Resource Center
|
What are the current updates On Land Appreciation Tax?
08/03/07
In a move widely seen as a Government effort to further cool down the real property market in China and intensify tax collections, the State Administration of Taxation has issued Guoshuifa [2006] No. 187 (“Circular 187”) announcing its intention to strengthen the collection of LAT. Circular 187 provides clarifications and guidelines on LAT income recognition, deductible expenses, assessment timing and other issues, with which the SAT hopes to reduce the ambiguities in the existing LAT rules and practices and create a uniform platform for LAT enforcement and collection across the nation.
What is Land Appreciation Tax (LAT) and what affects will it have on Taxpayers?
LAT, which became effective from 1994, is a tax on the gain realized on the transfer of land, buildings and associated structures. In general, LAT is imposed on taxable gains derived by companies (including property developers) and individuals from the transfer of real properties. The applicable LAT rate is progressive and ranges from 30% to 60%, depending on the amount of the taxable gain calculated after taking into consideration allowable prescribed deductions.
LAT is also a local tax collected by provincial and local governments at the location of the real property. However, due to various economic reasons, it has not been actively collected in past years. More recently, the Central Government and the SAT have increasingly stepped up efforts in pushing local governments to enforce and collect LAT.
In the China residential market where pre-sales are common, LAT is often pre-collected based on a certain percentage of the gross sales proceeds. However the final settlement is rarely enforced. One of the most important implications of Circular 187, which will become effective from 1 February 2007, is that the SAT has provided rules for both voluntary and tax authorities’ initiated LAT settlements. The latter “triggering conditions” can potentially require LAT payments prior to the sale of all units. In addition, the SAT has specified that the unit of LAT assessment and settlement should be each real property development project or each phase of a real property development project as approved by the government authorities.
Circular 187 also provides clarifications and guidelines on LAT income recognition, deductible expenses, assessment timing and other issues. With these clarifications and guidelines, the SAT hopes to reduce the ambiguities in the existing LAT rules and practices and create a uniform platform for LAT enforcement and collection across the nation.
The active enforcement and collection of LAT based on Circular 187 will no doubt bring about a profound impact on the bottom line of property developers and owners, especially those who have acquired land or real property at low cost. In addition, any non-voluntary LAT settlement requested by the tax authority will adversely affect the cash flow position of a property developer.
Going forward, property developers and property investors will definitely need to factor in the cost and timing of LAT in their profitability and cash flow planning. Provisions for LAT may also need to be accrued in the books of developers, which could impact their financial position. It is also possible that the additional cost of LAT could make some real estate investment projects unattractive for investors.
The issuance of Circular 187, of course, provides the SAT’s guidance and clarification on many matters regarding the settlement of LAT to both taxpayers and local tax authorities. However the circular does leave some implementation details to be determined by the provincial-level tax authorities. As a result, taxpayers with real estate projects will need to pay close attention to the implementation regulations to be issued by the local tax authorities as well as local practice in the locations of their real estate projects.
|
