On March 24, 2016, Chinese regulators issued implementation rules on transitioning from Business Tax (BT) to Value Added Tax (VAT). The new rules are applicable to all industries, including real estate. The long-awaited VAT pilot program contains VAT rates and policy stipulations, and paves the way for the tax reform by replacing current business tax with VAT, effective as of May 1, 2016. Highlights of the policy release are as follows:
- To ensure a smooth transition, the pilot program contains a simplified VAT accounting method for properties obtained under the previous tax system. The simplified method is expected to limit disruption to the market caused by the introduction of the new system.
- The pilot program also contains rules for deducting land price and a simplified VAT accounting method for use by purchasers of residential properties. These measures are also consistent with current business tax policy and are in line with regulator’s commitment to further alleviate the tax burden.
- If the owners of purchased property categorize the property as a fixed asset, then they will be able to claim input VAT credit over a 2-year period. This is likely to boost demand from occupiers for ownership of commercial property, as well as promote the destocking of excess inventory in the China commercial real estate market.
- The tax reform is part of a transition between a local and state tax regime. After the transition period and the implementation of the new VAT, local governments may turn to the land market for revenue, which is likely to drive land prices higher in tier 1 and 2 cities.