Recently, SOHO China released its 2023 interim results announcement, disclosing that: as of the date of the announcement, its subsidiary, Beijing Wangjing Sohou Real Estate Company Limited, owed nearly $2 billion in land value-added tax (LVAT) and late fees, and may be at risk of fines and tax enforcement. For large real estate development enterprises, land value-added tax often occupies a very high proportion of the overall tax burden, is a tax cost that cannot be ignored, if not well in advance of the tax planning, resulting in unpaid land value-added tax, will face serious tax risks. This paper intends to analyze the tax-related risks and countermeasures of real estate development enterprises defaulting on land value-added tax in the context of SOHO China's tax arrears, and put forward suggestions to the majority of taxpayers to resolve tax arrears risks.

I. Case Study

(I) SOHO China subsidiaries received tax payment notices in August 2022     

In August 2022, Beijing Wangjing Soho Real Estate Company Limited, a subsidiary of SOHO China, received a tax payment notice from the local tax authorities requiring it to pay the land value-added tax related to Towers 1 and 2 of the Wangjing SOHO project in the amount of RMB1,733 million by September 1, 2022, with a late fee of five ten-thousandths of one percent of the amount of the late tax to be charged on a daily basis from the date of the late payment of the tax.

(II) SOHO China still owes 1.986 billion yuan of land value-added tax

On August 18, 2023, SOHO China released its 2023 interim results announcement, which showed that Beijing Wangjing Sohu Real Estate Company Limited had paid land value-added tax of RMB30.6 million as of June 30, 2023, and that RMB1,986 million of land value-added tax and related late payment fees were still outstanding.SOHO China further stated that. "Pursuant to the Tax Collection and Management Law, the local tax authorities may take other coercive measures, including, but not limited to, the seizure, attachment, auction or sale of the relevant properties in accordance with the law, as well as the imposition of a fine of not less than 50% and not more than 50% and not more than five times of the unpaid or underpaid tax in respect of the late payment of the land value-added tax."

In order to pay off the land value-added tax and the related late payment fees, the Group has been in continuous communication with the local tax authorities and has reached an agreement on a specific repayment plan, whereby SOHO China will continue to dispose of certain commercial properties in order to pay off a portion of the land value-added tax. After June 30, 2023 and up to the date of approval of the Interim Condensed Consolidated Financial Statements, SOHO China will make a further reimbursement of RMB7 million.

II. Formation of land value-added tax arrears of real estate development enterprises

From an entity perspective, due to the long development and construction cycle and the large amount of capital utilized in the real estate industry, the rolling development mode is mostly adopted, i.e., the pre-projects in the development segment are reclaimed by way of pre-sale, and the revenues obtained continue to be used for the development of the projects at a later stage. The land value-added tax (VAT) is characterized by the liquidation of the project after the basic completion of the project, which leads to a disconnect between the time of obtaining project income and the time of liquidation of the project. If real estate development enterprises do not make tax planning in advance and expand the scale of development projects, it may lead to the inability to pay land value-added tax in the liquidation of preliminary projects. In recent years, the real estate market has been on a downward trend, with a large number of real estate transactions shrinking, triggering a "downturn in the property market - difficulties in the return of funds to new projects - defaults in the delivery of old projects - claims by owners and builders - claims by owners and builders - claims by owners and builders. -Claims of owners and builders - default on bank loans", the mode of "remedying taxes by removing the east wall and mending the west wall" through bank loans is also unsustainable, and more and more projects are caught in the predicament of defaulting on payment of land value-added tax. More and more projects fall into the predicament of non-payment of land value-added tax. From the procedural point of view, the formation of land value-added tax arrears usually goes through the following links:

(I) Failure to file land value-added tax clearance declarations in accordance with the law      

According to Articles 9 and 10 of the Land Value-added Tax Settlement Management Regulations, the conditions for land value-added tax settlement are divided into two categories, which should be liquidated and may be requested by the tax authorities to be liquidated. According to Article 11 of the Land Value-added Tax Settlement Management Regulations, after a real estate project meets the conditions that it should be liquidated, the real estate development enterprise shall go through liquidation procedures within 90 days. After a real estate project meets the conditions that it may be required to liquidate, the tax authorities require the real estate development enterprise to carry out land value-added tax liquidation, and the real estate development enterprise shall carry out the liquidation procedures within 90 days from the date of receipt of the liquidation notice. If a real estate development enterprise does not make a liquidation declaration within the prescribed period after meeting the liquidation conditions, or does not make a liquidation declaration within the prescribed period after receiving the notice from the competent tax authority, it is a case of failing to make a land value-added tax liquidation declaration in accordance with the law.

(II) Refusal to declare when ordered to do so by the deadline

If a real estate development enterprise fails to make land value-added tax declaration in accordance with the law, the tax authorities may, in accordance with the provisions of Article 62 of the Law on Administration of Tax Collection, issue a Notice of Order to Make Corrections within a Time Limit to require the real estate development enterprise to make a declaration within a time limit and to provide the information on the declaration within a time limit. If the real estate development enterprise does not make liquidation declaration and provide liquidation information within the period required by the tax authority after receiving the Notice of Order to Make Corrections within a Time Limit, the real estate development enterprise is ordered to make declaration within a time limit and refuses to make declaration.

(III) Compulsory implementation of land value-added tax clearance audit

If a real estate development enterprise is ordered to make declaration within a certain period of time and refuses to make declaration, the tax authorities will usually issue a Notice of Tax Inspection to carry out inspection of the real estate development enterprise. During the inspection period, the tax authorities may issue the Notice of Inquiry and Notice of Access to Book Information to the real estate development enterprise, etc., and implement the land value-added tax liquidation audit by inquiring the staff of the enterprise, accessing the book information of the enterprise and carrying out on-site inspections, etc., and notify the real estate development enterprise of the adjustment of the non-deductible costs and expenses by way of the issuance of the Notice of Tax Matters. After the above inspections, the tax authorities compulsorily completed the land value-added tax liquidation and audit work and issued the Notice on Tax Matters (Notice of Conclusion of Liquidation and Audit), informing the real estate development enterprise of the land value-added tax that should be paid back and requesting it to pay the same by a certain deadline. Since then, the fact that the real estate development enterprise owed land value-added tax was determined by the tax instrument in accordance with the law.

It should be noted that if a real estate development enterprise fails to make a liquidation declaration in accordance with the law after meeting the conditions for liquidation, the tax recovery period shall be calculated from the date of expiration of the liquidation declaration period (i.e., the date of establishment of the unlawful act). During the tax recovery period, the tax authorities may implement the above investigative and punitive acts in accordance with the law. For real estate development projects that do not meet the conditions that should be liquidated, but meet the conditions that can be liquidated, and the tax authorities notify the real estate development enterprise to liquidate, there is a controversy as to whether the tax recovery period applies.

III. Risk analysis of land value-added tax arrears of real estate development enterprises

(I) Indefinite period for the recovery of tax arrears and the imposition of late payment charges

According to the Reply of the State Administration of Taxation on the Issues Relating to the Period of Recovery of Tax Arrears (Guo Shui Han [2005] No. 813), the tax arrears that have been investigated and dealt with by the tax authorities shall not be subject to the limitation of the period of recovery of tax, and the tax authorities shall recover tax for an indefinite period in accordance with the law. Therefore, if a real estate development enterprise does not handle the land value-added tax liquidation declaration in accordance with the law, and the tax authorities open a case for inspection within the tax recovery period and eventually make a Notice of Tax Matters (Notice of Liquidation Audit Conclusion), which results in the formation of land value-added tax arrears by the real estate development enterprise, the tax authorities may recover the tax indefinitely and impose late payment charges. The means of recovery by the tax authorities mainly include:

Recovery from the taxpayer

If the tax authorities have made a Notice of Tax Matters (Notice of Conclusion of Liquidation Audit) requesting the real estate development enterprise to pay the land value-added tax in arrears within a certain period of time, and the real estate development enterprise fails to pay the tax within a certain period of time and has not filed any remedial procedures such as administrative reconsideration or administrative litigation, or has not applied for an extension of the tax payment, the tax authorities may, in accordance with the provisions of Article 32 and Article 68 of the Law of the People's Republic of China on the Administration of Taxation Levies, make a Notice of Tax Notice of Matters", ordering the real estate development enterprise to pay the tax in arrears within a certain period of time, and adding a late fee of five ten thousandths of one percent of the amount of late tax on a daily basis from the date of late payment of tax.

Recovering the tax from the tax guarantor

The tax guarantee of land value-added tax is mainly applicable to three situations:

The tax authorities have the basis to believe that the real estate development enterprise has the behavior of evading the tax obligation and order it to pay the tax payable within a limited period of time, and within the limited period of time, it is found that the real estate development enterprise has the obvious signs of transferring or concealing the taxable income;

The legal representative of a real estate development enterprise that owes land value-added tax and late payment fees needs to leave the country;

The real estate development enterprise needs to apply for administrative reconsideration.

When other enterprises provide tax guarantee for the land value-added tax owed by a real estate development enterprise, they are required to sign a tax guarantee agreement and a Tax Guarantee Certificate with the tax authorities, agreeing on the period of time for the fulfillment of the tax debt. This deadline is usually determined based on the deadline for the real estate development enterprise to initiate legal remedy proceedings or the deadline for the tax authority to request the real estate development enterprise to pay the tax in arrears. If the real estate development enterprise loses the lawsuit after reconsideration or litigation, or fails to pay the outstanding tax on time without initiating remedial proceedings, the tax authority will issue a Notice of Tax Matters to the guarantor before the expiration of the deadline for the fulfillment of the outstanding tax debt, informing the guarantor of the guarantor's responsibility in accordance with the law. If the real estate development enterprise still fails to pay the outstanding tax upon the expiration of the deadline for the fulfillment of the outstanding tax debt, the tax authority will make a Notice on Tax Matters to the guarantor within 15 days, informing the guarantor to fulfill the guarantee obligation according to the law within 15 days, and to pay the guaranteed outstanding tax and late payment fee on behalf of the guarantor. If the guarantor fails to fulfill the guarantee obligation, the tax authority will issue a Notice of Tax Matters to the guarantor and order the guarantor to pay the outstanding tax and late payment fees within 15 days.

(II) Enforcement

(1) Enforcement of taxpayer's property

According to Article 40 of the Tax Collection and Administration Law and Article 35 of the Administrative Compulsory Law, if a real estate development enterprise fails to pay the tax in arrears in accordance with the prescribed period and is ordered by the tax authorities to pay the tax within a specified time limit, and if it fails to pay the tax after the expiry of the time limit, the tax authorities will make a Reminder (Applicable to Administrative Compulsory Enforcement) to require the real estate development enterprise to pay the tax in arrears within a specified time limit, if the real estate development enterprise fails to pay the tax even after a reminder, the If the real estate development enterprise still fails to pay after reminders, the tax authorities may take the following enforcement measures:

Make a "Decision on Tax Enforcement (Applicable to Withholding and Payment of Tax)" to the real estate development enterprise and make a "Notice of Withholding and Payment of Tax Amounts" to the bank or other financial institution of the real estate development enterprise, and notify the bank or the financial institution to withhold and pay the tax amount from the deposit of the real estate development enterprise;

Make a "Decision on Tax Enforcement (Auction and Sale Applicable)" to the real estate development enterprise, seize or attach the commodities, goods or other properties of the real estate development enterprise with a value equivalent to the tax payable, and auction or sell them according to the law, and use the proceeds from the auction or sale to offset the tax.

(2) Enforcement of property of tax guarantor

If the tax guarantor fails to fulfill the guarantee obligation to pay the outstanding tax and late payment in accordance with the specified period, and if the tax authority orders the tax guarantor to pay the outstanding tax but still fails to do so, the tax authority may take the following enforcement measures:

Make a "Decision on Tax Enforcement (Applicable to Withholding and Payment of Taxes)" to the tax guarantor and make a "Notice of Withholding and Payment of Tax Amounts" to the bank or other financial institution of its account, and notify the bank or financial institution to withhold and pay the taxes from the deposits of the tax guarantor;

To make a Decision on Tax Enforcement (Auction and Sale) to the tax guarantor, and to seize or attach the commodities, goods or other properties of the tax guarantor with a value equivalent to the tax payable, and to auction or sell them according to the law, and use the proceeds from the auction or sale to offset the tax payment.

(3) Enforcement of the secured property of the tax mortgagor or pledgee

If a tax guarantor fails to fulfill the guarantee obligation to pay the tax and late payment fee in accordance with the specified period, and if the tax authority orders the tax guarantor to pay the fee after the specified period, the tax authority will make a Decision on Enforcement of Taxes (Auction and Sale) and a Decision on Auctioning (Sale) of Tax-Contributing Property, and auction or sell the mortgages and pledges, and offset the proceeds from the auction or sale against the tax payment.

(III) Risk of administrative penalties

According to Article 68 of the Tax Collection and Administration Law, if a real estate development enterprise fails to pay or underpays the tax payable within the prescribed period, and if the tax authorities order it to pay the tax by the deadline and it still fails to do so, the tax authorities, in addition to taking the abovementioned enforcement measures, may impose on the real estate development enterprise a fine ranging from 0.5 times to 5 times of the tax that it fails to pay or underpays.

(IV) Criminal Risks of Evading Recovery of Tax Arrears

According to Article 203 of the Criminal Law, if a real estate development enterprise, after defaulting on payment of land value-added tax, adopts the means of transferring or concealing property so that the tax authorities are unable to recover the unpaid tax, and the amount exceeds 10,000 yuan, it constitutes the crime of evading recovery of unpaid tax, and it may be referred to the tax authorities for investigation of criminal liability.

IV. Risk Response of Real Estate Development Enterprises Owing Land Value Added Tax

As mentioned earlier, taxpayers who default on tax payments are not only required to pay back the tax, but may also be subject to late payment fees. One of the purposes of land value-added tax is to regulate the excessive income from land appreciation, and the land value-added tax burden itself is very heavy for taxpayers, plus the late payment fee not only may not be fully covered by the investment income, but also will cause additional economic losses to taxpayers, therefore, taxpayers should be properly coped with the unpaid land value-added tax.

(I) Negotiation with tax authorities for deferment of payment and payment by installments

(1) Apply for deferment of tax payment if qualified

According to Article 31 of the Law on Administration of Tax Collection, if a taxpayer is unable to pay the tax on time due to special difficulties, he/she may apply for deferment of tax payment with the approval of the State Administration of Taxation or Local Taxation Bureau of the province, autonomous region or municipality directly under the Central Government. The Announcement of the State Administration of Taxation on the Rights and Obligations of Taxpayers (Announcement of the State Administration of Taxation No. 1 of 2009) specifies the specific circumstances under which a taxpayer may apply for deferment of tax payment: firstly, due to force majeure, which leads to a large loss of the taxpayer, and a large influence on normal production and operation activities; and secondly, the monetary funds of the current period are insufficient to pay the tax after deduction of the wages payable to the employees and social insurance premiums. However, even if the taxpayer meets the conditions for applying for tax deferral, the tax should be paid within three months at the latest.

(2) Negotiation to pay tax first and late fee later

If a taxpayer or a tax guarantor fails to pay the tax beyond the period prescribed by tax laws and administrative regulations or beyond the tax payment period determined by the tax authorities in accordance with the provisions of tax laws and administrative regulations, according to the provisions of Item (1) of Article 1 of the Announcement of the State Administration of Taxation on Certain Matters Concerning Tax Levies and Administration (Announcement of the State Administration of Taxation No. 48 of 2019), the taxpayer or tax guarantor may negotiate with the tax authorities to negotiate to pay the tax arrears first without having to pay both the tax arrears and the late payment fee at the same time. There are two advantages of paying tax arrears first, on the one hand, the late payment fee corresponding to the tax will be terminated after paying tax arrears, on the other hand, paying tax arrears first can also reduce the burden on taxpayers and tax guarantors.

(3) Apply for payment of tax in installment if it has entered into the stage of enforcement

According to Article 42 of the Administrative Compulsory Law, if the taxpayer owes land value-added tax and is subject to compulsory enforcement, the tax authority may, without prejudice to the public interest and the legitimate rights and interests of others, reach an enforcement agreement with the taxpayer, agreeing to fulfill the tax and the late payment fee in stages. In accordance with this provision, the taxpayer may defer the pressure to pay the outstanding tax to subsequent years, and there is no restriction on the stage and period of performance of the taxpayer's phased performance as long as the taxpayer fulfills the execution agreement in accordance with the law.

(II) Apply for bankruptcy in time if it is really unable to pay

If the taxpayer's application for deferment and installment payment of outstanding tax and late payment fee is not approved, and if the taxpayer is really unable to pay the land value-added tax, it should apply for bankruptcy in time and exit the market in an orderly manner. According to the provisions of the Enterprise Bankruptcy Law, the tax authorities have tax claims on the taxes owed by the taxpayers, and if the taxpayers are unable to repay the taxes, the tax authorities can declare the tax claims through the bankruptcy procedure, and the tax claims will be liquidated in accordance with the statutory subordination. For the tax arrears arising from the normal operation of the real estate development enterprise and the late payment, if the taxpayer has been ruled by the court to be bankrupt according to the law, the taxpayer may, according to the Notice of the State Administration of Taxation on Deepening the Reform of "Putting in Place and Serving" and Making Greater Efforts to Promote the Optimization of the Procedures for Handling the Tax Write-Offs (No. 64 of Taxation General Administration of Taxation [2019]), Article 1, Paragraph (3). 

V. Recommendation: Resolve the risk of tax arrears at the front end as far as possible

The long development cycle, miscellaneous external data and high degree of specialization of real estate projects have led to the complexity of land value-added tax (LVAT) processing. From the perspective of tax policy, land VAT collection and management procedures include a number of special links such as pre-collection and clearing, and the recognition of sales revenue, the collection and apportionment of costs and expenses will have a great impact on taxpayers' tax liabilities. Moreover, there are a large number of parts of land VAT that authorize local legislations, and the policies of various places are not uniform, which is prone to tax-enterprise disputes and tax-related risks. This requires taxpayers to maintain active and smooth communication with the tax authorities, not only to provide true, accurate, complete and timely tax-related information required for liquidation and audit, and to cooperate with the tax authorities in carrying out inquiries, access to account books and information, inquiries into bank accounts and field inspections and other inspections, and to strive to restore the factual situation and to promote the audit procedure; they also have to actively exercise the right to make statements and defend themselves, and to give evidence to the tax authorities to prove the objective facts or exchange in-depth information on the applicability of the law. If a real estate development enterprise has a tax-enterprise dispute during the liquidation process and the tax authorities take audit measures, it can initiate procedures such as administrative reconsideration or even administrative litigation to realize the right to relief in the case of payment of taxes or provision of guarantees. If necessary, tax lawyers can be hired to intervene to help taxpayers effectively put forward their defense from the perspectives of whether the disputes are within the scope of taxation, whether the calculation of tax in dispute is correct, and whether the tax collection procedures are lawful, etc., so as to fundamentally and appropriately resolve the tax-related disputes and dissolve the tax risks of the enterprises in the front-end. We help taxpayers effectively resolve tax-related disputes and minimize corporate tax risks at the front-end. We avoid the formation of large land value-added tax arrears, which may trigger higher legal risks.