Jun. 7 – The State Administration of Taxation released a circular last month that aims to better manage the collection of land appreciation tax. Guoshuihan [2010] No. 220, issued on May 19, clarifies revenue recognition issues related to land appreciation tax (LAT).

In cases where sales invoices have been issued, the circular states that the revenue recognized should be the total amount shown in the sales invoice. For cases where the sales invoices have not yet been issued or have only been partially issued, the revenue recognized should be the total amount shown in the sales contract. For cases with adjusted sales amounts due to differences in sales contracts and the actual measurement conducted by the relevant authorities, the basis of the LAT calculation will also be adjusted.

The circular clarifies deduction items when calculating LAT. According the circular, interest expenses can be deducted based on the actual amount incurred if the following conditions are met:

• The interest expenses can be allocated to the property being transferred
• The supporting documents from financial institutions are available
• The interest deduction cannot exceed the amounts charged at the lending rates adopted by commercial banks

In addition, for LAT calculation purposes, other property development expenses will be allowed to be deducted at no more than 5 percent of the total expenditures pair for land use rights and property development costs. In cases where the criteria for interest expenses is not met, or where no interest expenses were incurred, 10 percent of the total expenditures paid for land use rights and property development will be allowed for LAT calculation.

Circular 220 states that the payment for overdue property development will not be allowed and the deed tax paid for acquiring land use rights needs to be included as part of the land cost for LAT calculation purposes.

For more information regarding Circular 220, please contact Dezan Shira & Associates at tax@dezshira.com.