Taxman goes after mainland developers

Sandy Li
05 June 2010

Amid a tightening credit crunch and a sharp decline in property sales, mainland developers are now being hit by the taxman.

The State Administration of Taxation on Thursday ordered property companies to hold more funds for the prepayment of land appreciation tax.

The directive requires local governments to strictly enforce collection of the tax and set pre-collection rates at as much as 2 per cent of sales revenue. Before the directive, local governments set the minimum ratio and in some cases did not enforce the tax.

Stricter implementation of the tax could put further cash-flow pressure on developers, particularly those with a potential funding gap, according to report written by Yi Wang, an analyst at Beijing Gao Hua Securities.

“Such incremental cash-flow pressure, plus the likely supply increase in the second half of 2010, suggests more meaningful price cuts from developers are not far away, which could lead to less stringent policies for the sector,” Yi said.

The tax office said land appreciation prepayment ratios could not be less than 2 per cent of contracted sales in the eastern part of the mainland, 1.5 per cent in central and northeastern China and 1 per cent in the west.

Where developers cannot provide enough evidence to verify the settlement amount, a minimum amount of 5 per cent of property sales would be applied, it said.

Continuing regulatory efforts show the government is maintaining a tightening stance towards the property market, according to a report issued by DBS Vickers Securities.

“The market has been speculating that the mainland may stop introducing new tightening policies because of the European credit crisis. But we think it will not change its stance until prices drop to a reasonable level,” it said.

As developers have large cash positions following strong contract sales last year, there is no urgency to cut prices.

DBS suggested prices in first and second-tier cities might fall 20 to 30 per cent as high taxes squeezed liquidity at developers.

Shenzhen World Union Properties Consultancy believes that mainland property developers may owe a combined 187.8 billion yuan (HK$214.3 billion) of unpaid land appreciation tax from last year.

Alan Chiang Sheung-lai, the head of the mainland residential department of consultancy DTZ, said the central government’s move aimed to force developers to cut prices.

Home prices in Shenzhen fell 1.6 per cent last month from April to an average of 20,000 yuan per square metre despite a significant drop in the volume of transactions.

“The magnitude of price falls is still far less than what the central authority hopes to see after imposing a string of cooling measures to rein in the red-hot property market,” Chiang said.

He said the bigger listed developers had set aside the necessary funds in their budgets for the land appreciation tax.

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