Tax fog boggles property developers
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ATAHK reads from China Daily that In late April, Greenland Group, one of the largest developers in China, forwarded its staff a plan,proposed by a consultancy, to cope with the new 11 percent value-added tax or VAT, which ishigher than the 5 percent business tax.
The plan suggested that developers should try their best to have their projects taxed as per thepre-reform rate.
VAT is supposed to replace business tax this month onwards in the real estate industry. But, taxauthorities have allowed developers to apply for their projects－existing as well as those underconstruction to be taxed simply by the sale value, as an interim method.
Developers have long been levied a 5 percent business tax on their sales. Given the largeamount of costs developers can deduct, the actual tax as per the VAT system could work outlower than before.
Developers' scrambling for the old tax rate underscores their worry over uncertainty over the newtax.
In late March, the Ministry of Finance and the State Administration of Taxation issued a circularclarifying that the cost of land－the biggest cost for developers that accounts for 30 to 70 percentof the project sale price－would be considered while computing the tax outgo. It came as a relieffor developers that long feared the land cost may not be included in tax computation.
However, many real estate developers are still uncomfortable with the new tax, and prefer theprevious 5 percent flat rate, which they said was simpler to calculate.
It was recommended that developers should apply for their existing projects to be subjected to"easy taxation" before the deadline of April 30, Greenland informed its staff. "Old projects" aredefined as those that got the construction permit before May 1, or whose construction startedbefore.
"We are still awaiting more detailed implementation rules, which would enable us to conduct athorough assessment of which taxation is better," said an accountant with a Changsha-baseddeveloper, who sought anonymity. "The new system might save some tax. But we just want toensure there is no increase in tax outgo."
For major developers, getting invoices would not be difficult as they have bargaining power. Theproblem is for millions of small contractors that might not be able to get invoices from theirupstream businesses, experts said.
Alan Wu, national indirect tax leader for PwC China, said in general the reform is positive fordevelopers, but there are some pending technical issues. For example, whether demolition costwould be included in the "land purchase cost".
"Now most land developers bid for local government contracts. Those demolition projects havebeen completed. But developers typically don't pay that cost. But there are still some land parcelsthat developers have to pay for, and may not get the invoice," Wu said.
Besides, the reform will allow, for the first time, VAT incurred by all the enterprises on newlyacquired immovable properties to be deducted while computing tax outgo. This has createdspeculation that enterprises would be incentivized to buy properties, especially commercialproperties, to gain tax credit, and thus lower tax burdens. Greater demand for properties wouldbuoy the market.
Asked about the issue, Vice-Finance Minister Shi Yaobin said that he did not believe this wouldbe the case.
"Companies' primary focus is profits. If an investment does not align with the company'sbusiness, I don't think they'll buy properties simply for the purpose of tax credit."
Other experts shared similar views. Wu said the purchase of real estate requires a large sum ofmoney, which far exceeds the benefits in the new VAT credit. "Not many companies that are notreal estate investment-focused have large enough cash flow to buy properties," he said.
Homebuyers' burden to ease.
There is no cause for concern that the new value-added tax may increase homebuyers' taxburden, tax officials said in a circular.
For the first time, VAT will cover individuals besides companies in sales of existing homes. Thishas given rise to concern that buyers will pay more tax in such transactions.
The circular clarified that the VAT rate for individual secondhand home sales will be 5 percent,the same as the previous business tax rate.
Wang Kang, deputy director of the State Administration of Taxation, said last month that VAT willlikely help reduce the tax burden. For, the taxable amount will likely be lower under the VATsystem.
"The business tax rate was 5 percent. If people spent 1 million yuan, they would pay a 50,000yuan ($7,720) business tax. But under the VAT system, taxable base will be 1 million divided by1+5%," he said.
The buyers of secondhand homes will pay 2,400 yuan less as tax under the VAT system.
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