Developers get warning on China tax traps

PUBLISHED : Friday, 11 November, 1994, 12:00am
UPDATED : Friday, 11 November, 1994, 12:00am

PROPERTY developers and investors should be careful when spending money in China because of tax traps set by vaguely-defined legal terms, says an accounting firm tax partner.

Wong Mun-kit, tax partner with Horwath & Co, said developers and investors should be wary of major tax changes that went into effect at the beginning of the year on the mainland.

'The traps are mainly caused by unclear terms in taxation laws and regulations,' said Ms Wong. 'Only the people who pay attention to them can avoid the traps.' She added that some people were not aware there were four significant new taxes that would affect real estate investment. They include value-added tax, business tax, individual income tax and land appreciation tax (LAT).

'These people might put themselves in some unexpected losses or risks in future,' she said.

According to Ms Wong, under LAT rules yet to be implemented, there are also five deductible items which are not clearly defined. Two of those items include land development and construction costs.

'Will loan interest charged by banks also be classified as a kind of cost and expense of land development which is to be deductible?' she asked.

Ms Wong said the laws also do not clearly define the term 'ordinary standard residential buildings' which was to be free of duty.

She added the income of both developers and investors could betaxed twice by being subject to LAT and enterprise income tax.

'These traps can only be removed when the Chinese Government reviews the tax reforms, particularly the legal provisions governing the implementation of various kinds of taxes,' she said.

Ms Wong suggested developers bear all these risks in mind.

She also suggested investors included some conditional provisions in their purchase contracts such as acquiring proper title even if the seller had not paid LAT.