Originally published 6 July 2010
Keywords: State Administration of Taxation, Circular 53, land appreciation tax, LAT final settlement, real estate,
On 25 May 2010, China's State Administration of Taxation (the "SAT") issued another circular to strengthen the collection of land appreciation taxes ("LAT") — Notice on Reinforcing the Collection and Administration of Land Appreciation Tax (Guo Shui Fa  No.53) ("Circular 53"). Circular 53 is the second circular issued by the SAT on the subject of LAT within 10 days, following the issuance of Circular 220 — Notice on Several Issues Concerning the Final Settlement of Land Appreciation Tax (Guo Shui Han  No. 220) ("Circular 220").
Unlike Circular 220, which only clarified certain technical issues (for a more detailed discussion of Circular 220, please refer to our previous legal update at http://www.mayerbrown.com/publications/article.asp?id=9085&nid=10353.), Circular 53 focused heavily on enforcement measures.
In Circular 53, the SAT sets minimum provisional rates for levying LAT. Except for affordable housing, the provisional levying rate should be no less than 2% in the eastern provinces, no less than 1.5% in the central and northeastern provinces, and 1% in the western provinces. Further, Circular 53 requires that different rates should be set for different types of housing. These rates represent an increase for some cities. For example, Beijing and Shanghai, both of which are considered to be in the eastern provinces, currently collect provisional LAT at the rate of 1%. Shenzhen, also considered to be in the eastern provinces, more than doubled its provisional levying rates in 2008 and is now in line with the new national standard; its provisional LAT rate is 1% for ordinary standard residential buildings, 3% for villas and 2% for all other types of housing.
The SAT also urges local tax authorities to take the following specific actions to strengthen the collection of provisional LAT:
- To link the collection of provisional LAT with the collection of business tax in real estate sales
- To adjust the provisional LAT rate based on the effective LAT burden after LAT final settlement
- To adjust the provisional levying rate based on the rise of property prices so that the provisional rate will come close to the effective tax rate
If the above measures are effectively implemented, they could impact the cash flow of property developers.
The SAT reiterated the importance of LAT final settlement, requiring local authorities to formulate plans on how to enforce LAT final settlement and to submit their plans to the SAT before the end of June. Such a plan must contain concrete indicators that will be used to measure how much progress will have been made. Further, enforcement of final settlement will be taken into account in assessing the performance of local authorities.
Local authorities are also required to select three to five projects as key audit targets, focusing on overpriced projects or projects whose prices have risen too quickly. The objective, however, is not to limit the final settlement to such key targets, but to set these targets as exemplary models with a view to expanding the audits to all property developers. The outcome of major audit cases involving LAT evasion is required to be disclosed to the public timely.
Collection of LAT on a Deemed Basis
The SAT emphasised its policy of discouraging local authorities to collect LAT on a deemed basis, and local authorities were urged to make efforts to collect LAT on an actual basis. Collection on a deemed basis is allowed only when the conditions as set forth in the relevant tax measures have been met. However, in some cities, local authorities have used the deemed method as the principal way of collecting LAT. The deemed method tends to make collection easier and faster, but the LAT collected under this method is generally believed to be lower than what would have been collected on an actual basis.
For the first time, the SAT prescribed a minimum deemed rate, which should, in principle, be no less than 5% of sales. The SAT also requires local authorities to set different deemed levying rates for different types of properties.
Certain regions have already set official deemed levying rates. Shenzhen, for example, set the rates at 6% for ordinary standard residential buildings, 8% for other residential buildings, 10% for commercial buildings and 5% for other types of properties. These rates include the provisional levying rates. Most other regions, however, have deemed rates substantially lower than the standard rate of 5%. The new minimum deemed rate will put more pressure on developers to properly document their costs and expenses so that they could pay LAT on an actual basis, assuming that their actual LAT rates are lower than 5%.
Compared to other circulars issued by the SAT over the years, the tone of Circular 53 is unprecedented, putting forward many requirements on local tax authorities to enhance their collection measures. This new tone may be due to the fact that the enforcement of LAT is directed by the State Council for the first time since the introduction of LAT in China. On April 17, 2010, the State Council issued the Circular on Resolutely Curbing the Housing Prices in Some Cities from Rising Too Fast, demanding the enforcement of LAT in regions with overheating property prices.
As a local tax, LAT is administrated by local authorities. Though local tax authorities are technically answerable to both the SAT and local governments, they are more easily affected by local governments. As a result, the SAT has all along had less influence on local tax authorities than local governments have. This may explain the weak enforcement of LAT, despite the SAT's continued efforts to stress enforcement.
As this round of LAT enforcement originates from the State Council, it is expected that enforcement at the local level will be substantially enhanced. Property developers should prepare themselves for stricter enforcement efforts.
Background: Filing of LAT
The filing of LAT generally includes two stages, the periodic provisional filing and final settlement.
- Provisional filing of LAT should be made on pre-completion advance sales. Provisional tax rates are prescribed by provincial governments based on market conditions of particular locations
- Final settlement is then made on completion of a development
Rules and Procedures for Final Settlement of Land Appreciation Tax (Guo Shui Fa  No.91) ("Circular 91"), among others, reaffirmed the mandatory final settlement and introduced measures giving local tax bureaus the discretion to require final settlement under certain circumstances.
Mandatory Final Settlement
A taxpayer must have its LAT settled in any of the following circumstances:
- Construction work of the real estate development project has been completed and the underlying sale has also been completed
- The real estate development project is transferred as a whole before construction has been completed
- The land use right is directly transferred without any construction work
Discretionary Final Settlement
In any of the following circumstances, the relevant tax authority may demand final settlement of LAT by the taxpayer:
- In the case of a completed and accepted real estate development project, the building area that has been conveyed accounts for 85% or more of the total saleable building area, or, although such 85% threshold is not met, the remaining saleable building area has been let or used by the property developer
- Sales are not completed within three years after the issuance of the sales (pre-sale) permit
- The tax payer files an application for tax deregistration without first having completed LAT final settlement
- Other circumstances identified by the provincial tax authority
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