Land value appreciation tax must go
December 18, 2008 | BY
clpstaff &clp articles &New approach needed in falling property market
Property developers in China are panicking. A controversial tax on land value appreciation was reintroduced in February 2007, after a hiatus of more than 10 years, in hopes of curbing the property market bubble. Many developers are now being forced to sell their properties at lower prices to reduce their tax burden (land value appreciation tax (LVAT) is calculated progressively, so the higher the property value, the more tax the developer must pay - see below for more details).
China's real estate road has been bumpy in the past two years: property prices had surged but have been in decline for several months. Unless the government responds to the falling market and abolishes LVAT, the outlook for property developers could get worse in 2009.
Yongjun Peter Ni, partner of White & Case in Shanghai, predicts the tax will eventually be eliminated by combining it with regular income tax. “This will happen sooner if the Chinese property market continues to go south,” he says.
The State Administration of Taxation is formally levying tax of between 30 and 60% on developers' net gains from property deals. But the rules have not been strictly enforced by the local governments responsible for collecting the tax. Real estate investment plays a key role in driving growth and is an important performance measure for local officials. In fear of discouraging local real estate investment, they have been giving developers significant discounts on the LVAT. Despite this, developers must still provide for their tax in their monthly financial statements.
“The impact is already felt in the industry,” says Tina Lai, general counsel of Soho China, a PRC property developer. “Once you sell all the properties, you have to go to the tax bureau and do a settlement of taxes. Then … the government will tell you how much LVAT to be paid. [LVAT is] a particularly onerous obligation at the moment,” she says.
Irrelevant cuts
The government has already made some policy changes, but none of them relieves the burden on property developers.
In October 2008, the Ministry of Finance, the State Administration of Taxation and the People's Bank of China together announced a series of new measures to boost the domestic real estate market. Buyers no longer pay stamp duty on property purchases or value-added tax of the land, the central bank also has announced to lower the threshold of the down payment for those making their first home purchase for self use from 30% to 20%.
“What the government is trying to do is to restore property buyers' confidence by telling them that transaction fee is reduced, but because those transaction fees used to be borne by the property buyers anyway, in terms of reducing [the] tax burden to property developers it's not doing much help here,” Lai says.
She adds that the tax cuts have not achieved what the government wanted to achieve; what the developers want, she says, is the abolition of LVAT.
(This article is part of the New directions for China in 2009 special feature)
The Circular on Issues Concerning the Administration of the Settlement of Land Appreciation Tax on Real Estate Development Companies (G.S.F[2006] No. 187), issued by the State Administration of Taxation, states that LVAT is payable as follows:
· If the value-added rate is below 50%, the tax will be 30%
· If the value-added rate is between 50 and 100%, 40% will be levied
· If the value-added rate is between 100 and 200%, 50% will be levied
· If the value-added rate is more than 200%, 60% will be levied
The tax will be collected when a single project is completed or transferred.
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