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|Developers are being forced to quickly understand the market’s quickly changing landscape|
Vietnam’s real estate sector recently went through a very exciting cycle which reached its peak by the end of 2008 and entered a correction period.
Co-incidentally, or intentionally as some may argue, this was also the time the government introduced some significant changes to the tax regulations affecting developers and buyers. We have examined and commented on these “fundamental changes” as perceived by the market at the time (VIR December 8th-14th, 2008).
With over a year of practical application of the new tax regulations affecting the real estate sector, albeit with a lot less excitement due to the market cool-off, there are a number of issues being identified and looming for the attention of regulators and taxpayers.
Based on many recent positive signs we have seen with many reported real estate merger and acquisition projects, inactive licenced projects being revived and new projects explored, new players showing up in Vietnam, there is a perception that a market recovery may be around the corner.
In light of this, we believe it is a good time to raise these identified problematic tax issues which may hinder the positive development of the market and hopefully with the appropriate corrections from the tax authorities the issues can be resolved and lending support to the development of a more healthy and strong real estate market. Due to the limitation of space in this article, we shall cover two issues here first.
Transfer of land use rights - Value Added Tax exemption
Under Circular 129/2008/TT-BTC dated December 26, 2008 effective from January 1, 2009 on Value Added Tax (“VAT”), the transfer of Land Use Right (“LUR”) is VAT exempt.
The circular further provides details that the revenue subject to VAT is the real estate transfer value minus the LUR value at the time of the transfer. For example, the transfer value of a property is VND8 billion, while the building value is determined at VND5 billion and the balance of VND3 billion is attributable to the value of the LUR. The revenue subject to VAT in this case is only VND5 billion.
The deduction of the LUR value from the revenue subject to VAT also applies in cases of instalment payment, from the first instalment payment. Under the above example provided in Circular 129, if the first instalment payment of the property is 30 per cent, then a deduction of 30 per cent of the LUR value (30 per cent x VND3 billion) can be deducted from the revenue subject to VAT. The LUR value is determined and fixed at the time of the first instalment payment.
The above taxation principle as set out by the regulations and demonstrated by these examples is simple, clear and straightforward. However, there are various implementation issues faced by the taxpayers in practice.
Firstly, how the LUR value at the transfer time may be determined and fixed for this VAT deduction purpose? Circular 129 provides that where the price of the land at the date of transfer declared by the taxpayer is not deemed to have sufficient basis in order to determine a reasonable VAT taxable price pursuant to law, the deductible price of the land shall be the price of the land (or the rent for the land) stipulated by a people’s committee under central authority at the date of transfer of real estate.
Under some official letters issued by Ministry of Finance (MoF) (i.e. Official Letter No. 10383/BTC-TCT dated July 22, 2009), it is confirmed that when determining the price of land at the date of transfer of real estate property, enterprises and their customers can make reference to the land price listed at Real Estate Transaction Centre or enter into a contract with price assessment agencies. This indicates that “market price” can be used. Can this “market price” for land be determined appropriately in a “true and fair” manner and can be acceptable by the tax office?
Secondly, for apartment sales, especially with the high-rise apartments, how the common owned LUR value (even if assuming can be determined correctly and appropriately) may be allocated to each apartment unit for VAT deduction purposes? The current tax circular does not specifically address this issue. Reference to the Land Law, Law on Housing, Law on Real-Estate Business and other relevant implementing regulations would be required here and this can be very legally complex. We have seen LUR ownership paperwork for a number of different high -rise apartments showing different ways of calculation and presentation of the allocated land here even within the same city.
Finally, having the LUR value deducted from the revenue subject to VAT effectively implies that the developer is in a partial VAT exemption position. Accordingly, the developer cannot claim all the input VAT incurred relating to the land and building development. In other words, the input VAT incurred relating to the LUR transfer revenue (e.g. land improvement expenses) which is VAT exempt, is not technically creditable.
If the input VAT relating to the LUR transfer revenue cannot be clearly identified (i.e. the expenses and related VAT incurred may be related to both land and building development), then the input VAT must be claimed based on the ratio of the VATable revenue (the house/apartment transfer value) over the total revenue (the house/apartment transfer value plus the LUR transfer value). This would create certain VAT leakage to the developer.
The practice so far has indicated that in most cases in Hanoi, the developers issue invoices for VAT purpose on the full property transfer value without deduction of the LUR transfer value portion. On the other hand, we have seen that some developers in Ho Chi Minh City do try to work this out and exclude the VAT charge on the LUR transfer portion.
For a healthy market development and to make it fair for individual property buyers (i.e. not having to pay VAT on the value of LUR of the property they purchase as clearly allowed under the VAT law), it is important that practical and easy to follow guidance from the tax authority would be required here on this subject for strict and consistent application of the tax regulations
Long-term lease upfront payment-Corporate Income Tax (“CIT”) implications
It is common to see industrial park developers around the country is to rent the land from the government, develop the infrastructure and then sub-lease the land to the tenants over a long period of time. Recently, qualified foreign buyers may buy only “long-term leases” for their properties say for 50 years as allowed under current regulations. In some projects located in central business districts of the cities or beachfront, properties may only be sold by the developer on a long-term lease basis even to Vietnamese national buyers.
Tenants/buyers in the above cases would typically be required to pay the full lease value upfront for many years to the developers. For accounting purposes, we understand that many developers do recognise the full lease upfront payment as their sale revenue in the year of receipt.
However, for CIT purposes, under the previous CIT regulations (i.e. Circular 134/2007/TT-BTC applicable to December 31, 2008), developers may choose to recognise the above taxable sale revenue on the basis of an one-off full lease upfront payment or deferred basis with taxable revenue recognition annually over the lease period.
The current Circular 130/2008/TT-BTC dated December 26, 2008, replacing Circular 134 and effective from January 1, 2009, no longer allows the above two options. Taxable revenue must now be recognised on a deferred basis (i.e. option 2 above) only.
Circular 130 fails to provide any provisions for transitional cases i.e. can developers with projects already operational before January 1, 2009 be allowed to continue with what they may have in place for many years e.g. recognition of sales revenue for both accounting and tax purposes on an one-off full lease upfront payment basis or all have to change to the new rule from January 1, 2009.
The more serious related problem in connection with this new tax provision is how the difference between the tax and accounting profits may be addressed in terms of dividend payment. The current regulations on dividend payment require that dividends may only be declared and paid out after the company has fulfilled its Vietnamese tax obligations (i.e. only profits after tax can be paid out as dividends).
Many developers would face the situation that they may have substantial accounting profits, but be unable to pay out full dividends for many years because full CIT cannot be declared and paid for these accounting profits recognised. For real estate developers who may constantly need quick cash turn, this can be another challenge that needs careful management and advance planning.
-Ninh Van Hien (firstname.lastname@example.org) and Do Thi Thu Ha (email@example.com) - tax partners leading the Real Estate Practice at KPMG Vietnam.
-The views expressed by the authors here do not necessary represent the views and opinions of KPMG.