Beijing targets developers in amended tax measures

PUBLISHED : Wednesday, 23 April, 2008, 12:00am
UPDATED : Wednesday, 23 April, 2008, 12:00am

Beijing will continue to fine-tune property market regulations this year, with the State Administration of Taxation's amendment note on developers' provisional income tax payments providing the latest evidence of the current focus of policymakers, analyst say.

Under the arrangements unveiled on Wednesday last week, developers are required to prepay income tax quarterly based on an estimated taxable income calculated on a hypothetical net profit margin set in most cases at 20 per cent of presale proceeds.

This compares with the previous practice of calculating taxable income based on a hypothetical gross profit margin mainly set at 20 per cent of presale proceeds minus deductible costs and expense items.

Under the new arrangements settlement of the estimated tax bill may also be required monthly rather than quarterly. The announcement, dated April 7, takes effect retroactively from January 1.

'The [possible monthly settlement] will have an impact on developers' cash flows but to a limited degree, and cash-strapped developers are likely to suffer more,' said John Gujun, principal of China tax at KPMG.

'I think Beijing is just reiterating the policy, urging local governments to strictly implement the rule,' said Terence Lee Bun-ching, group accounting controller at Hopson Development Holdings.

Mr Lee believes the impact on group cash flows will not be material.

Guangzhou R&F Properties financial controller Fergus Chow Oi-wah said his firm settled its provisional income tax quarterly based on 20 per cent of its sales proceeds, hence the new policy would have little impact on the business.

However, some analysts took a different view.

'In the past, developers could usually manipulate the 'deductible items and expenses items' to lower their estimated taxable income and thus settle a smaller amount of provisional tax,' said Oscar Choi Kam-keung at Citigroup.

Under the new regime, this could no longer be done, which meant that financially stretched developers pursuing aggressive sales growth targets would suffer the most, he said.

Raymond Cheng Wai-mo, an analyst at CCB International Securities, said as the mainland's company profit tax rate had fallen from 33 per cent last year to 25 per cent from this year because of tax reform, imposing a higher hypothetical margin on developers was unlikely to have a significant adverse impact.

'I think Beijing intends to show the public that it will continue to monitor the housing market closely,' he said.

Mr Cheng said the attention drawn by Beijing to the new tax regime suggested it would continue to fine-tune existing measures and keep urging local governments to strictly implement regulations already laid down to rationalise the property market.

Official property sales data show prices of transactions in 70 key mainland cities have fallen since January this year, with year-on-year growth in the average housing prices at 10.7 per cent last month, down from 11.3 per cent in January and 10.9 per cent in February.