When real estate development enterprises carry out land value-added tax (VAT) settlement, it is an important obligation of taxpayers to reasonably collect the relevant income, costs and expenses between different periods and projects as required, and it is also a key concern of the competent tax authorities in carrying out preliminary management and settlement audit. As there are differences in the amount of land value-added tax levied under different apportionment methods, and the land cost constitutes an important part of the base for enterprises to add deduction and development expenses, whether the correct cost apportionment method can be selected will have a significant impact on the tax burden of enterprises. However, as the land cost apportionment method for real estate development projects has not yet been unified at the national level, localities have autonomy in determining the apportionment method, and the decentralization and differentiation of tax policies in different regions have made it difficult for taxpayers to understand the relevant policies and carry out tax-related operations, which has led to many disputes between taxpayers and enterprises in determining the land cost apportionment method.

Ⅰ. Cost apportionment method - from central to local level

Under the caliber of land value-added tax (LVAT) clearing, the cost component is firstly the amount paid for obtaining the land use right, including the land price paid by the taxpayer for obtaining the land use right and the relevant fees paid in accordance with the unified provisions of the State; and secondly, the cost of real estate development, including the compensation fee for land acquisition and demolition and relocation, the preliminary project fee, the construction and installation project fee, the infrastructure fee, the public supporting facilities fee and the development indirect fee. Due to the long development time of real estate projects, taxpayers are often required to divide the liquidation units in accordance with the approval of the relevant state departments, choose to apply certain apportionment methods, and aggregate the costs according to the different liquidation objects in the development projects when carrying out the land value-added tax ("LVAT") liquidation.

(I) Provisions at the central level

According to Article 9 of the Rules for the Implementation of the Provisional Regulations on Land Value-added Tax (hereinafter referred to as the "Implementing Rules"), "Where a taxpayer develops and transfers real estate in installments after being granted land use rights in patches, the amount of deductions may be calculated and apportioned according to the ratio of the area of the transferred land use rights to the total area, or according to the building area, and the amount of deductions may be apportioned according to the ratio of the area of the transferred land use rights to the total area. proportion of the total area, or calculated and apportioned on the basis of the floor area, or calculated and apportioned in other ways confirmed by the tax authorities." The implementation rules mainly clarify the floor area method and the building area method for land cost apportionment, and grant the tax authorities the authority to confirm the other apportionment methods. However, it does not clarify the specific calculation caliber of the above methods, such as whether the "floor area" in the floor area method refers only to the vertical projection area of the building or includes the area occupied by green areas, roads and other ancillary facilities; whether the "floor area" in the building area method refers to the total building area In the building area method, "building area" refers to the total building area, the above ground building area or the saleable building area. The specific implementation of the caliber is still to be grasped by the competent tax authorities on the basis of full consideration of the benefits and reasonableness.

According to the Circular of the State Administration of Taxation on Issues Related to the Administration of Land Value-added Tax Clearance for Real Estate Development Enterprises (Guo Shui Fa [2006] No. 187), Article 4 (5), "Costs and expenses common to a number of real estate projects shall be calculated according to the ratio of the saleable floor area of the clearing project to the saleable floor area of the number of projects, or by any other reasonable method, to determine the amount of deduction for the clearing project". the amount of deduction for the liquidation project." This provision clarifies the application of the floor area method for apportionment of common costs and expenses according to the caliber of the saleable floor area.

Item (5) of Article 21 of the Regulations on Administration of Land Value-added Tax Clearance (Guo Shui Fa [2009] No. 91) further states that "Where a taxpayer develops a project in phases or develops a number of projects at the same time, or constructs different types of real estate in the same project, it shall apportion the common costs and expenses in accordance with the objects to be benefited by adopting a reasonable allocation method. " It can be seen that the deduction items of land value-added tax liquidation emphasize the reasonableness of the common cost and expense apportionment, and in order to consolidate this legislative orientation, the regulations also emphasize that the competent tax authorities should focus on whether the cost of land is reasonably apportioned according to the project in the liquidation audit. What is "reasonable"? Tax authorities in different areas have different understandings.

（II)Provincial and Municipal Regulations

According to the authorization of the Circular of the State Administration of Taxation on Issues Related to the Administration of Land Value-added Tax Clearance for Real Estate Development Enterprises (Guo Shui Fa [2006] No. 187), the provincial tax authorities may formulate specific clearing and management methods based on the provisions of the Circular and in conjunction with the local actual situation. At present, a number of provinces and municipalities have issued administrative measures or regulations on local land VAT liquidation, in which the provisions on the method of apportionment of deductible items are different:

Ⅱ. Tax-related risks of incorrect land cost apportionment

For real estate development enterprises, how deductions are apportioned among different projects, different clearing units and different real estate types is an important element of land value-added tax clearing. Common cost apportionment methods include building area method, floor area method, direct cost method, floor height coefficient method, budget cost method, and in practice, other reasonable methods recognized by tax authorities may also be applicable to the apportionment of deductible items. The identification of income and deductions in the land value-added tax basis is very complicated, and the wrong application of the apportionment method will seriously affect the taxpayer's collection and distribution of costs and expenses, which will lead to tax-related risks.

(I) Significant difference in tax burden level under different apportionment methods

Case 1: In 2007, Company T's Phase I W project was approved. Until June 2013, the completion inspection and acceptance filing was conducted for all the Phase W projects.The development projects were all sold out by the end of 2015, and Company T applied for land value-added tax clearing for the Phase W project.On July 5, 2019, the Tax Bureau of Municipality of E made a Clearing and Reviewing Notification to apportion the demolition and relocation compensation fees adopted by Company T by way of in-kind compensation among the three types of ordinary residential buildings, non-ordinary residential buildings and other developed products. product types according to the floor area method, and determined that Company T should pay land value-added tax of RMB5,910,205.41. It had prepaid land value-added tax of RMB9675044.88 and should refund RMB3764839.47.

Disputes between the two parties: Company T believed that the tax law emphasized that the method of cost and expense collection should be "reasonable" and should be chosen by the enterprise independently, and that its income and cost of construction was clear and definite, and that the method of collection should be adopted according to the "three-part method" for different real estate types, and was not limited to the method of collection. According to the report of CUIPPC, the land value-added tax payable for the project was RMB897,214.4, and the land value-added tax paid in advance was RMB967,544.88, which should be refunded to the Company in the amount of RMB877,783,830.48. The tax bureau of Municipality E considered that the land value-added tax payable for the project, which amounted to RMB591,025.41, was incorrect. The E Municipal Taxation Bureau held that the beneficiary of the demolition and relocation compensation fees charged by Company T in the form of compensation in kind was all the development products of the liquidation project, which could not be reasonably and accurately pooled separately under the "three-part method", and was therefore uniformly apportioned among the three types of development products according to the floor area method.

The Court held that, according to Article 9 of the Rules for the Implementation of the Provisional Regulations on Land Value-added Tax, "where a taxpayer develops and transfers real estate in installments after being granted land use rights in pieces, the amount of deductions may be calculated and apportioned according to the ratio of the area of the transferred land use rights to the total area, or according to the floor area, or according to other methods confirmed by the tax authorities. calculation of apportionment." Accordingly, the decision on how to apportion the demolition and relocation compensation fee was made by the tax authorities rather than the real estate development enterprise. The tax authorities have the right to reject the accounting method of "Company T's apportionment of the demolition and relocation compensation fees partly by the floor area method and partly by the exclusive cost method" as inappropriate.

On the one hand, the determination of the nature of deductible items affects the tax burden. As the value-added amount in the calculation of land value-added tax needs to be determined by subtracting the statutory deductions such as costs and expenses from the income, in comparison, except for the special circumstances such as deemed sales, the recognition of income is relatively simple, but for the recognition of costs and expenses, the nature of the costs and expenses must be clarified to determine whether they belong to the scope of deductions and so on, which will further affect the calculation of the taxable amount.

On the other hand, the application of the apportionment method is subject to conditions. Costs, expenses in different liquidation units, different types of real estate between the collection, allocation, but also consider the corresponding apportionment method of the applicable conditions. Exclusive cost method, for example, the application of this apportionment method requires that the costs and expenses incurred have a clear direction and uniqueness, such as demolition and relocation compensation only for the land under the demolished houses, excluding new houses; and exclusively belong to a particular industry (distinguishing between general residential, non-general residential and other development products) the cost of the business will only benefit from the business, and has nothing to do with the other business. If a cost does not meet the applicable conditions of the apportionment method selected by the enterprise, and is pooled or apportioned in accordance with other apportionment methods, it may cause changes in the amount of land value-added tax and affect the level of tax liability of the taxpayer.

(II) Improper cost apportionment method, back payment of land value-added tax and late payment fee

Case 2: On January 6, 2012, H Municipal Tax Bureau accepted Company C's land value-added tax liquidation declaration.

On July 10, 2014, H Municipal Taxation Bureau made a "Verification Opinion on Land Value-added Tax Clearance" to Company C. After the initial verification, you adjusted down the amount paid for obtaining the land use right and the total cost of real estate development of RMB 15,481,880,202.7 yuan.

On December 19, 2014, H Municipal Taxation Bureau made a Notice of Payment of Land Value-added Tax Clearance to Company C, confirming that the land value-added tax payable for Project F developed by Company C should be RMB 33,153,296.61 yuan, the land value-added tax already paid was RMB 90,772,525.18 yuan, and the land value-added tax payable should be RMB 2,497,060,041.43 yuan.

Company C did not accept the notice, which was upheld by the Provincial Taxation Bureau, and the litigation arose.

The Court of First Instance held that the calculation method of "percentage of saleable area method" adopted by H Municipal Taxation Bureau for clearing the land value-added tax of the project in question was obviously erroneous, and revoked the notice of payment of tax issued by H Municipal Taxation Bureau.

The H Municipal Taxation Bureau appealed against the judgment of the first instance, claiming that, regarding "the issue of cost-sharing between ordinary and non-ordinary housing", Company C had proposed the method of apportionment of the percentage of saleable area, the method of apportionment of the floor area of the floor-height coefficients, the method of apportionment of the cost of the average saleable area of ordinary and non-ordinary housing, etc., as "cost-sharing". "The court of first instance only pointed out that its cost allocation method was significantly wrong, but did not clarify what the correct calculation method was.

Upon review, the Court of Second Instance held that the application of the Circular of the State Administration of Taxation on Issues Relating to the Administration of Land Value-added Tax Clearance for Real Estate Development Enterprises, and the uniform adoption of the "percentage of saleable area method" in the province's land value-added tax clearing were based on evidence and ensured the uniformity of the standard of taxation in accordance with the law. The judgment of the first instance, based on the fact that the project in question was a single development project, found that the calculation method of the city tax bureau for the cost sharing of ordinary and non-ordinary residential buildings was "obviously wrong", which was not justified by the law. The judgment of the first instance was revoked and Company C's claim was rejected.

Since land cost is an important part of the real estate enterprise's deduction and development cost accrual base, the land value-added tax amount varies significantly under different apportionment methods. In order to reflect the principle of matching revenue and cost, different apportionment methods should be applied to cost components of different nature. Moreover, according to Articles 5 and 21 of the Regulations on Administration of Land Value-added Tax Clearance, the competent tax authorities have the responsibility to audit the taxpayer as to whether the various costs and expenses summarized in the amount of the deductible items are directly incurred or should be apportioned in the development of the clearing project, as well as whether the taxpayer develops the project in phases or develops a number of projects at the same time or constructs different types of real estate in the same project, and whether the taxpayer Apply a reasonable allocation method to apportion common costs and expenses in accordance with the beneficiary objects. A taxpayer choosing to apply the cost allocation method shall obtain the approval of the competent tax authorities. In practice, only those costs that comply with the allocation and apportionment regulations can be deducted. The land area, building area and saleable area of real estate development must be consistent with the area data contained in the ownership certificates, property certificates, pre-sale certificates, measurement data of housing surveying and mapping institutes, sales records, sales contracts, and documents of the relevant competent authorities, etc., and the apportionment standard of each deduction item is determined. There are also special provisions for the apportionment of some special costs, such as the apportionment of the cost of a garage. The allocation or apportionment of deduction items of real estate development enterprises is not in accordance with the regulations, which will be recognized as not allowed to be deducted or deducted incorrectly, and it is very easy to be adjusted by the tax authorities with other apportionment methods. Not only do they need to pay back taxes and late fees, but depending on the circumstances, they may also be recognized as tax evasion and penalized.

Ⅲ. How to choose the deduction apportionment method for real estate enterprises

(I) Focus on local differences in apportionment methods

In real estate development projects, land costs account for a relatively high proportion, and it is crucial for real estate enterprises to correctly apportion land costs among different projects and types of real estate. Throughout the land value-added tax rules, the central-level regulations only set out the optional apportionment methods and the principle of beneficence that should be followed, and do not restrict the conditions and circumstances under which each method is applicable. As a result, local tax authorities have made a variety of provisions based on local characteristics, each with its own particularities. In order to prevent tax risks arising from improper cost apportionment, taxpayers should pay attention to the provisions of local tax authorities on the scope of costs and expenses, the identification of beneficiary objects and the selection of apportionment methods in the land value-added tax settlement.

(II) Declare the deduction items according to the facts and fulfill the tax obligations correctly.

According to the current effective tax policies such as Guo Shui Fa [2006] No. 187 and Guo Shui Fa [2009] No. 91, the land value-added tax shall take the development project as the clearing unit, and the costs and expenses incurred by different clearing units shall not be offset against each other, and costs and expenses incurred by more than one clearing unit shall be reasonably distributed or apportioned among the clearing units in accordance with certain methods. This requires that enterprises accounting for deduction items should not only retain and provide legal and effective deduction vouchers and accurately divide the liquidation units, but also pay attention to the selection of cost-sharing methods for enterprises carrying out real estate development and construction business in provinces and municipalities where the selection of cost-sharing methods is permitted to ensure that the deduction items are true and accurate, and that they correctly fulfill their tax obligations to avoid taking the excuse of incomplete books of accounts to request tax Approved levy, confusingly expanding the scope of public supporting facilities and other behaviors to achieve the purpose of tax saving.

(III) Strengthening the effectiveness of communication with tax authorities

As mentioned above, some provinces and municipalities have not imposed strict conditions and order restrictions on the application of cost-sharing methods, which means that as long as it can be fully explained that the applicable apportionment method can reasonably allocate costs and expenses, and that the method can be recognized by the tax authorities, the real estate enterprises will, to a certain extent, have the right to choose the cost-sharing method. Therefore, taxpayers should, on the one hand, base on the characteristics of real estate development cost items, follow the principles of benefit, proportion and consistency, and determine a reasonable apportionment method according to the way of resource consumption. On the other hand, in the process of land value-added tax settlement, taxpayers should cooperate with the tax authorities in the settlement audit and actively communicate and negotiate with the tax authorities on the authenticity of the deduction items, the accuracy of the aggregation as well as the applicability of laws and regulations in order to strive for the application of the apportionment method that is favorable to the enterprise.