Preface

On November 12, 2013, the Third Plenary Session of the 18th Central Committee of the Communist Party of China adopted the "Decision of the Central Committee of the Communist Party of China on Several Major Issues Concerning Comprehensively Deepening Reform," proposing to establish a unified construction land market in urban and rural areas. Under the premise of complying with planning and land use control, it is permissible for rural collective commercial construction land to be transferred, leased, or used as shares, implementing equal access to the market, equal rights, and equal prices as state-owned land. With the official implementation of the newly revised "Land Management Law" on January 1, 2020, the term 'transfer' is no longer exclusive to state-owned land but also includes collective commercial construction land. The legal nature of land transfer is different from assignment; it is the establishment of other property rights. Our country's land public ownership is divided into ownership by the whole people and collective ownership. Transfer is the new establishment of usufructuary rights on the basis of unchanged ownership, that is, land use rights, while assignment is the re-disposal of usufructuary rights, that is, the transfer of land use rights. In theory, transfer can only be implemented once, while assignment can be done an unlimited number of times. Due to different subject identities, the tax policies for transfer are different from assignment. Of course, state-owned and collective land cannot be the same. Currently, the entry of collective commercial construction land into the market is still in the stage of reform and exploration, and relevant tax legislation is also in the stage of soliciting opinions. This article's analysis and discussion on the taxes and fees payable in the transfer of such land only represents personal opinions.

In April 2016, in order to promote the market entry reform of collective commercial construction land and explore the establishment of a land appreciation income distribution mechanism that takes into account the state, the collective, and individuals, the Ministry of Finance and the Ministry of Natural Resources formulated the "Interim Measures for the Collection, Use, and Management of Land Appreciation Income Adjustment Fund for Rural Collective Commercial Construction Land" (Cai Shui [2016] No. 41), and issued it to pilot reform areas for implementation. The core content of these interim measures is that the transferor, lessor, or contributor (shareholder) and re-transferor of rural collective commercial construction land must pay 20%-50% of the increased value income to the state as an adjustment fund before they can apply for land market entry and re-transfer real estate registration procedures. During the transition period when deed tax cannot cover the market entry of rural collective commercial construction land, an adjustment fund equivalent to 3%-5% of the transaction price must be levied, which shall be paid by the land transferee. After the expiration of the interim measures, the Ministry of Finance and the Ministry of Natural Resources issued the "Notice on Extending the Policy Period of Land Appreciation Income Adjustment Fund for Rural Collective Commercial Construction Land" (Cai Shui [2019] No. 27), extending the implementation period to December 31, 2020.

Regardless of the legislative trend of governing the country according to law or the policy environment of regulating non-tax revenue, it is determined by the joint issuance of normative documents by the two State Council administrative departments to determine a major distribution mechanism involving the interests of the state, collectives, and farmers. The level of effectiveness is too low. Without legal support, it is not suitable for promotion outside the pilot areas. The design of the land appreciation income adjustment fund is a useful attempt to explore how to exert an effect similar to the land transfer income of state-owned land to ensure fiscal revenue. However, in the later revised "Land Management Law" and "Implementation Regulations of the Land Management Law", unlike the state-owned land transfer income, there are no provisions or authorizing provisions on how the state should obtain compensated income in the transfer of collective commercial construction land, and no mention of the land appreciation income adjustment fund. Obviously, this model has not been recognized by legislation. Therefore, the interim provisions on the land appreciation income adjustment fund naturally became invalid after the extension expired.

Since January 1, 2022, the transfer income of state-owned land use rights, as an important government non-tax revenue, together with special mineral resources income, sea area use fees, and uninhabited island use fees, have all been transferred from the natural resources department to the tax department for collection. This adjustment of collection responsibilities has not changed the nature of non-tax revenue. The receipt and payment vouchers for the transfer income of state-owned land are still receipts uniformly printed by the finance department instead of invoices supervised by the tax department.

We know that taxation is not only the main form of the state organizing fiscal revenue, but also an important tool for regulating the distribution of social wealth. The tax authorities and customs exercise the duty of taxation on behalf of the state in accordance with the law. According to the "Land Management Law", the ownership of state-owned land is exercised by the State Council on behalf of the state, and a system of compensated use is implemented in accordance with the law. One represents the state in collecting taxes, and the other represents the state in collecting fees. The two exist in parallel. Since the transfer income of state-owned land has been transferred to the tax authorities for collection, why can't it be regarded as a tax revenue? The author believes that there are the following obstacles. First of all, it does not make sense logically for the state to collect its own taxes; secondly, the State Council represents the state in exercising the ownership of all the people's land, which has exceeded the scope of the unified social credit code, and even the taxpayer identification number is beyond the outline. No tax bureau can collect taxes from the State Council; furthermore, the main income from land transfer is to go into the pockets of local finances, and it is a waste of manpower and material resources to concentrate and redistribute through taxation; finally, it involves the redefinition of tax-free economic behavior, and in accordance with the principle of taxation according to law, it is necessary to launch a series of tax laws to initiate amendments. Therefore, the transfer of state-owned land adopts the method of directly collecting land transfer income from the units and individuals who obtain the right to use the land, instead of distributing wealth between the state and the units and individuals through taxation like in the transfer process.

However, there are no similar problems with collective commercial construction land. In the previous issue, we elaborated in detail that the state has confirmed that rural collective economic organizations are the main bodies representing the exercise of collective ownership through promoting the reform of the rural collective property rights system from the aspects of policy guidance, laws and regulations, and institutional mechanisms. At the same time, through the establishment and improvement of a series of mechanisms such as asset confirmation, democratic management, public supervision, reasonable distribution, external responsibilities and rights, code assignment and registration, rural collective economic organizations at all levels have become legal entities that can independently carry out independent business services and independently assume legal and economic responsibilities, and have the main qualification of enterprise income tax taxpayers. Therefore, as the main body of the transfer of collective commercial construction land, rural collective economic organizations are ordinary taxpayers, and the state can fully share the land appreciation income through taxation.

State-owned land is restricted by the tax-paying entity and is divided into two tax and fee collection models: transfer and assignment. However, there is no problem with the tax-paying entity for collective commercial construction land, and the economic substance of the transfer is the transfer of land use rights. The author believes that in accordance with the basic principle that taxation should follow the substance over form, there is no need to distinguish between transfer and assignment for collective commercial construction land taxation, and it should be consistent with the current tax policy for the transfer of state-owned land. Some people say that projects involving agricultural production and operation are tax-free? However, the theme we are discussing is the transfer of commercial construction land by rural collective economic organizations, rather than the transfer of contracted land by rural collective economic organizations or individual farmers. The premise is that the land has been legally planned for non-agricultural purposes, and of course, it is not applicable to tax-free preferential policies involving agriculture. Let's take a look at the taxes and fees involved in this process.

1. Value-Added Tax (VAT). Although VAT is one of the six tax categories in China's current 18 tax types that have not yet been legislated, according to the "Notice of the Ministry of Finance and the State Administration of Taxation on Comprehensively Promoting the Pilot Program of Replacing Business Tax with VAT" (Cai Shui [2016] No. 36) Annex 1: "Implementation Measures for the Pilot Program of Replacing Business Tax with VAT", "Notice of the Ministry of Finance and the State Administration of Taxation on Further Clarifying Policies Concerning Labor Dispatch Services and Toll Road Toll Deductions in the Comprehensive Promotion of the Pilot Program of Replacing Business Tax with VAT" (Cai Shui [2016] No. 47) and other authorized tax normative documents, there is no distinction between state-owned and collectively owned. As long as the land use right is transferred, VAT should be paid according to the sale of intangible assets - natural resource use rights (land use rights). Currently, the tax rate for general taxpayers is 9%, and the collection rate for small-scale taxpayers is 3%. Taxpayers who transfer land use rights obtained before April 30, 2016, can choose to apply the simplified tax calculation method, using the balance of the total price and extra-price charges obtained minus the original price of obtaining the land use right as the sales amount, and calculate and pay VAT at a collection rate of 5%. Small-scale taxpayers who transfer land use rights obtained before April 30, 2016, can either apply the 3% collection rate for full taxation or the 5% collection rate for differential taxation.

2. VAT Surcharges. These taxes and fees include three items: urban maintenance and construction tax, education surcharge, and local education surcharge. They do not have independent taxable objects but are based on the actual amount of VAT and consumption tax paid. Since land transfer does not involve consumption tax, it is levied simultaneously with VAT. The urban construction tax rate is 7% for taxpayers located in urban areas; 5% for those located in county towns and established towns; and 1% for those not located in urban areas, county towns, or established towns. The calculation standard for the education surcharge is 3% of the VAT amount, and the calculation standard for the local education surcharge is 2% of the VAT amount. Eligible surcharges can also enjoy tax reduction and exemption preferential policies.

3. Enterprise Income Tax. This is an income tax levied on the production and operating income and other income of enterprises and other organizations that obtain income within China. Enterprise income tax is not calculated based on income but based on the profit after deducting costs from income, which is called taxable income. The statutory tax rate is 25%, but eligible companies can enjoy many preferential tax rates, especially for small and micro enterprises, where the tax rate can be as low as 2.5%.

4. Stamp Duty. According to the "Stamp Tax Law" reviewed and approved on June 10, 2021, and effective on July 1 this year, the transfer of land use rights and transfer contracts are subject to stamp duty at a tax rate of 0.5‰, which is paid by the person who draws up the document. If the property transfer document is signed in the form of a contract, both parties to the contract are taxpayers.

5. Deed Tax. The "Deed Tax Law" implemented on September 1, 2021, stipulates that the transfer of land use rights belongs to the act of transferring land and housing ownership, and the accepting units and individuals should pay deed tax at a tax rate between 3% and 5% determined by each province, autonomous region, and municipality directly under the Central Government, based on the fair transaction price as the tax base. Compared with the past "Provisional Regulations on Deed Tax", the new legislation deletes the word "state-owned" and expresses the previous "state-owned land use rights" as "land use rights", thereby eliminating legal obstacles to the collection of deed tax on the transfer of collective commercial construction land.

6. Land Appreciation Tax. This is a tax levied on the appreciation amount obtained from the transfer of real estate. It is a tool for allocating income distribution between the state and taxpayers. This tax implements a four-level progressive tax rate of 30%, 40%, 50%, and 60% based on the proportion of the appreciation amount. The greater the appreciation, the more tax is paid. For example, if the appreciation amount exceeds twice the deductible cost, then nearly 60% of the income must be gloriously paid to the country as tax. According to the current "Provisional Regulations on Land Appreciation Tax", land appreciation tax taxpayers are still units and individuals who transfer state-owned land use rights, buildings and their attachments on the land, and obtain income. The transfer of collective commercial construction land is not within the scope of taxation.

The author believes that the tax system design of the land appreciation tax is the closest to the function of the state-owned land use right transfer fee. It is imperative to levy land appreciation tax on the transfer of collective commercial construction land through tax legislation.

From July 16 to August 15, 2019, the Ministry of Finance, together with the State Administration of Taxation, drafted the "Land Appreciation Tax Law of the People's Republic of China (Draft for Comment)" to solicit public opinions. Among them: Article 1 of the draft for comment changed the original provisional regulations' "transfer of real estate" to "transfer of real estate." It can be seen from the legislator's intention that the original transfer behavior model has been difficult to meet the needs of the development of the situation, and the transfer includes not only the transfer but also the transfer behavior; Article 2, Paragraph 1 of the draft for comment adopts a legislative technique similar to the "Deed Tax Law" and the "Stamp Tax Law", changing the original provisional regulations' "transfer of state-owned land use rights" to "transfer of land use rights", thereby breaking self-restrictions and enabling the tax to be applied to both the transfer of state-owned land use rights and the transfer of collective commercial construction land use rights; Article 2, Paragraph 2 of the draft for comment adds the concept of transferring collective land, according to the State Administration of Taxation, is to establish a land appreciation income distribution mechanism, so that the tax system is in line with the land system reform of establishing a unified urban and rural construction land market, and collective real estate is included in the scope of taxation; Article 8 of the draft for comment still follows the provisional regulations' four-level progressive tax rate of 30%-60%, considering the deduction amount in the calculation of land appreciation tax, it is actually roughly at the same level as the 20%-50% of the increased income from the payment of collective commercial construction land originally formulated by the Ministry of Finance and the Ministry of Natural Resources as a regulatory fund; Article 10 of the draft for comment is a provision made after fully considering the actual situation of tax collection and management in rural areas, including the transfer of collective land use rights, buildings and their attachments on the land, or the use of collective land use rights, buildings and their attachments on the land as capital contribution or shares, if the deduction amount cannot be determined, land appreciation tax may be levied according to a certain percentage of the income from the transfer of real estate. This provision is what we often call assessed collection. The calculation of land appreciation tax is the most complicated of all taxes, without exception. If this loophole is not left, according to the level of financial management development of rural collective economic organizations, I am afraid that they will not be able to calculate clearly even if they want to pay taxes.

Reform is an arduous systematic project, interlocking. Land appreciation tax legislation will directly affect the market entry reform process of collective commercial construction land. After completing the legislative process in accordance with the land appreciation tax legislation ideas, the distribution of income from the transfer of collective commercial construction land between the state, the collective, and farmers can all be realized through taxation, and the land appreciation income adjustment fund is no longer necessary. However, before the completion of the legislation, there is no higher law to support either the collection of land appreciation income adjustment funds or the collection of land appreciation tax, which is a dilemma. In order to break this predicament, the author suggests that in accordance with the provisions of Article 14 of the "Provisional Regulations on Land Appreciation Tax", the competent government department of the reform pilot area may submit an application, and the Ministry of Finance or the State Administration of Taxation authorized by the Ministry of Finance shall make an interpretation on how to apply the relevant content of the land appreciation tax regulations on "reasonably adjusting land appreciation income and safeguarding national rights" in the case of changes in the basic legal relationship.

Author's Profile

Yu Kun, Tax Lawyer