In land value-added tax (LVAT) settlement, how costs are pooled and deducted has a bearing on the determination of value-added amount, which directly affects the level of tax liability of taxpayers. Cost deduction is divided into two methods: direct deduction and apportionment deduction, and apportionment deduction includes the method of land area, building area and other methods. What is the relationship between these deduction methods and the principle of benefit? Should the principle of benefit be taken into consideration when choosing deduction methods? On the basis of sorting out the relevant policies on cost pooling deduction methods, this article is going to analyze the application of the benefit principle in land value-added tax settlement, and accordingly explain the necessity of selecting cost pooling deduction methods according to the benefit principle.

I. Provisions for cost attribution deduction methods

For a certain real estate project or a certain type of real estate, the method of cost and expense deduction to be applied has a direct impact on the calculation of its value-added amount and the actual burden of land value-added tax on taxpayers. However, as there are only principle regulations at the national level, tax authorities in different regions tend to implement the regulations according to local specifications, resulting in significant differences in land VAT settlement in different regions.

(I) National level

Article 7 of the Regulations on Administration of Land Value-added Tax Clearance (Guo Shui Fa [2009] No. 91, hereinafter referred to as the "Regulations") stipulates that a taxpayer that develops a project in phases or develops a number of projects at the same time shall reasonably aggregate the relevant revenues, costs and expenses according to the requirements of the clearing according to the different periods and different projects. Article 21(4) of the Regulations states that the costs and expenses summarized in the amount of deductions must be directly incurred or apportioned in the development of the liquidation project. It can be seen that the basic principle of cost aggregation and deduction is reasonable aggregation, and the costs that can be aggregated and deducted include those directly incurred and those that should be apportioned.

There are also relevant provisions on the method of apportionment and deduction of apportionment of costs that should be apportioned. Article 9 of the Rules for the Implementation of the Provisional Regulations on Land Value-added Tax (hereinafter referred to as the "Implementation Rules") specifies that in the case where a taxpayer develops or transfers real estate in installments, the amount of deductions may be calculated and apportioned in accordance with the ratio of the area of the transferred land use right to the total area, or in accordance with the floor area, or in accordance with other methods confirmed by the tax authorities. The amount of deduction items can be calculated and apportioned according to the ratio of the area of transferred land use rights to the total area, or according to the floor area, or according to other methods recognized by the tax authorities. However, the specific apportionment standards or implementation caliber have not been clarified, such as whether the "floor area" includes only the vertical projection area of the main body of the house and excludes the area occupied by non-transferable green areas, roads and other ancillary facilities. Does "floor area" refer to the total floor area, ground floor area or saleable floor area? At the same time, this article, as an enabling provision, gives the tax authorities the power to confirm the application of other modes of apportionment.

Article 21 (5) of the Statute proposes that common costs and expenses should be apportioned in accordance with the beneficiary, using a reasonable allocation method, and guides taxpayers in carrying out project management, self-liquidation and liquidation audits conducted by the tax authorities. However, what is the relationship between the benefit principle and the cost sharing method in practice? Should the benefit principle guide the selection of cost-sharing method? There is no regulation at the national level.

(II) Local level

The basis for local tax authorities to formulate locally specific liquidation methods or protocols for implementation is mainly derived from the authorization of the Implementation Rules. In terms of the specific provisions of each place, some places have clarified the guiding role of the beneficiary principle in cost aggregation and deduction, for example, Ningbo Municipality has stipulated that, in a real estate development project, if the corresponding contract of the development cost clearly specifies the beneficiary object, it will be directly accounted for in the corresponding beneficiary object, and if it does not specify the beneficiary object or if there is more than one beneficiary object, it will be apportioned in accordance with other methods.

Some places do not explicitly use the beneficiary principle as a guiding principle, but rather prescribe a specific cost aggregation method for a certain type of cost. One is to directly stipulate that a certain type of cost is subject to a single cost collection method, for example, Guangxi, Hebei, Tianjin and many other places directly stipulate that land costs are fixed to be deducted in accordance with the land area method, and other costs are fixed to be deducted in accordance with the building area method. The other is to a certain type of costs and expenses in different circumstances applicable to the apportionment of different provisions, but also to the implementation of the caliber of the refinement. For example, Qingdao Municipality stipulates that, for land costs belonging to different real estate projects, priority shall be given to deduction in accordance with the land area method; if it is not possible to divide the land area, deduction shall be made in accordance with the building area method, and the caliber of "total building area" shall be implemented.

II. Controversy over the specific application of the cost attribution method

(I) Case 1: The court upheld the fixed method of cost attribution in a dispute between a tax enterprise and a tax enterprise over the method of cost attribution.

In August 2011, Company H met the conditions for land value-added tax settlement and considered that the "sales ratio method" was more in line with the principle of benefit in its self-settlement, so it adopted this method to summarize the costs of ordinary and non-ordinary residential properties, and considered that it should pay land value-added tax of RMB11.11 million.

In December 2014, the Municipal Tax Bureau served Company H with the Conclusion of Land Value-added Tax Clearance and the Notice of Payment of Land Value-added Tax Clearance Tax, which clarified that the cost of the project in question developed by Company H was to be attributed according to the percentage of saleable floor area method as stipulated by the Hainan Province, and confirmed that Company H was liable to pay back the land value-added tax in the amount of RMB24.98 million.

Company H was not satisfied and filed administrative reconsideration and administrative litigation successively. The Court held that 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 was applicable within Hainan Province, and that the percentage of saleable area method was uniformly adopted in the province's land value-added tax clearance. Accordingly, it was not improper for the Municipal Taxation Bureau to adopt the percentage of saleable area method for the calculation of the cost attribution of ordinary residential units and non-ordinary residential units in the land value-added tax clearance process of the project in question.

(II) Case 2: Dispute between a tax enterprise over the method of cost attribution, the court upheld the attribution on the basis of the benefit principle

In November 2016, Company Z applied to the local tax bureau of City E to clear the land value-added tax ("LVAT") of Project Y. Company Z applied to the local tax bureau of City E to settle the LVAT of Project Y. As the cost of demolition and relocation reimbursement incurred for different types of development products can be accounted for independently, Company Z considered that the cost of demolition and relocation reimbursement incurred for ordinary residential, non-ordinary residential and other products should be separately aggregated and deducted for each of the three types of development products, and that there was no need to summarize the cost of demolition and relocation reimbursement before apportioning it according to the floor area method. Accordingly, the land value-added tax refundable was calculated to be RMB8.45 million.

In July 2019, the E Municipal Tax Bureau issued a Liquidation Audit Notice, which determined that the beneficiary of Company Z's demolition and restoration of construction costs was all the development products of the Liquidation Project, and that the demolition and restoration of construction costs should be included as the development costs of the overall project, and should be apportioned among the three types of products according to the floor area method and the floor height coefficient method, and confirmed that the land value-added tax refundable to Company Z should be RMB3,760,000 yuan.

Company Z was not satisfied and filed administrative reconsideration and administrative litigation. The court held that, in accordance with the principle of benefit, the exclusive cost method is preferred for cost attribution, and only when the exclusive cost method does not have the conditions of applicability is the floor area method or other methods determined by the tax authorities selected. The exclusive cost of demolition and relocation emphasizes the uniqueness of clear direction and benefit. In this case, the cost of demolition and relocation is included in the cost of land at the point of time of demolition and relocation, regardless of how the demolition and relocation agreement is stipulated, the cost of demolition and relocation is aimed at the land under the demolished house rather than the newly built house, and the purpose of demolition and relocation is for the further development of the whole piece of land rather than pointing to a certain industry, and the benefit of which is the whole piece of land, so the cost of demolition and relocation is regarded as non-exclusive cost in accordance with the principle of benefit. Therefore, the cost of construction should be regarded as a non-exclusive cost to be apportioned in accordance with the floor area method.

(III) Summary

In the two cases mentioned above, although neither of the cost attribution methods claimed by the taxpayers was upheld by the courts, the courts did not have the same starting point in upholding the cost attribution methods applied by the tax authorities. One case supported the application of an imputation method fixed by local regulations and did not consider whether the method complied with the principle of benefit, while the other started from the principle of benefit, arguing that the demolition and relocation compensation costs, although incurred in some of the parcels of land of the project, had benefited all the businesses of all the parcels, and should therefore be apportioned among all the businesses of all the parcels of land as a common cost, and negated the direct imputation of the costs to the parcels of land on which the costs had been incurred. Deduction.

III. Choice of cost attribution method - with the principle of benefit as the fundamental guide

(I) The original purpose of the cost-sharing methodology

The cost attribution method is a specific means of realizing the deduction of various types of costs by attributing them to different liquidation units or different types of real estate, and its purpose is to accurately account for the amount of value-added, to tax more on high value-added, less on low value-added, and not to tax no value-added, to regulate real estate investment income, and to safeguard the fairness of taxation. If a certain cost that does not have an impact on the value-added of the type of real estate is attributed to that type of real estate, it will reduce its value-added, and at the same time, it will also cause the type of real estate that should be apportioned to the cost of the cost of the lack of cost, value-added increase, and the attribution of the cost in violation of the principle of benefiting the taxpayer's tax burden will be imbalanced. That is to say, the cost attribution focuses on achieving the reasonableness of the amount of recognized value added, and from the perspective of the original purpose, the benefit principle has the necessity and priority of application in the cost attribution deduction.

(II) Liquidation activities should be guided by the principle of beneficence

According to Article 21(5) of the Land Value-added Tax Settlement and Management Regulations, "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 common costs and expenses in accordance with the objects to be benefited by adopting a reasonable allocation method". This is certainly a requirement for the tax authorities to review the deduction items, but also a standard that taxpayers should meet in apportioning common costs and expenses, i.e., the principle of benefit is the fundamental requirement for cost aggregation, and the floor area method, the floor space method and other methods recognized by the tax authorities are only the means to achieve this requirement.

In the liquidation of specific real estate projects, it is not possible to depart from the actual situation of each case and prescribe "across-the-board" what liquidation units, what types of real estate or what deductions must be used in a certain method of apportioning deductions. Where the floor area method is more in line with the principle of benefit, the floor area method should be applied; where the floor area method is more in line with the principle of benefit, the floor area method should be applied; and where none of the prescribed methods is in line with the principle of benefit, other reasonable methods should be applied.

(III) Some local provisions substantially affect the application of the principle of beneficence

At the national level, the Implementation Rules specify that the methods of apportioning deductions include the floor area method, the floor area method and other methods recognized by the tax authorities, neither limiting the order of application of these methods nor specifying that only the floor area method or the floor area method can be applied in the absence of any other method specified by the tax authorities. The provisions of the tax authorities in various regions, although to a certain extent, have refined the above ambiguous provisions by stipulating the conditions for the application of the various apportionment methods in accordance with the deduction items, liquidation units or different real estate types respectively, and some of them have even imposed restrictions on the order of application. Throughout the regulations, it is often clear that a certain or sequential application of certain apportionment deduction methods is fixed under various circumstances, and few places have given the "other reasonable methods" room for application in cost summarization. This actually limits the opportunity for taxpayers to choose to apply other reasonable methods, and out of the consideration of avoiding law enforcement risk, the tax authorities will not apply the collection methods proposed by taxpayers which are more in line with the principle of benefit, thus exposing taxpayers to the risk of a sharp increase in the land value-added tax burden caused by the adjustment of deduction items and aggravating the obligations of taxpayers. It can be seen that some local regulations limit the application conditions and order of application of cost sharing methods, ignoring the important guiding role of the beneficiary principle in the common cost pooling, and there is also the suspicion of violating the higher law.

IV. wrap-up

In terms of purpose, the cost allocation method is committed to the accurate recognition of value-added; in terms of realization criteria, the requirement for the reasonableness of the cost attribution deduction is to comply with the principle of beneficence; and in terms of regulations at the national level, the legislation permits the use of other reasonable methods, provided that they comply with the principle of beneficence. Therefore, rather than rigidly applying local regulations, it is more reasonable and necessary to confirm whether the cost attribution method used by the taxpayer complies with the benefit principle.

However, at present, the mainstream of tax enforcement is still based on the application of specific local regulations, and taxpayers who want to adopt other reasonable methods for cost imputation should consult the competent tax authorities in advance and actively state the reasons why the cost imputation methods used are more in line with the beneficiary principle, so as to strive for the results in favor of the taxpayers, and to avoid the deduction items from being adjusted, which will result in the payment of back taxes and late fees, and even the risk of being found guilty of tax evasion and even criminal prosecution of the crime of tax evasion. Avoiding the risk of having the deduction items adjusted, resulting in back taxes and late payment fees, or even being recognized as tax evasion and incurring fines or even criminal liability for tax evasion.