By Clara Yang

Recently, the attorneys at our firm have encountered several contentious cases related to the land value-added tax (LVAT) settlement for real estate enterprises. Most of these revolve around the recognition and allocation of "land cost". Land value-added tax is one of the most significant taxes for real estate enterprises, characterized by a high tax rate, a complex and varied basis for assessment, and a long settlement cycle. Land costs typically represent a substantial portion of the development costs, and the determination of the deductible amount and the method of deduction can significantly impact the amount of LVAT. This article provides a brief analysis of key issues surrounding land cost accounting in LVAT settlements. 

1.Settlement Unit

The "Notice on the Administration of Land Value-Added Tax Settlement for Real Estate Development Enterprises" (State Administration of Taxation [2006] No. 187) first introduced the concept of the "settlement unit." Article 1 of this notice stipulates that LVAT settlement is conducted on a per real estate development project basis, as approved by relevant state authorities. For phased development projects, settlement is performed on a per phase basis. Additionally, Article 17 of the "Notice on Issuing the Regulations on Land Value-Added Tax Settlement Administration" (State Administration of Taxation [2009] No. 91) specifying that, during the settlement review, it should be checked whether the real estate development project is being settled on a per approved project basis and whether phased developments are being settled on a per phase basis. It should also be confirmed whether different types of real estate are treated separately for the calculation of value-added amount and tax rate.

While the national regulations establish the basic framework for defining the "settlement unit," they do not provide clear guidance on the specific form in which "approval by the relevant national authority" should be expressed. Furthermore, the concepts of "phased development" and "phased project" are not explicitly defined in these regulations. Instead, the regulations provide an authorization clause: "Local tax authorities may develop specific settlement management measures based on the provisions of this notice and local circumstances." As a result, local tax authorities have been granted the discretion to formulate specific measures tailored to local conditions. This has led to regional variations in how the "settlement unit" is determined.

In practice, local governments have adopted different standards for determining settlement units, which are generally based on one or more of the following documents: the "Construction Land Planning Permit," the "Construction Engineering Planning Permit," the "Building Construction Permit," or approval documents from the National Development and Reform Commission. These standards vary from province to province.

2. Allocation of "Land Costs"

From the perspective of the state policy, taxpayers may allocate costs using a reasonable method based on the principle of the benefiting object. Article 21 of the "Notice on Issuing the Regulations on Land Value-Added Tax Settlement Administration" (State Administration of Taxation [2009] No. 91) stipulates that, for projects developed in phases or for multiple projects developed simultaneously, or for a single project containing different types of real estate, costs should be allocated based on the benefiting object using reasonable allocation methods. Article 9 of the "Implementation Rules of the Interim Regulations on Land Value-Added Tax of the People's Republic of China" (Finance Law [1995] No. 6) stipulates that if a taxpayer acquires land use rights in bulk and subsequently develops or transfers real estate in stages or batches, the determination of the deductible amount may be calculated on a pro-rata basis either by the ratio of the area of the transferred land use rights to the total area, or by the building area, or by other methods confirmed by the tax authority.

Common methods for allocating the deduction items of land value-added tax include: the building area method, the land area method, and the direct cost method. The building area method allocates costs based on the ratio of the building area of the real estate project to the total building area. The land area method allocates costs based on the ratio of the land area of the real estate project to the total land area. The direct cost method directly accumulates costs based on the benefiting object or settlement unit. The method of allocation directly affects the deductible items for the settlement unit, which in turn influences the value-added amount, the value-added rate, and the applicable tax rate, ultimately affecting the amount of LVAT payable.

Typically, when different types of real estate are developed on separate parcels of land, it is more appropriate to allocate land costs using the land area method. In contrast, when a building contains different floors or different sections with varying types of use, it is more reasonable to allocate costs based on the building area method.

In some provinces and cities, regulatory documents on LVAT allow for the direct cost method to be prioritized. When costs can be directly attributed to a cost object, they should be directly included in the cost. Only when direct attribution is not possible should allocation methods be used. For example:

The "Announcement on Several Issues Concerning Land Value-Added Tax" (Jiangsu Provincial Local Taxation Bureau Announcement [2015] No. 8) stipulates that, when allocating land costs between different settlement units or between different types of real estate within the same unit, costs that can be directly attributed should be included directly in the land cost of the relevant settlement unit or type of real estate. If direct attribution is not possible, allocation may be made using the building area method or other reasonable methods recognized by the tax authorities.

However, relevant documents in Shandong Province stipulate that, when land costs are allocated using the direct cost method, the land must be governed by independent land agreements to reflect the independence of its costs. 

Announcement by the State Taxation Administration Shandong Provincial Taxation Bureau on the Issuance of the "Regulations on the Settlement Management of Land Value-Added Tax by the State Taxation Administration Shandong Provincial Taxation Bureau" (State Taxation Administration Shandong Provincial Taxation Bureau Announcement No. 10, 2022) states in Article 30 that deductible items for real estate development shall meet the following requirements: (6) The land costs and other costs and expenses within the same settlement unit shall be allocated based on the proportion of saleable building area for each type of real estate relative to the total saleable building area. For projects that can provide independent land transfer contracts, allocation agreements, or investment agreements, land costs may be directly attributed to the beneficiary object.