Property, Page 38
Sept, 7, 2012
By Chen Wenya (陳文雅)
Translated by Tang Xiangyang
Original article: [Chinese]

With local governments bringing in less fiscal revenue, property developers are being subject to a new round of “tax inspection” (稅收清算).

Data from the Ministry of Finance shows that real estate tax revenue has decreased from January to June. The revenues from taxes on deeds (契稅) and sales tax (營業(yè)稅) decreased by 9.9 percent and 8.5 percent respectively based on the same period last year.

Meanwhile, the growth in revenue from land value-added tax was 14.7 percent, which is 76.4 percentage points lower than that of the same period of last year. The revenue from land value-added tax accounts for 2.5 percent of all tax revenue.

The large decreases were attributed to significantly fewer sales. The sales volume of commercial apartments decreased by 9.1 percent in the first five months of the year.  

The smaller tax revenue is pushing local government to impose stricter inspections on real estate taxpayers.

The revenue from real estate sales taxes in Guangdong decreased by 17 percent in May. The decreases are reportedly very severe in Guangzhou and Shenzhen, putting huge pressure on local tax bureaus. The Guangzhou Taxation Bureau has thus chosen 165 property projects to conduct tax inspection on and Shenzhen has selected 120.

“The tax load of the real estate sector is too heavy,” said an unnamed source familiar with the matter. “Sales tax, land value-added tax and business income tax are the three major taxes.”

He said that property developers in Beijing, Shanghai, Shenzhen and Guangzhou have to pay 8 to 10 percent of their sales volume as tax. If the tax inspection is serious, the ratio will be 20 percent. For projects like the Xinghewan (星河灣) luxury housing complexes, it will be around 30 percent.

According to the source, the previous “tax inspections” were never serious. But with local governments receiving less revenue, they’re becoming increasingly stringent. 

Liu Heng (劉恒), a consultant with the State Council and professor with the Central University of Finance and Economics, said that if tax inspection is intensified, local governments can increase their tax revenue several times over.

In the first half of the year, intensified tax inspection brought Yuetang District, Xiangtan City of Hunan Province 10 million yuan in revenue from land value-added tax – an increase of 237 percent compared to the same period last year.

Li Mingjun (李明俊), president of the China Real Estate Taxation Consulting Web (中國房地產(chǎn)稅務(wù)籌劃網(wǎng)), said that since the tax inspection began earlier this year, several developers have come to him asking how to avoid more taxes.

“This is a trend now,” Li said. “Developers are paying higher taxes than they expected. They used to evade taxes, but that’s a time bomb - very risky. Many developers are in prison because of tax evasion.”

A real-estate developer that was subjected to Guangdong Province’s inspection came to consult Li. The average price on units in the first stage of the company’s project was 5,500 yuan per square meter, but by the time they had completed the second stage it was sold for an average of 9,000 yuan per square meter. This was in spite of construction costs for the latter being only 100 yuan per square meter higher than the former. According to accounting rules, projects that are divided into different stages should be settled separately for tax purposes. Since the second stage was worth more and the tax code is progressive, it was subject to a higher tax burden.

Li suggested that the developer combine the two stages and combine the costs. That helped save 38 million yuan in taxes.

Another real estate developer was also subject to inspection since it had reached the sales threshold for its units. However, it received a 100 million yuan receipt for construction costs after the taxes were settled. At first, the tax accountant didn’t accept it. But Li Mingjun persuaded him, saying that the receipt was received within three months. The Taxation Law says that all receipts received within three months can be considered costs and reduce the tax burden accordingly.

Li Ming suggested that developers paying construction costs do it all at once and as soon as possible in order to save on taxes. If the developer pays the first half of the construction costs first and the second half later, then the project is taxed accordingly. The developer will have to pay 15 percent of the entire cost in taxes even though he’s already paid for the first half of construction.