Chinese VAT liability for real estate
Planned reforms this year of the Chinese VAT regime on property and real estate mean developers can expect a sharp tax liability increase.
Developers are currently taxed under the Business Tax regime on their revenues. This Business Tax rate is typically 5% on property. The reform of Chinese VAT means that they will instead be charged on the difference between the VAT on their costs (inputs) and sales (outputs). However, crucially, it seems that VAT charged by local governments on the sale of land will not be deductiable. This could increase costs for developers by an estimated 30%. The final VAT rate on property supplies has not yet been confirmed, but is likely to be 16%.
Sales of land for development by local governments have been one of the key drivers of growth and construction in China over the past ten years. The central government is in the process of opening up bond markets to local government to cut their dependency on land sales.
Chinese VAT reform
Chinese VAT reform began in 2012 with an initial pilot that went country wide the next year. The changes, to move from an antiquated sales take to a full OECD-based regime, are being undertaken sector by sector. Real estate is one of the last areas to be tackled.