Land value-added tax (LVAT) settlement by housing enterprises requires the collection and allocation of costs and expenses according to certain settlement units or different real estate types. As the tax burden calculated under different apportionment methods may differ significantly, but in the absence of clear conditions and order of application of the cost apportionment methods at the national level, tax policies are scattered and different in different regions, which leads to confusion in understanding the relevant policies and tax-related operations of enterprises. This article is intended to analyze the dispute between tax enterprises on the application of cost-sharing methods in the context of a case.

I. Introduction of the case

(I) Facts of the case

In May 1993, Company H was assigned the land transferred by Company N as the construction site of the Fortune Plaza project, and in June 2009, the project was completed and accepted.

On August 1, 2011, Company H met the conditions for land value-added tax ("VAT") settlement and submitted the "Report on Confirmation of Land Value-added Tax Settlement Results of the Fortune Plaza Project" to the Assessment Sub-bureau of the Municipal Taxation Bureau. The report adopted the "sales ratio apportionment method" to apportion the cost of ordinary residential units and non-ordinary residential units, and Company H considered that according to the land value-added tax clearance report made by the intermediary organization, it should pay land value-added tax of RMB11.11 million.

On December 19, 2014, the Municipal Taxation Bureau served Company H with the Land VAT Liquidation Conclusion and the Notice of Payment of Land VAT Liquidation Tax, which clarified that the cost of the project in question developed by Company H was liquidated according to the Percentage of Saleable Floor Area Method, and affirmed that Company H should pay back land value-added tax in the amount of RMB 24,976,041.43 yuan.

Company H was not satisfied and on May 29, 2015, it applied to the Provincial Tax Bureau for an administrative reconsideration. The reconsideration upheld the Notice of Payment of Land Value-added Tax Clearance Tax made by the Municipal Tax Bureau, and Company H was not convinced, so it filed an administrative litigation with Meilan District People's Court of Haikou City. The first instance judgment revoked the liquidation conclusion, notice and reconsideration decision in the case. the municipal tax bureau and provincial tax bureau appealed to the Intermediate People's Court of Haikou City, Hainan Province, and the second instance judgment revoked the original judgment and rejected the litigation claim of the appellee, Company H. Company H was not convinced and applied for a retrial at the Higher People's Court of Hainan Province.

(II) Focus of Dispute

Whether the "sales ratio apportionment method" or the "percentage of saleable area method" should be applied to apportion the costs of ordinary and non-ordinary residential units?

(III) Views of the Parties

The enterprises argued that the project in question adopted the "sales ratio apportionment method" for calculating the cost sharing of ordinary and non-ordinary residential units.

The tax authorities held that the project adopted the "percentage of saleable area method" in calculating the cost-sharing of ordinary and non-ordinary residential units.

The Court held that the "Circular of the State Administration of Taxation on Issues Relating to the Administration of Land Value-added Tax Clearance for Real Estate Development Enterprises" was applicable within Hainan Province, and that the "percentage of saleable area method" was adopted uniformly in the province's land value-added tax clearing. Accordingly, it was not improper for the Municipal Taxation Bureau to adopt the percentage of saleable area method in the calculation of the cost sharing between ordinary and non-ordinary residential units in the land value-added tax clearance process of the project in question.

(IV) Court judgment

Company H's application for rehearing is rejected.

II. Cost apportionment methods - from central to local level

The key to land value-added tax (LVAT) clearance lies in how costs and expenses are apportioned among multiple real estate projects or different types of real estate in the same clearing unit. However, judging from the regulations currently in force, the nationally applicable regulations are vague, while the regulations formulated by localities are scattered, and there are certain discrepancies in the concrete implementation.

(I) Provisions applicable nationwide

According to Article 9 of the Rules for the Implementation of the Provisional Regulations on Land Value-added Tax (hereinafter referred to as the "Implementing Rules"), "Where a taxpayer develops or transfers real estate in installments after being granted land use rights in pieces, the amount of deductions may be calculated and apportioned according to the ratio of the area of the transferred land use rights to the total area, or according to the building area, or according to the proportion of the transferred land use rights to the total area, or according to the building area. proportion of the total area, or calculated and apportioned on the basis of the floor area, or calculated and apportioned in other ways confirmed by the tax authorities." The Implementing Rules mainly specify the basic ways of land cost apportionment as the method of land area and the method of building area, but do not point out or refine the specific calculation caliber of the above methods, and there is a lack of uniform standards on how to determine the "area" in the above methods. For example, does the "area" in the floor area method include the area occupied by non-transferable green areas, roads and other ancillary facilities? The "area" in the building area method is implemented in accordance with the total building area, above ground building area or saleable building area?

Article 4(5) of the Circular of the State Administration of Taxation on Issues Relating to the Administration of Land Value-added Tax Clearance for Real Estate Development Enterprises (Guo Shui Fa [2006] No. 187) further clarifies that "costs and expenses common to multiple real estate projects" shall be apportioned in accordance with the floor area method and states that "...the floor area" implements the "building area method". The building area" is of "saleable" caliber, and can be apportioned according to other reasonable methods.

Article 21(5) of the "Regulations on Administration of Land Value-added Tax Settlement" (Guo Shui Fa [2009] No. 91) abstracts the principles of benefit and reasonableness of cost apportionment, together with the principle of consistency, for common costs and expenses of taxpayers' projects developed in phases, projects developed at the same time, or the construction of different types of real estates in the same project, and the principle of benefit and reasonableness of cost apportionment, together with the principle of consistency, which are not only the fundamental principles for taxpayers' settlement but also the fundamental principles for tax authorities' settlement audit. These three principles are not only the fundamental guidelines for taxpayers to carry out liquidation, but also the main basis for the tax authorities to review the liquidation.

In practice, the common cost-sharing methods include direct cost method, floor-height coefficient method and budget cost method, in addition to building area method and floor area method.

(II) Provisions formulated locally

According to the authorization of Guo Shui Fa [2006] No. 187, provincial tax authorities may formulate specific liquidation management methods in light of the local actual situation. Among them, the definition of the cost-sharing method is often reflected in the methods or protocols implemented in the localities.

1. The application of the cost-sharing methodology is divided according to different liquidation units and different real estate types in the same liquidation unit, as exemplified by the local regulations.

2. Examples of the application of the cost-sharing methodology according to the division of land costs and other costs are provided below.

As can be seen, the methods of apportioning costs and expenses specifically determined in each region differ depending on whether the corresponding costs and expenses belong to the same project, whether they belong to the same liquidation unit, and what type of deductions they belong to, and there is also a difference in the order of application in the specific implementation of the various methods.

III. Selection of cost-sharing method

From the viewpoint of this case, the "sales ratio apportionment method" adopted by Company H was adjusted by the tax authority with the "percentage of saleable area method", which led to the reduction of the amount of deductible items and the increase of land value-added tax payable by more than ten million dollars. Due to the significant regional differences in the cost apportionment methods, in order to avoid the subsequent outbreak of tax-related risks such as retroactive tax, the real estate development enterprises should be based on the local regulations of the development and construction and look for the apportionment method that is the most favorable to the enterprises in the liquidation, rather than arbitrarily breaking the limitations of the local regulations, and even if they want to apply the "other reasonable methods", they should obtain the approval of the competent tax authorities. Even if "other reasonable methods" are to be applied, the approval of the competent tax authorities should be obtained. Specifically, the selection of cost-sharing methods should pay attention to the following aspects:

(I) The direct collection of cost objects can be clarified.

In the cost collection and allocation of real estate enterprises, if the cost objects can be accurately accounted for and have clear cost objects, they should be directly collected into the corresponding cost objects. The application of the direct cost method should be based on the use (i.e., the beneficiary object) to accurately identify the attribution of the "cost": if a certain expenditure is specifically used for a certain type of development products, it is the exclusive cost of the product, and vice versa, it is a common cost. Therefore, in accordance with the principle of beneficence, the direct cost method has the priority of application in the collection and apportionment of costs and expenses, and only when the conditions of application of the direct cost method are not met, the floor area method, the floor area method, and other methods will be useful. Among other things, the conditions for the application of the direct cost method emphasize both the clear directionality of the cost, i.e., the cost is only for the land and not for the newly built houses, and the uniqueness of the benefit, i.e., the cost benefits only a certain type of business in the general residential, non-general residential, or other types of real estate, and has nothing to do with the other types of business. If the exclusivity of the cost cannot be demonstrated, it must be apportioned as a common cost.

(II) How are common costs apportioned?

1. Who has the right to choose the method of cost apportionment

The implementation rules specify the floor area method and the building area method, in addition to other methods recognized by the tax authorities to calculate the apportionment. Can the tax authorities arbitrarily decide to apply the above methods? Can taxpayers choose the applicable apportionment method for jointly incurred costs and expenses?

As specific regulations on cost apportionment have been made in different regions, the land value-added tax settlement of housing development enterprises should still be based on the regulations of local tax authorities. According to the specific regulations made by each place, the allocation of the right to choose the cost sharing method is not uniform. Some of them directly limit the apportionment methods to be applied in different circumstances, such as Hainan and Guangxi; some of them leave room for taxpayers to choose to apply the floor area law or other reasonable methods recognized by the tax authorities, such as Jiangsu. In the latter case, the taxpayer can propose reasonable apportionment methods to communicate with the tax authorities to determine, in line with the principle of benefit, the principle of reasonableness and the principle of consistency, the tax authorities should be recognized.

2. Is it necessary to adopt the same method of cost allocation for different types of costs in liquidation?

According to the relevant tax policy, the premise of cost apportionment by taxpayers is that there is no independent financial accounting for different types of property costs. If the taxpayer has made a clear distinction between the corresponding costs and expenses in the financial accounting, the direct pooling and deduction of the relevant costs and expenses is in line with the law. From the implementation rules and other provisions, the tax law does not require all costs and expenses to adopt the same method of collection, so the costs that can be independently accounted for are directly collected and deducted, and those that cannot be independently accounted for are apportioned and deducted, which is in line with the requirements of land value-added tax settlement. In some places, it is stipulated that "taxpayers shall develop real estate projects in phases, and the calculation and apportionment method of the amount of deduction items of each liquidation unit shall be consistent", such as Guangxi. According to the authorization of Guo Shui Fa [2006] No. 187, provincial tax authorities may formulate specific liquidation management methods, aiming at refining the provisions to facilitate the implementation, but absolutely cannot be detached from the supreme law. This kind of regulations require the liquidation unit to unify the apportionment method contrary to the application of the apportionment method of the premise, and in fact increase the taxpayer's liquidation burden, and may even cause significant changes in the taxpayer's tax burden, impairing the taxpayer's rights and interests in the recovery of real estate investment, and there is a suspicion of violation of the supreme law.

3. Can the tax authorities directly decide to apply "other reasonable methods" to calculate the apportionment?

Various regions have made detailed regulations on the types, conditions and order of application of cost and expense apportionment methods, but in actual implementation, there are cases in which the tax authorities confirm the application of apportionment methods other than those stipulated in the regulations. In this case, the court of first instance held that the project in question was a single project developed as a whole, and the apportionment method of "simultaneous development of multiple projects" should not be applied. The Court of Second Instance, on the other hand, held that it was not improper for the tax authority to confirm the application of other methods that had formed a customary and reasonable practice. It can be seen that the tax authorities have certain discretion in the application of the cost allocation method, and taxpayers should pay close attention to the local land value-added tax related policies and actively communicate and negotiate with the tax authorities on the accuracy of the cost allocation and the application of the allocation method, in order to strive for a favorable outcome.

IV. Summary

On the one hand, different methods of apportionment may easily cause fluctuations in the level of tax burden. The apportionment of costs and expenses should be clear as to what kind of deductions they belong to, and then determine whether they belong to the scope of additional deductions. The collection and allocation of costs and expenses among different liquidation units and different types of real estate should also take into account the exclusivity of the costs and expenses. If a certain cost and expense does not satisfy the applicable conditions of direct collection, then if it is apportioned in accordance with other apportionment methods, it may lead to the disparity of the taxable amount, which may seriously affect the level of tax burden of the taxpayers.

On the other hand, improper application of the apportionment method may result in the need to pay land value-added tax and late payment fees. Under different apportionment methods, there are significant differences in the tax burden of taxpayers. Only costs that comply with the apportionment regulations can be deducted. If the cost and expense apportionment of the real estate development enterprise is contrary to the regulations, it will be recognized as non-deductible or incorrectly deducted, and it is very easy for the tax authorities to adjust the amount of deductible items by other apportionment methods, and if the value-added amount increases as a result of the reduction of deductible items, the taxpayer not only needs to pay back the tax and the late payment fee, but also may be recognized as a tax evasion and be fined or even be investigated for the crime of criminal responsibility of tax evasion.

Therefore, taxpayers should pay special attention to the local tax authorities' regulations on the scope of costs and expenses, the identification of beneficiary objects and the selection of apportionment methods in the land value-added tax (LVAT) settlement. They should keep legal and valid deduction vouchers, accurately account for the amount of deduction items, ensure the authenticity and accuracy of the deduction items, declare accordingly, and correctly fulfill their tax obligations. In the application of cost-sharing methods, taxpayers should actively communicate with the tax authorities and strive for the application of methods that are favorable to the enterprise.