Savills: The long awaited B2V for the real estate sector is finally here

James Macdonald, Director of China Research said: “The long awaited transition from Business Tax to Value Added Tax for the real estate sector is finally over. Announcements were made in early March as to the timeline, and yesterday additional details of the policy were released with implementation taking place on 1 May 2016. The transition will most likely be fraught with teething issues as companies search for the best way to minimize their tax exposure and offset any additional tax that may need to be paid.”

The State Council launched the pilot program for the transition from business tax to value added tax in stages in January 2012, hoping to eliminate double taxation and promote the overall economy. The earlier stages of the roll out have already touched upon many sectors of the economy, including but not limited to transportation network providers and telecommunications. Four key sectors remain, the construction sector, financial services and consumer services (includes hotels, restaurants, education, healthcare and others) and the real estate sector. It was announced by Le Keqiang at the fourth session of the twelfth National People’s Congress on 5 March 2016 that work to include the final four sectors under the new VAT system would begin on 1 May 2016.

China, in its implementation of the VAT system, hopes to join the close to 140 other countries that have implemented a full VAT regime. The transition to VAT is likely to prove very challenging for many companies, especially given the short lead time provided between the announcement and implementation of the new rules. In order to plan for the transition to the new tax regime, many companies started preparing earlier this year or even in 2015. However, others have decided to wait until more details are made public, particularly because China’s VAT system is believed to be more complicated than those of other countries.

While many companies are concerned that the transition to a higher VAT rate from the existing business tax will increase the tax burden for their business, input tax credits should help offset the higher tax rate, meaning that some, but not all, companies could receive some tax relief from the new system. This will be determined by each individual company’s operations and what costs can be deductible tax credits under the new system.

The government has expressed its belief that VAT will reduce the tax burden. A report by China International Capital Corp stated that tax savings could total more than RMB900 billion, or the equivalent of 0.4% of GDP, once all industries have shifted to the VAT system in 2016.

The hope is also that VAT will encourage the development of the service industry, helping the economy shift from a manufacturing and fixed asset investment led economy to a consumption and services led economy.

For the real estate sector, the current business tax is 5% on the sale of immovable property and 3% on construction services. Under the new VAT regime the tax rate will be set at 11%, though there will be the introduction of input tax credits which will allow companies to offset some of their costs. The combined effect could prove to be beneficial to the tax payer; however this will be decided on a case by case basis.