Since 2023, a number of local tax bureaus have focused on issuing a number of notices on tax matters, requiring real estate enterprises to make liquidation declarations on their land value-added tax (LVAT) or to approve their taxable amount, which may result in a concentrated eruption of tax-related risks for the enterprises. For projects eligible for liquidation, real estate enterprises should organize timely liquidation and pay close attention to the risk of land value-added tax.

I. Centralized Publication for Service of Land Value Added Tax Clearance Notices

(I) Ningbo 

In April 2023, the Second Tax Office of Yuyao Municipal Tax Bureau of the State Administration of Taxation ("SAT") and the Gaotang Tax Office of Yuyao Municipal Tax Bureau of the State Administration of Taxation ("Yuyao Municipal Tax Bureau") served a total of four announcements of real estate enterprises with Notices of Tax Matters, which requested for approval of the levy and collection of land value-added tax ("LVAT") in respect of their eligible projects.

(II) Jiangsu Province 

On March 16, 2023, the Second Taxation Sub-bureau of Shuyang County Taxation Bureau of the State Administration of Taxation served a Notice on Tax Matters (Land Value-added Tax Clearance Notice) to three real estate enterprises by way of announcement, requesting them to go through the procedures of declaration of liquidation in respect of the projects which have met the conditions for land value-added tax clearance.

(III) Sichuan Province 

On March 16, 2023, the Third Tax Office of Jinniu District Tax Bureau, Chengdu City, State Administration of Taxation ("SAT") served the Notice on Tax Matters (Land Value-added Tax Clearance Notice) to 2 real estate enterprises by announcement, requesting them to go through the procedures of declaration of liquidation in respect of the projects which have met the conditions for land value-added tax clearance. 

On February 10, 2023, the Zhihe Tax Sub-bureau of Pengzhou Taxation Bureau of the State Administration of Taxation ("PZB") served the Notice on Tax Matters (Land Value-added Tax Clearance Notice) to three real estate enterprises by way of announcement, requesting them to go through the procedures of declaration of clearance and submission of relevant information in respect of the projects which have met the conditions for land value-added tax clearance.

(IV) Beijing

On February 24, 2023, the Beijing Pinggu District Tax Bureau of the State Administration of Taxation ("SAT") served land value-added tax ("LVAT") approved collection instruments to 2 real estate enterprises by public announcement, requesting them to declare and pay taxes in respect of the corresponding projects.

On July 26, 2022, the Science and Technology Park Tax Office of the Beijing Yanqing District Taxation Bureau of the State Administration of Taxation ("SAT") served a Notice of Land Value-added Tax ("LVAT") Clearance on five real estate development enterprises by public announcement, requesting them to go through the procedures of applying for liquidation in respect of the projects that have met the conditions for LVAT clearance.

II. Centralized Clearance and Third-Party Audit Continues

According to public information on the China Government Procurement Website, since 2023, 155 real estate projects in Beijing, Hebei, Jiangsu, Sichuan, Guangdong, Shandong and Liaoning provinces have been successfully awarded bids and implemented for land value-added tax (LVAT) clearance and third-party co-audit services. Among them, 60 projects for Beijing Chaoyang District Taxation Bureau, 6 projects for Yantai Laishan District Finance Bureau, 4 projects for Chengdu Xindu District People's Government Guihu Street Office, 10 projects for Chengdu Xindu District People's Government Xindu Street Office, 30 projects for Beijing Tongzhou District Taxation Bureau, 16 projects for Suzhou Gusu District Taxation Bureau and Suzhou National High-tech Industrial Development Zone Taxation Bureau, 4 projects for Dandong Border Economic Cooperation Zone Taxation Bureau, 4 projects, Guangzhou Nansha District Taxation Bureau, 8 projects of Beijing Districts Taxation Bureau, and 17 projects of Xianghe County Taxation Bureau. The percentage of land value-added tax service projects procured by each local tax bureau is shown in the chart below: 

The high number of government purchases of land value-added tax auditing services reflects the fact that a large number of real estate projects have reached liquidation conditions and need to be processed for land value-added tax liquidation. On the one hand, the reason for this is that real estate enterprises are not highly motivated to take the initiative to liquidate, and on the other hand, due to the fact that enterprises do not have a deep understanding of the tax law, take chances or are negligent, etc., which leads to improper calculation and declaration of land tax, and it is very easy to lead to tax risks in the stage of land value-added tax liquidation and audit.

Since the issuance of the Circular of the State Administration of Taxation on Strengthening the Collection and Administration of Land Value-added Tax (Guo Shui Fa [2010] No. 53) in May 2010, the past practice of "mainly approving the land value-added tax, once approving the land value-added tax" and "seeking for quickness and economy" has been corrected. In the future, the main method of land value-added tax collection will still be based on liquidation collection, and no unit or individual shall expand the scope of authorized collection without authorization.

III. Land value-added tax centralized liquidation audit, real estate enterprises should pay attention to the six major risks

(I) Risk of paying back land value-added tax

According to Article 32 of the Tax Collection and Management Law, as long as a taxpayer has the situation of "failing to pay tax in accordance with the stipulated time limit", regardless of whether the taxpayer has the subjective intention of tax evasion or not, the tax authorities may order the taxpayer to pay tax by the stipulated time limit. If a real estate development enterprise underpays the tax in the land value-added tax clearance audit, the enterprise will first face the risk of paying back the tax.

Enterprises that have not yet been included in the scope of land value-added tax liquidation and audit cannot take any chances. According to the Circular of the State Administration of Taxation on the Issuance of <Land Value-Added Tax Liquidation and Management Procedures> (Guoshuifa 〔2009〕 No. 91), the tax authorities implement the preliminary stage of real estate projects' land value-added tax management, and since taxpayers have obtained the right to use the land, the tax authorities will establish the files and set up the accounts according to the projects respectively. Since the taxpayer acquired the land use right, the tax authorities set up files and accounts according to the project, and carried out tracking and monitoring of the whole process of real estate development, such as project initiation, planning and design, construction, pre-sale, completion and acceptance, project settlement and project liquidation. Even though the project has not yet entered the liquidation stage, the tax authorities have actually grasped more detailed tax-related information of the relevant project, which may expose the hidden risk of land value-added tax existing in the real estate project. Enterprises that have been included in the scope of land value-added tax liquidation audit should pay land value-added tax in full and on time in accordance with the law.

(II) Risk of land value-added tax late payment fees

According to Articles 32 and 52 of the Law on Administration of Tax Collection, except for the cases where the taxpayer has underpaid tax due to the responsibility of tax authorities, the tax authorities may order to add a late payment fee of five ten thousandths of the tax from the date of late payment on a daily basis. That is to say, for the situation other than the responsibility of the tax authorities, the payment of tax and the late payment fee are often accompanied by each other. The longer the real estate development enterprise pays the tax, the longer the late fee will become a heavy economic burden.

(III) Risk of not being able to deduct the land value-added tax paid before tax

Normally, land value-added tax and enterprise income tax are the two heaviest tax burdens for real estate development enterprises. The land value-added tax paid in compliance can be expensed before enterprise income tax, thus reducing the burden of the enterprise. However, both land value-added tax and enterprise income tax are not payable on a per-period basis, but are payable for a certain period of time, of which "a certain period of time" is different. Land value-added tax is paid during the period of real estate development and construction, while enterprise income tax is paid on an annual basis. Real estate development and construction is usually carried out by setting up a project company according to the project, which is liquidated and written off after the project development is completed and the commercial properties are sold. If the real estate development enterprise does not timely liquidate after the liquidation conditions are met, resulting in the completion of the enterprise income tax remittance and the existence of unpaid taxes, unable to do the tax write-off, then, in the case of the enterprise has no source of income, the huge losses arising from the retroactive payment of enterprise taxes can not be made up by the income, and because China's enterprise income tax does not have the rule of loss carry-forward, the corresponding losses will be ultimately borne by the shareholders of the project company. The shareholders of the Company will ultimately bear all the losses.

(IV) Risk of transferring from liquidation review program to tax audit

As mentioned above, the tax authorities are involved in the whole process of tax-related administration of real estate projects, and the land tax increase audit is only one of the links. According to the "Tax Audit Procedures" (Guo Shui Fa [2009] No. 157), tax collection and management information is an important source of information for audit. The Circular of the State Administration of Taxation on the Issuance of Measures for the Management of Tax Audit Case Sources (for Trial Implementation) (Taxation General Administration of Taxation [2016] No. 71) has also made it clear that data, information and clues relating to suspected tax evasion (avoidance of payment of tax), avoidance of recovery of tax debts, tax fraud, tax resistance, false invoicing and other tax offenses are established as sources of tax audit cases. If the third-party audit finds that the enterprise concerned may have committed major tax violations such as stealing, evading, resisting, cheating, false invoicing, etc., the audit report issued by the third-party will be used as tax collection and management information, based on which the tax authorities may determine the enterprise concerned as the target of audit and file an audit case. If, after the audit, the enterprise subjectively has the intention to evade tax and avoids payment of land value-added tax by committing tax evasion or accepting false invoices listed in the Tax Collection and Administration Law and the Measures for the Administration of Invoices, the enterprise may be fined from 0.5 times to 5 times of the underpayment of tax.

(V) Risk of false tax declaration triggering criminal liability

In the course of tax audit, the tax authorities will transfer the case file to the public security authorities if they find that the enterprise is suspected of committing a crime. If the investigation finds that the enterprise does have tax evasion behavior, it may be held criminally liable for tax evasion. According to paragraph 1 of Article 201 of the Criminal Law, the enterprise may be sentenced to a maximum of seven years' imprisonment and fined according to the severity of the circumstances of the crime. Paragraph 4 of Article 201 of the Criminal Law also indicates that a taxpayer who has committed tax evasion but pays the tax due and late fees after the tax authorities have issued a notice of recovery in accordance with the law and has already been subject to administrative penalties will not be held criminally liable. However, it will be difficult to circumvent criminal liability if the enterprise misses the opportunity of administrative preliminaries.

(VI) Centralized liquidation audit poses greater compliance challenges to the tax management capability of real estate enterprises

At present, the land value-added tax levy and control is tightening, and centralized land value-added tax liquidation audits may become the norm in the future, which requires real estate enterprises to take effective measures to deal with the various tax risks revealed in the centralized liquidation audits.

For one thing, the excessive difference in the land value-added tax liability rate in the past years may attract the attention of the tax bureau. After making up for the tax, the land VAT tax liability rate of enterprises may be significantly increased. However, after the completion of the development and construction of a real estate project, the sales may be spread over many years, and the enterprise needs to pay attention to whether the land VAT liability rate is balanced in each year. If the difference between the land VAT liability rates of enterprises in different years is too large, they may be required by the tax authorities to provide reasonable explanations.

Secondly, the tax audit may be extended to other taxes. Through the tax-related information of the enterprise grasped in the process of liquidation audit, the tax authorities may extend the scope of tax audit to other taxes through the issue of land value-added tax. It may involve the risks of concealing enterprise income tax revenue, forging enterprise income tax deduction vouchers, accepting false VAT invoices for booking and deduction, concealing shareholders' personal tax, underpaying and omitting stamp duty and deed tax, and so on.

Thirdly, the liquidation audit may trigger the audit of enterprises outside the scope of the audit. If the tax authorities, through the tax-related information in their possession, find that the income or deduction declared by the enterprises not included in the scope of centralized liquidation audit differs significantly from that of the enterprises in the same lot, they may be required to provide materials for explanation, which may even lead to tax audits. Therefore, even if they are not included in the scope of audit, enterprises should pay close attention to whether the land value-added tax declared by them is more balanced than that declared by enterprises of the same type in the same lot.