09.08.10 01:49 Age: 8 yrs
SAT Issued New Circular to Restrict Collection of LVAT
On May 19th 2010, the State Administration of Taxation (“SAT”) promulgated the Notice Regarding Certain Issues of Calculating Land Value-Added Tax (Guo Shui Han  No.220) (the “Notice”). The Notice further clarified the calculation of land value-added tax (“LVAT”) from certain aspects concerning calculation of income, deduction of costs, compensation of dismantlement, and such others.
(1) Calculation of Income
If invoices are made out, the calculation of income shall be in accordance with the invoice value; otherwise, it shall be in accordance with contract value and other income.
(2) Deduction of Costs
a) Where the developer withholds a certain payment of the project under the contract, the withheld amount may be deducted only if the developer has made out invoices; if not, such amount may not be deducted when calculating LVAT.
b) Interests of loans from financial institutions may be deducted with the limit of 5%, and interests of other loans with 10%.
c) Idle land fee may not be deducted from the calculation of LVAT.
d) Deed tax, which is paid by the developer in order to obtain the right to use the land, may be deducted.
(3)Compensation of Dismantlement
If the developer resettles the dwellers with its own real estate, the costs should be calculated in accordance with SAT’s relevant circular (Guo Shui Fa  No.187). Costs of resettlement otherwise should be deducted based on actual costs.
Scott Garner, Manager of Lehman, Lee & Xu Shanghai Office, said, “The Notice indicates SAT’s determination in restricting the collection of LVAT. If the Notice is fully implemented, there would be an impact for the real estate developers.” He further analyzed, “Prior to the Notice, LVAT is levied in a loose way. The restriction imposed is a significant transition. It can increase the income of taxation; on the other hand, it can also urge the developers to develop idle lands to some extents.”
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