if the rural property is leased on a long-term basis), Hungary (only 50% of regular inheritance tax shall be paid, or 25% if the heir is a registered farmer), Ireland, Korea (depending on the relation between the heir and the donor), Poland, Slovenia (exempt if the farm is transferred to another farmer), the United Kingdom and the United States (where a progressive tax rate is applied to inheritances of all family businesses above the threshold of USD 11.18 million as amended (and doubled) by the TCJA).
In Korea farm assets are excluded from inheritance tax with a maximum deduction of KRW 1.5 billion (USD 1.36 million) from the taxable value of inherited property, when inherited by direct descendant who is a farmer and who will continue farming the land for up to five years.
Valuation of agricultural land can also be lower than the market price, creating a preferential tax base on which inheritance taxes are levied. This approach is used by the following countries: Japan, Finland, and the United States (the value of farmland for inheritance tax purposes is its “use value” which is 40%-70% lower than the fair market value). Market values of agricultural properties in Ireland are reduced by 90%. Discounts depend on fulfilment of the conditions that the beneficiary is a farmer with an agricultural qualification or is already farming the property at least 50% of their normal working time, and who commits to farm the inherited land on a commercial basis.
Deferral of taxation is allowed for farmland subject to inheritance taxes in Japan, while in Ireland, lower interest rates are charged on instalment payments for the Capital Acquisition Tax due on inheritances of agricultural property.
copy the linklink copied!2.7. Taxes on goods and services and fuels and related concessions in agriculture
In almost all countries, standard value added and general tax rates range between 8% and 27% in Hungary (Figure 2.3). The average tax rate in EU Member States is 22%, while for other OECD countries covered, the average rate is lower at 15%. Canada combines a federal sales tax of 5% and provincial taxes, while in the United States, sales taxes only apply at the state or local levels, the total rate varying between states from zero to 10%. Reduced rates are frequently used for some products, in particular agricultural and food products, which are considered as basic necessities. A few countries also apply reduced rates in specific region (Table A B.3).
Zero or special reduced Value Added Tax (VAT) rates for agricultural outputs or inputs are offered by all countries apart from Chile, Denmark (standard rate 25%), Estonia (standard rate 20%), Japan (standard rate 10%) and New Zealand (standard rate 15%) (Table 2.5).
VAT is often either not levied or levied at reduced rates on basic foodstuffs. Reduced prices of agricultural outputs can be beneficial to farmers via increased demand, but consumers are the main beneficiaries and the target for this policy measure.
Notes: See Table A B.3. * See country notes in Box 2.A2.1 of the source.
1. Unweighted average.
Source: Annex Table 2.A.1 VAT rates from OECD (2018[86]), (last updated 11 December 2018).
A reduced or zero VAT on farm inputs is offered in many countries. Table 2.6 details the VAT levels charged in EU Member States on pesticides and fertilisers. This differentiated approach to inputs may lead to policy inconsistencies which is highlighted by an analysis included in the literature review. For instance by replacing the zero VAT rate currently charged on some fertiliser products in Ireland with the standard VAT of 23% fertiliser consumption would decrease by 10%. The need for a consistent mix of policies is discussed further under fuel taxes.
In many countries, farmers are not obligated to be VAT registered. With no need to account for VAT, submit VAT returns or make claims for VAT paid, farmers’ tax administration compliance costs are reduced. To compensate non-VAT registered farmers for VAT paid on inputs purchased for their businesses which they are unable to claim, most EU Member States implement flat rate regimes as is provided for by the European Commission.1 Under this scheme, non-VAT registered farmers are able to add a certain percentage on to the prices of their agricultural products sold to VAT-registered businesses, or farmers are compensated by a lump sum paid by the State. EU Member States using the flat rate scheme and the percentages added to different products are listed in Table 2.7. Noteworthy is Italy, which has eleven flat rate charges for different products.
Although most countries restrict farmers’ entitlement to use the flat rates by income, it should be noted that a significant number of farmers in Europe are using this simplified method. Ninety per cent of farmers in Spain operate under the Special Regime for Agriculture, Livestock and Fisheries (REAGP) with farm incomes of below EUR 250 000 (USD 295 000). These farmers are able to charge a flat rate on their products. In Germany, 65% of farmers are using the flat rate (which is believed to be advantageous), and in Poland over 60% of farmers are not VAT registered and so use the scheme.
As of 1 January 2018, the Netherlands discontinued the flat rate regime for farmers. Online tax filing means that scheme’s rationale of easing tax administration for farmers is no longer justified.
In the United Kingdom there are two VAT regimes depending on whether a farmer is VAT registered or not. Farmers who are not VAT-registered can use the Agricultural Flat Rate Scheme and charge a flat rate of 4% on their sales to VAT registered customers. A simplified administrative option is also available for VAT-registered farmers who may participate in the Flat Rate Scheme, which includes sectoral flat rates for agriculture. This is available to all VAT-registered businesses with turnover under GBP 150 000 (USD 200 000).
Latvia introduced a VAT reverse charge in 2016 whereby the VAT on cereals and oilseeds processed for consumption is paid by the recipient of the cereals. From 1 January 2019, non-VAT registered farmers in Ireland can claim VAT paid on construction of farm buildings, drainage, and land reclamation.
Fuel tax concessions
Despite being counter to sustainability goals, reductions on excise taxes for fuels used in agricultural production activities are applied in almost all the countries surveyed. Often times this is the largest tax concession granted to the sector. From information provided by countries, in Italy the tax saving derived from reduced tax rates of fuel in the agricultural sector represented 40% of total agricultural tax expenditure (in 2017) while in France these concessions represented 60% of tax expenditures (in 2018).
Taking the form of tax expenditures benefiting agricultural users of fossil fuels these policies are enduring and are not subject to the same scrutiny or frequency of review as budgetary transfers (OECD, 2018[44]). In OECD (2005[1]) the point is made that the history of tax concession measures should be assessed to test the logic of their continuation, highlighting that the lowering of fuel duties in the United Kingdom was initiated during the Second World War to increase production.
Politically these measures are extremely difficult to remove but some countries have. Since 2013, the agricultural sector in Austria has been charged the regular mineral oil tax. The Netherlands also removed its policy of differential tax rate on diesel fuel in 2013 due to the negative environmental impact of the policy which was also considered as being too costly to monitor to prevent fraud. These countries are among only a handful of EU Member States to have taken such an approach. In January 2019, the Slovak Republic reinstated fuel tax rebates for farmers a policy previously removed in 2011. In Switzerland, the refunds of the mineral oil tax is not based on real fuel consumption but calculated as a lump sum based on fixed production indicators whereby the marginal costs of fuel consumption are not reduced.
International pressure to reform fuel subsidies is mounting with initiatives being driven by the G20 and APEC. Fuel subsidies and their measurement are the focus of extensive work being undertaken in the OECD to increase the transparency of countries’ policies and to promote fossil fuel subsidy reform.
The OECD’s Fossil Fuels Support and Tax Expenditure database estimates countries’ budgetary transfers and tax expenditures benefiting producers and consumers of fossils fuels. The database includes agricultural-specific information for some of the countries covered by this report.
Following on from the G20 countries commitment in 2009 to “rationalise and phase out over the medium term inefficient fossil fuel subsidies that encourage wasteful consumption” six countries have voluntarily completed G20 Peer Reviews of inefficient fossil fuel subsidies. These reviews are chaired and facilitated by the OECD. To date the reviews have contained agriculture sector specific recommendations.
The PSE database captures agriculture fuel tax concessions for most countries. PSE data for fuel tax concessions appears to be missing or may be incomplete for the following countries covered by this report: Belgium, Chile, Croatia, Finland, Korea, Lithuania, Mexico and Spain. Working with countries the OECD will investigate the inclusion of information in order to improve consistency.
Using information from the PSE in absolute terms (in USD) the countries offering the largest tax fuel rebates to their agricultural sectors in 2018 are France, Italy, the United States and Germany (Table 2.8). The amount of rebates has, however, decreased in the United States, while it has increased in France, Italy and Germany. Moreover, some countries (Austria, Greece, Mexico, the Netherlands, the Slovak Republic and Spain), which had or introduced fuel tax concessions for agriculture in the mid to late 2000s, no longer offered them in 2018 (although as of 2019 the Slovak Republic has reintroduced agricultural fuel tax concessions). In Japan, fuel tax rebates remain very small.
Relative to the size of the sector, fuel tax rebates for agriculture have significantly increased in the last decade in Latvia reaching levels well above those in other countries. Fuel tax rebates account for over 1% of the total value of agricultural production in France, Norway, Slovenia and Italy, although they have decreased in Norway (Figure 2.4). Overall fuel tax rebates have increased relative to the size of the agricultural sector in half of the countries that have implemented some concessions over the period 2000-18, and have decreased in the other half.
Note: Eurostat agricultural output value at producer price for EU member States.
Source: OECD (2019[87]), (extract September 2019).
copy the linklink copied!2.8. Environmental taxes and related concessions in agriculture
About half of the countries in Table 2.9 use environmental taxes and related concessions in agriculture to encourage a more sustainable management of natural resources, or the adoption of more environmentally-friendly farm practices.
In the following countries taxes are charged for the use of water: Czech Republic, Latvia, Poland and Slovenia. Studies included the literature review are inconclusive about the impact of taxes on reducing extractions. Water pollution is taxed in Belgium, Czech Republic and Spain.
Estonia, France and Latvia charge farmers for the use of resources generally. Permits for pollution emissions can production-systems specific for example in Lithuania poultry and cattle producers are taxed whereas in Poland poultry and pig farmers are charged. The Flemish government applies a manure levy on the amount of manure produced by farms.
Denmark, France, Norway and Sweden apply pesticide taxes. As highlighted in the literature review the relative effectiveness of these measures in reducing pesticide use is limited, however Norway’s scheme of taxing pesticide brands according to their environmental risks has reduced the use of more harmful products. Denmark has subsequently changed its pesticide tax measure and adopted a similar approach to Norway after finding that despite taxing pesticide at the highest levels in the world, application rates doubled.
Users of fertilisers in Denmark are taxed on the product’s nitrogen content, although many farmers are exempt. From the literature review it is apparent that although fertiliser taxes can be a useful tool in reducing pollution the optimal level of taxes needs to be set relatively high and success is dependent on the policy mix.
One critical element is ensuring policy consistency. For example from Section 2.7 it is apparent that in many countries no VAT or a reduced VAT is charged on farm inputs which include fertilisers and pesticides. From Table 2.6 (Section 2.7) the following countries included in this report offer discounted VAT rates for these products: Austria, Belgium, France, Germany, Ireland, Italy, Poland, Slovenia and Spain.
Fees are charged for removing land from agricultural production in the Czech Republic, whereas in Spain a tax is levied on the underutilisation of agricultural land. Landowners in Australia, Canada and Colombia may benefit from tax deductions by participating in conservation or easement programmes or in the case of Colombia by maintaining natural forest.
Belgium and Lithuania apply levies on packaging used in agriculture. In France there is a tax credit for organic producers.
copy the linklink copied!2.9. Tax incentives for R&D and innovation and the uptake by the agricultural sector
R&D tax incentives include income tax deductions or tax credit for investment in R&D activities, tax deductions for income from R&D activities (e.g. patent box), and reduced labour tax or social security contributions for researchers.
Almost all countries use tax incentives to stimulate research and development (R&D) activities in the private sector, with only six of the 35 countries covered in this report not using any (Costa Rica, Croatia, Estonia, Finland, Germany and Switzerland) (Table 2.10).
The tax provisions are not specific to agriculture-related R&D, but can be used by farm input suppliers to generate innovation for agriculture, and by food processing companies, with indirect benefits for primary agriculture through the value chain. Many countries reflected that there was a low uptake by the agricultural sector of available R&D tax credits. In the Netherlands for example, these provisions are mainly used in the horticultural sector (OECD, 2015[68]).
In 2015, support from tax incentives accounted for over three-quarters of government support for business R&D in the Netherlands, Australia, Ireland, Japan, Lithuania and Canada, and for over half of government support in a majority of the countries included in Figure 2.5. The lowest shares of support for business R&D through tax incentives are found in Greece, New Zealand and the Slovak Republic. The United States is also among the countries, where support for business R&D is mainly through direct support (about three-quarters).
In the last decade, support for business R&D through tax incentives increased in almost all OECD countries and emerging economies for which the OECD collects data (OECD, 2018[88]; OECD, 2019[87]). Moreover, the share of tax incentives in government support for business R&D increased in almost two-thirds of the countries covered between 2006 and 2016 (Figure 2.5).
Tax credits or reduced tax rates (either on income or, in some cases, on labour costs) theoretically incentivise innovation by reducing the relative cost of that activity, but the extent to which this occurs is highly dependent upon the policy’s design (Section 3.2). The generosity of R&D tax incentives is also related to business characteristics, in particular whether the firm is making a profit (OECD, 2018[88]).
An approach to measure the potential incentive effect of tax relief for R&D is to estimate for representative firms the expected impact of tax incentives on the after tax cost of R&D for the marginal unit to spend on R&D. This implied tax subsidy rate is defined as 1 minus the B-index, a measure of the before-tax income needed by a “representative” firm to break even on USD 1 of R&D outlays (Warda, 2001[90]).
Note: For more information on R&D tax incentives, see http://oe.cd/rdtax, and for general notes and country-specific notes for this R&D tax incentive indicator, see http://oe.cd/sb2017_notes_rdtax.
2016 is replaced by 2015 for Australia, Austria, Belgium, Brazil, Denmark, France, Greece, New Zealand, Slovenia, United Kingdom, by 2014 for Iceland and Brazil, by 2013 for the United States. 2006 is replaced by 2007 for Denmark, Korea, Netherlands, New Zealand, by 2008 for Brazil, Chile, Turkey, by 2009 for People’s Republic of China (China), and by 2011 for Greece.
Source: OECD (2019[89]), (extracted in September 2019).
Figure 2.6 presents OECD estimates of implied tax subsidy rates for “representative” large firms and SMEs according to whether they can claim tax benefits against their tax liability in the reporting period. There are large variations across countries in all scenarios. For large profitable or loss-making firms, the highest rates are estimated in France, Portugal and Chile. Among other countries which rely predominantly on tax incentives to support business R&D, implicit tax subsidy rates are relatively high in Ireland, but much lower for large firms in Australia, Canada, the Netherland and Japan, for example.
According to OECD estimates, profit-making firms benefit from higher implied tax subsidy rates than loss-making firms. Moreover, in countries where R&D tax incentives only include corporate income tax rebates such as Brazil and Japan, loss-making firms experience a full loss of tax benefits. In several countries, however, the estimated rates are equal for profit- and loss-making firms. This is the case in particular for the Netherlands, where tax allowances are directed towards reducing the wage costs of employees involved R&D or deducting R&D investment and exploitation costs, without affecting taxation of profits (OECD, 2015[68]).
In several countries, Small and Medium sized enterprises (SMEs) benefit from higher tax concessions (Australia, Canada, France, Japan, Korea, Spain, United Kingdom and United States). This is also the case for start-ups and young firms in Belgium, France, Portugal, and the Netherlands (OECD, 2018[88]). In these countries, SMEs benefit from higher tax subsidy rates than large firms. The gap is particularly large in Australia, Canada, Korea, the Netherlands, and the United Kingdom (Table A B.4).
← 1. The tax subsidy rate is defined as 1 minus the B-index, a measure of the before-tax income needed by a “representative” firm to break even on USD 1 of R&D outlays.
Source: OECD (2019[89]) (extracted in September 2019).
Note
← 1. Under Council Directive 2006/112/ES of 28 November 2006 on the on the Common System of Value Added Tax – Common Flat Rate Scheme for Farmers, Chapter 2 Articles 295 – 305.
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