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 LEGALITIES
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Legalities: China real estate tax - a serious attempt to manage and cool the real estate market
Issue 33 - August 2007

New developments in China's taxation approach mean that investors, developers and real estate lenders should take proactives steps to review their situation and assess the risk.

background and summary
Enforcement of China’s tax laws as they apply to real estate projects often has been inconsistent with, and intentionally weaker than, the original purpose of such laws. To encourage such projects, many localities have granted tax and other incentives and have purposely refrained from full scale implementation of applicable real estate taxes, in particular the Land Appreciation Tax or “LAT”.

Recently, soaring land values, accompanying social concerns, and increasing pressures on China’s currency from foreign investment have motivated the central government to attempt to cool off the real estate market through the introduction of various policies, including:

• Tightening control on foreign investors in the real estate market (e.g. requiring the use of a local company for ownership, limits on debt financing, etc.) (JianZhuFang (2006) No. 171); and

• Collecting LAT (Guoshuifa (2006) No. 187 and Jianji [2007] No. 87 (“Circular 87”)).

Despite these circulars, some localities have been reluctant to strictly enforce the laws because of the potential negative impact on future real estate
investment in their areas. To overcome this, the State Administration of Taxation (“SAT”) recently issued Circular 69 (Guoshuifa [2007] No. 69) to force local authorities to apply the tax laws. Circular 69 is expected to significantly affect real estate developers in regions with previously lax enforcement.

Among other items, Circular 69 addresses the settlement of LAT. LAT applies progressive rates from 30 percent to 60 percent on gains from the transfer
of real estate and is imposed on both enterprises and individuals. Where localities have not strictly enforced LAT, primarily by allowing delays in the final
LAT settlement, its implementation will have serious financial consequences for many developers.


Contributed by:
Nancy Sun Marsh, Partner, Tax Services, China.
Real Estate Industry Practice Tax Leader, Deloitte Touche Tohmatsu CPA Ltd.

 

 

 

 

 

 

 

Circular 69 is expected to significantly affect real estate developers in regions with reviously lax enforcement.
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details of circular 69
In April 2007, eight state departments issued Circular 87 to require various authorities to take certain enforcement actions. Following this release, the SAT issued Circular 69, which provides guidance to the local tax authorities on carrying out Circular No. 87 to ensure appropriate enforcement of tax laws for real estate developers and individuals, thereby having the effect of seriously strengthening tax administration. Details follow.

1. Local tax authorities are directed to strictly implement various real estate tax rules and increase their tax audit efforts by:

• Strictly enforcing policies and regulations on business tax, individual income tax, LAT and deed tax relating to the transfer of real property by individuals;

• Formulating detailed measures for LAT settlement, inspecting the enforcement of LAT regulations and establishing monitoring systems for key LAT taxpayers to enforce LAT settlements; and

• Listing real estate development enterprises as priority inspection targets and imposing on them onerous penalties for tax evasion.

2. The local tax authorities are directed to strengthen their internal review functions and to impose stringent penalties on certain conduct, such as granting approvals for tax matters without authority, granting approvals in
violation of relevant regulations and granting approvals for tax reductions and exemptions without any legal basis.

3. Various bodies are directed to establish better internal and external coordination. These bodies include the tax authorities, public security bureaus, customs offices, offices of the administration of industry and commerce, banks, real estate authorities, etc.

4. Nationwide tax inspections of the real estate market are to be scheduled for the second half of 2007.

5. Cases of material violation found will be publicised, in addition to the collection of undercharged taxes and imposition of penalties.



analysis
Investors and developers should perform a compliance review, identify potential tax exposures and make any required adjustments. During the review, they should focus on material tax matters, for example, whether the enterprise clearly qualifies under applicable regulations for tax benefits received, and whether proper procedures have been followed in obtaining relevant approval for tax and other benefits.

Circular 69, if it is carried out widely, might cool down the real estate market in the short term. However, we believe that the economic fundamentals and the continuing increase in demand for commercial space and residential units will keep both domestic and foreign investment flowing into China’s real estate market in the mid- to long-term. RFP


   
ISSN 1994-9464
Key title: RFP magazine
Abbreviated key title: RFP mag.
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