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Stricter land value appreciation tax rules for property developers
Subsequent to the issuance of Cai Shui [2006] 21 in March 2006 by the Ministry of Finance, as a collective measure to curb the heated property market in China and to strengthen tax collection, the State Administration of Taxation ("SAT") recently issued a circular Guo Shui Fa [2006] No.187 ("Circular 187") to tighten up the Land Value Appreciation Tax ("LVAT") administration. It will take effect from 1 February 2007.
Background
LVAT is levied on the gain of a property project of property developer at progressive rates from 30% to 60%. In spite of this general requirement, it is possible for property developers to pay LVAT at provisional rates ranging from 0.5% to 2% (subject to type of property and local variations) on their gross sales proceeds before the project is completed and all property units are sold out. Certainly, a reconciliation exercise should be done when all costs and expenses are finalized. At that moment, the aforesaid general requirement should be applied to calculate the final LVAT burden where property developers may need to true up any under-paid LVAT or obtain refund of any over-paid LVAT.
Given the China property market has been booming for years, LVAT payment should have been substantial. However, the actual growth of LVAT revenue did not seem to have caught up with the trend of China property market. As an implementation circular, Circular 187 may help improve the tax collection administration.
Timing of LVAT reconciliation
Circular 187 provides that property developers must perform LVAT reconciliation under the following situations:
- The construction is completed and the property units are completely sold out; or
- There is a transfer of the entire project which is still under construction; or
- There is a transfer of land use right.
Meanwhile, Circular 187 have built in some anti-avoidance measures where the in charge tax authorities can require a property developer to perform LVAT reconciliation in the following cases:
- The construction work has been completed and over 85% of total saleable area is sold; or
- Although the construction work has been completed and less than 85% (85% inclusive) of total saleable area is sold, the remaining saleable area is leased out or occupied by the property developer for self-use purpose; or
- Three years after the issuance of sales permit of the subject project; or
- The taxpayer has applied for tax deregistration before the LVAT reconciliation; or
- Other conditions required by the tax bureaux at the provincial level.
Other noteworthy points
- LVAT reconciliation should be performed on a project-by-project basis. Where a project is developed in phases, it is allowed to complete LVAT reconciliation by phases.
- For properties that are sold in furnished condition, the relevant decoration expenses incurred by property developer are allowed to be included in the cost of development for LVAT reconciliation purpose.
Uncertainties
Circular 187 has clarified a lot of areas but still leaves a few uncertainties. For instance, it is not clear on how to determine the allowable deductible costs and expenses upon reconciliation when a property developer has not sold out all property units in a project. Whether an allocation of costs and expenses should be done or what types of allocation basis are allowed may be the common questions. Perhaps, the last point of Circular 187 may give us a hint. It states out the costs and expenses determination rule for property units sold after the completion of LVAT reconciliation.
In addition, there is a deeming provision in Circular 187 which may arouse questions in the implementation. By virtue of that provision, tax authorities are empowered to levy LVAT in five situations, including where the actual appreciation amount cannot be reasonably determined in the absence of proper books and records and where the taxpayer does not complete LVAT reconciliation by the stipulated due dates. Under such circumstances, local tax authorities are allowed to levy LVAT, by reference to similar real estate projects in the region, at a deemed rate of not less than the local provisional rates. As it does not spell out any maximum rate, local variations are expected. On the other hand, whether the deemed LVAT rates are comparable to the profit level of property projects is another question. Hopefully, such uncertainties can be clarified at a later stage.
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