Editor's Note: Recently, Hwuason Law Firm received a consultation from a real estate development enterprise in a certain region. Due to incomplete cost vouchers for the enterprise's project caused by special historical reasons, the competent tax authority adjusted the enterprise's actual project revenue of 300 million yuan to 2 billion yuan when calculating the land value-added tax (LAT) liquidation tax using the verified collection rate, and then computed the tax by multiplying the hypothetical 2 billion yuan project revenue by a 5% collection rate. The enterprise found it difficult to determine whether this practice of the tax authority is legal. Combining the practice of LAT liquidation administration and the relevant provisions on verified collection, this article sorts out the two core modes of LAT verified collection, analyzes the legality of the tax authority's practice of significantly adjusting the project revenue in this case, and provides relief references for enterprises facing similar disputes.

01 Case Introduction

A real estate development enterprise responded to the local barren mountain management policy many years ago and obtained the right to use a parcel of state-owned land free of charge. Different from the conventional land acquisition mode of "bid, auction, and listing", the enterprise did not actually pay the land transfer fee, but only bore the reclamation costs such as land leveling and vegetation planting for the parcel. Later, the enterprise developed a real estate project based on this parcel. After the project was completed and sold, the competent tax authority notified the enterprise to start the LAT liquidation. After the preliminary calculation by both the tax authority and the enterprise, the project achieved a revenue of 300 million yuan and a deducted project amount of 100 million yuan. The LAT calculated under the account-based collection method was 110 million yuan, but there was a lack of land cost in the deducted items.

During the liquidation process, the enterprise stated that since the barren mountain greening activity was launched 10 years ago, the vouchers for the reclamation costs invested over the years had been incomplete due to factors such as storage period and staff turnover, resulting in no accurate land cost available for deduction. The enterprise thus requested the tax authority to verify the land cost with reference to the market evaluation price of similar land or verify the LAT using the verified collection rate. Subsequently, the tax authority issued a liquidation conclusion notice for verified collection, verifying the project's revenue as 2 billion yuan and confirming the LAT as 100 million yuan by applying a 5% verified collection rate.

The enterprise found it difficult to accept this verified result. The enterprise argued that if the account-based collection method were applied, the LAT calculated after supplementing the unsubstantiated land costs based on the market price of similar land would only be 40 million yuan. However, the tax amount verified by the tax authority was far higher than 40 million yuan, exceeding the enterprise's normal and reasonable tax burden. Moreover, the actual revenue of the project was only 300 million yuan, so there was no factual basis for adjusting the revenue to 2 billion yuan for calculation. This gave rise to a dispute between the tax authority and the enterprise.

In this case, does the competent tax authority's practice of significantly increasing the project revenue and then multiplying this hypothetical revenue by the verified collection rate comply with the relevant norms for LAT verified collection? To answer this question, it is first necessary to sort out the relevant rules for LAT verified collection in China. In accordance with the relevant provisions of the State Taxation Administration and the tax bureaus of various provinces and cities, and combined with the national practice of LAT liquidation administration, we have summarized two major categories of LAT verified collection modes: one is the combined method of account-based verification and verification, and the other is the verified collection rate method, which will be analyzed in sequence below.

02 Combined Method of Account-Based Verification and Verification: Supplementing the Tax Basis, Still Calculating Tax in Accordance with Account-Based Logic

The first category of verified collection mode, namely the combined method of account-based verification and verification, refers to verifying and supplementing the incomplete parts of revenue or deducted items. When finally calculating the tax amount, the account-based collection logic is still followed, including: "Appreciation amount = Revenue - Deducted items", "Appreciation rate = Appreciation amount / Deducted items", and "Tax payable = Appreciation amount × Progressive tax rate based on appreciation rate". Specifically, this mode can be divided into two scenarios.

(1) "Minor Verification" for the Four Development Costs

Article 4, Paragraph 2 of the Circular of the State Taxation Administration on Relevant Issues Concerning the Administration of Land Value-Added Tax Liquidation for Real Estate Development Enterprises (Guoshuifa [2006] No. 187) stipulates that if the vouchers provided by a real estate development enterprise for the four development costs (preliminary engineering fees, construction and installation engineering fees, infrastructure fees, and indirect development fees) do not meet the liquidation requirements or are untrue, the tax authority may, with reference to the construction cost quota data published by the local construction cost management department and considering factors such as building structure, purpose, and location, verify the per-unit area amount standard of these four development costs and use it to calculate the deduction.

This type of verification only targets the specific deducted items of the four development costs. In essence, it is the supplementary confirmation of costs under the framework of account-based collection, and the tax amount still needs to be calculated in accordance with the account-based logic subsequently. In local administration practice, Article 29 of the Measures for the Administration of Land Value-Added Tax Liquidation of Real Estate Development Projects in Xiamen (Announcement No. 1 of 2023 of the Xiamen Municipal Tax Service, State Taxation Administration) directly applies this rule and classifies the verification of the four development costs as one of the specific operation methods of verified collection in the region.

(2) "Item-by-Item Verification" for All Tax Bases

Different from the aforementioned "minor verification" method, the "item-by-item verification" method means that for real estate development projects eligible for verified collection, the tax authority conducts a comprehensive item-by-item verification of the sales revenue and the amounts of various deducted items, then calculates the appreciation amount and appreciation rate, and finally computes the tax amount in accordance with the progressive tax rate based on appreciation rate. When the tax authority conducts a comprehensive item-by-item verification of each tax basis, it often combines the actual amounts that can be accurately reflected in the enterprise's financial books with third-party data. Then, under this scenario, what are the provisions of various regions on the verification of "sales revenue" as a tax basis? Let's take examples:

Hainan: Article 25 of the Work Procedures for Land Value-Added Tax Liquidation of the Hainan Provincial Tax Service, State Taxation Administration (Announcement No. 3 of 2023 of the Hainan Provincial Tax Service, State Taxation Administration) stipulates that "the sales revenue from real estate transfer shall be determined based on the daily declared revenue data of the taxpayer and the total transfer contract amount of the real estate development project obtained from the government authorities. If the real estate sales price is significantly low and there is no justifiable reason, adjustments shall be made in accordance with the provisions."

Shandong: Article 37 of the Measures for the Administration of Land Value-Added Tax Liquidation of the Shandong Provincial Tax Service, State Taxation Administration (Announcement No. 10 of 2022 of the Shandong Provincial Tax Service, State Taxation Administration) stipulates that the verification of revenue shall be confirmed with reference to Article 26 of these Measures, namely "Revenue shall be determined in accordance with the following methods and order: (1) Determined based on the average price of similar real estate sold by the enterprise in the same region and the same year; (2) Determined by the competent tax authority with reference to the market price or evaluation value of similar real estate in the current year in the local area."

Sichuan: Article 2 of the Announcement of the Sichuan Provincial Tax Service, State Taxation Administration on Relevant Issues Concerning the Prepayment and Verified Collection of Land Value-Added Tax (Announcement No. 3 of 2023 of the Sichuan Provincial Tax Service, State Taxation Administration) stipulates that "if a taxpayer has circumstances such as the transaction price of transferred real estate being significantly low without justifiable reasons or inaccurate declaration, the tax authority shall verify the revenue from real estate transfer with reference to the real estate evaluation price."

Hubei: Article 45 of the Guidelines for Land Value-Added Tax Administration (Trial) (Eshuicaihang Bianhan [2021] No. 9) stipulates that "during the liquidation review process, if the competent tax authority determines that the tax basis declared by the taxpayer is significantly low and there is no justifiable reason, and the taxpayer can accurately calculate the deducted items, the competent tax authority shall only verify its tax basis. The sales revenue from house transfer may be verified with reference to the house transfer contract amount filed with the housing management department."

From the above local rules, it can be summarized that under the combined method of account-based verification and verification, the prerequisite for verifying revenue is that the declared revenue price is significantly low and there is no justifiable reason. The result of verification and adjustment shall follow the arm's length principle, with the core of restoring reasonable transactions. In operation, priority is given to confirming the revenue based on the enterprise's daily declaration data and the transfer contract amount filed with the government. Only limited adjustments are made to individual cases where the price is significantly low without justifiable reasons, and the adjustment method is to refer to the price of similar real estate, market price, or evaluation value. In other words, the tax authority cannot arbitrarily initiate the verification of revenue, nor can it randomly verify the specific amount of revenue; that is, the revenue verification conclusion made by the tax authority must meet the conditions of legality and rationality.

03 Verified Collection Rate Method: Multiplying Revenue by Collection Rate to Simplify the Tax Calculation Process

In addition to the combined method of account-based verification and verification, another mode of LAT verified collection is the verified collection rate method. This mode does not require item-by-item verification of each tax basis item, nor does it apply the calculation method of progressive tax rate based on appreciation rate. It is more direct and simple, with the calculation formula simplified to "Tax payable = Revenue × Verified collection rate".

From the provisions at the level of the State Taxation Administration, Article 7 of Guoshuifa [2006] No. 187 clearly specifies five applicable scenarios for this mode, including: failing to set up account books as required; arbitrarily destroying account books or refusing to provide tax-related materials; confusing account books making it difficult to determine revenue or deducted item amounts; failing to conduct liquidation within the time limit despite meeting the liquidation conditions; and declaring a significantly low tax basis without justifiable reasons. When an enterprise has these circumstances, the tax authority may refer to the LAT burden of local enterprises with similar development scale and revenue level to directly verify the tax payable at a collection rate not lower than the prepayment rate. Then, in local practice, what are the specific provisions on the confirmation of "revenue" when applying this mode?

In specific local practices, although the expressions of revenue confirmation in documents of various regions are different, they all refer to the actually incurred and realized revenue of the enterprise. For example, Article 31 of the Measures for the Administration of Land Value-Added Tax Liquidation of Real Estate Development Projects of the Qingdao Municipal Tax Service, State Taxation Administration (Announcement No. 6 of 2022 of the Qingdao Municipal Tax Service, State Taxation Administration) clearly stipulates that "for LAT collected at the verified collection rate, the development enterprise shall calculate and pay LAT based on the obtained revenue from real estate transfer (excluding value-added tax) and the verified collection rate. The calculation formula is as follows: Tax payable = Revenue from real estate transfer (excluding value-added tax) × Verified collection rate". Here, "obtained revenue from real estate transfer" refers to the actual sales amount realized by the enterprise. Another example is Article 2 of the Announcement of the Sichuan Provincial Tax Service, State Taxation Administration on Relevant Issues Concerning the Prepayment and Verified Collection of Land Value-Added Tax (Announcement No. 3 of 2023 of the Sichuan Provincial Tax Service, State Taxation Administration), which mentions that "if the deducted items cannot be verified, LAT shall be verified and collected based on the sales revenue and the verified collection rate". Combined with the tax administration logic, the "sales revenue" here should also be understood as the actually incurred revenue of the enterprise. In addition, Article 26 of the Work Procedures for Land Value-Added Tax Administration of the Shenzhen Municipal Tax Service, State Taxation Administration (issued in Announcement No. 8 of 2019 of the Shenzhen Municipal Tax Service, State Taxation Administration) stipulates that "the competent tax authority shall obtain the total transfer contract amount of the real estate project from the land and property rights management department to determine the actual sales revenue obtained from real estate transfer". That is, if it is impossible to accurately determine the actually incurred revenue of the enterprise, the revenue shall still be confirmed in accordance with the principles of reasonableness, accuracy, and authenticity. For example, the actual sales revenue obtained shall be confirmed based on the transfer contract amount filed with the government.

For cases where some local documents do not clearly specify how to confirm revenue under the verified collection rate method, in practice, the revenue verification standards of the first mode are usually referred to for systematic interpretation. Taking the Measures for the Administration of Land Value-Added Tax Liquidation of the Shandong Provincial Tax Service, State Taxation Administration as an example, Article 38 only specifies the verified collection rates for different types of real estate and does not mention the revenue verification rules. However, combined with Article 37 of these Measures, it can be inferred that even if the verified collection rate is adopted, if the revenue really needs to be verified, it can also be confirmed with reference to the average price of similar real estate, market price, or evaluation value. This interpretation not only conforms to the principle of systematization but also ensures that the finally confirmed revenue does not deviate from the market fair level, thereby maintaining the consistency of tax administration standards.

Comprehensively, LAT verified collection is mainly divided into two modes: the combined method of account-based verification and verification, and the verified collection rate method. The application of different modes varies across regions. Some regions only recognize one of them; for example, Hainan clearly requires that all verified projects must calculate revenue and deducted items item by item. Some regions allow the application of both modes, such as Xiamen, Shandong, and Sichuan, and some of these regions also clearly specify the application priority. However, regardless of which mode is adopted, the revenue needs to restore reasonable transactions. Real estate enterprises have a fixed process for selling development projects, which requires obtaining sales (pre-sale) licenses, purchasing invoices from tax authorities, and the daily declaration data and government-filed contracts can all confirm the revenue. Generally, no additional adjustments are needed. Only when the taxpayer cannot accurately calculate the revenue, or the revenue is significantly lower than the price of similar local real estate without justifiable reasons, will the tax authority verify the revenue. However, this kind of verification also belongs to "limited adjustment" and should not deviate from the market fair level, let alone be seriously disconnected from the actual transaction.

04 The Verification Method of Adjusting Revenue from 300 Million Yuan to 2 Billion Yuan Lacks Legality and Rationality

Combined with the two types of LAT verified collection modes sorted out above, and looking back at the operation of the tax authority in the introduced case, it is not difficult to find that its practice obviously lacks legality and rationality and completely deviates from the statutory rules and administrative logic of verified collection.

First, the tax authority chose to apply the verified collection rate method but violated the principle that the revenue under this mode must be based on actual occurrences. As mentioned earlier, in practice, it is required to take the sales revenue actually obtained by the enterprise as the calculation base. In this case, the preliminary calculation by both the tax authority and the enterprise has confirmed the revenue as 300 million yuan; that is, both the enterprise's book-recorded data and the government-filed data can accurately reflect the actually incurred sales revenue. The tax authority did not provide contrary evidence and facts, but denied the actually incurred revenue when applying the verified collection rate, and verified an excessively high revenue of 2 billion yuan, then calculated the tax amount by multiplying the verified excessively high revenue by the collection rate. This verification method is obviously wrong.

Second, even if there are individual cases where the house sales price is low, there can never be a reasonable space for adjusting the revenue from 300 million yuan to 2 billion yuan. As mentioned earlier, regardless of which verification mode is adopted, the adjustment of revenue belongs to limited adjustment. Under the combined method of account-based verification and verification, it is necessary to refer to the average price of similar real estate, local market price, or evaluation value; under the verified collection rate method, even if adjustment is needed, the same fair standards must be followed, and it cannot be adjusted upward infinitely regardless of the reality. In this case, the adjustment range from 300 million yuan to 2 billion yuan is no longer a correction of individual abnormal transactions, but a random verification that is completely divorced from the actual sales situation of the project and deviates from the market fair level. This adjustment not only lacks factual support but also does not conform to the operation norms for revenue adjustment in any local documents, exceeding the boundary of legal verification.

More importantly, the practice of the tax authority is essentially more like reversing the revenue to reach a specific tax amount result, which violates the basic principles of tax administration. From the result, the tax payable for the project under account-based collection is 110 million yuan, and the tax amount calculated by the tax authority after verifying the revenue as 2 billion yuan and applying a 5% collection rate is 100 million yuan. The two amounts are highly similar, which clearly shows that the tax authority reversely calculated the revenue of 2 billion yuan in order to make the verified tax amount close to the account-based result. This operation of reversing the revenue based on the tax amount target not only deviates from the taxation logic of LAT but also violates the principle of taxation based on capacity. Taxation should be based on the actual tax-paying capacity of the enterprise, rather than arbitrarily adjusting the tax basis to achieve a certain tax scale.

Conclusion: Due to the existence of some structural defects in China's tax administration documents and rule system for LAT liquidation, many specific and detailed matters do not have accurate norms at the level of the State Taxation Administration, and the rules of various regions are uneven, with many gaps and loopholes. To a certain extent, this makes it difficult to effectively regulate the law enforcement behavior of tax authorities and easily triggers disputes between tax authorities and enterprises. We suggest that enterprises encountering similar verified liquidation disputes should actively safeguard their legitimate rights and interests through legal relief channels such as administrative reconsideration and administrative litigation.

It should be particularly noted that enterprises must provide sufficient tax guarantees within the tax payment period specified by the tax authority, and the latest time for providing the guarantee should not be later than 60 days after receiving the verified conclusion document; otherwise, they will lose the right to relief. In practice, when real estate development enterprises encounter similar LAT verification disputes, they often fail to effectively safeguard their rights and interests due to their insufficient understanding of verification rules and lack of professional strategies for communicating with tax authorities. It is recommended to involve a professional tax lawyer team in a timely manner to effectively help enterprises resolve disputes and safeguard their legitimate rights and interests to the greatest extent.