Discussion on how to pay taxes on behalf of municipal engineering projects

Recently, I have been in contact with municipal governments and urban investment companies on how to pay taxes and fees for various projects entrusted by the government, which have a long time span and involve the construction and handover before and after the VAT reform. Agent construction project refers to the real estate enterprise to accept the entrustment of other units to develop and construct various projects, including construction sites, houses, municipal projects, etc., and is the sole agent of the construction party for the investment, planning, organization, management, settlement, transfer, return on investment and other matters of the construction project. Although governments at all levels are required to initiate and approve projects in the name of the construction agent, and are responsible for the whole process management of project design and construction bidding, after the completion of the project for the record, the project and its information will all be handed over to the relevant government units, and only the project management fee is earned, not to earn the project construction price difference, and a large amount of construction funds need to be advanced. Therefore, the government construction projects undertaken by these two types of companies have been taxed according to brokerage agency services, and VAT has not been levied according to construction services or sales of immovable property in accordance with the provisions of the tax law.

Enterprises generally reflect the cost of the construction project through inventory, construction in progress, fixed assets, other non-current assets or other payables, but because the construction project has the characteristics of long development time, precipitation of funds, and many links involved, there may be a phenomenon that the settlement of the project is not timely, resulting in the long-term posting of the cost of the above assets and the lag of the follow-up government repurchase funds. Some projects even start construction only relying on the red-headed documents of the government minutes, and do not sign the construction agreement until the completion of the project, and the final accounts are not yet settled, not only due to the lag in the government's financial final accounts, which causes the enterprise to be unable to determine the tax basis of the project, but also because of the lag in the repurchase funds, the enterprise has not handed over the assets of the enterprise, and at the same time, the enterprise has no business difficulties due to undertaking a large amount of financing advances for the project, and cannot correctly fulfill its tax obligations in accordance with the provisions of the tax law. In view of the above problems, we will discuss the construction of municipal engineering projects on behalf of the company and analyze the applicable fiscal and tax policies.

1. The concept of entrusted construction business

At present, there are two main modes of entrusted construction widely used by municipal and urban investment companies, of which mode 2 is the majority:

Business model 1 (i.e., the traditional "agency system"): the entrusted party and the entrusting party implement the full settlement (transfer of the original bill), and only charge the entrusting party the construction fee, that is, in the construction process, the construction party, the designer, the supervisor, etc. do not sign a contract with the entrusted party, but directly sign a contract with the entrusting party, and the entrusted party only charges a certain agency fee for real estate development. For example, the above two types of companies only undertake the preliminary work, bidding management, project management, completion acceptance and accounting functions of the project, and do not undertake the relevant investment and financing functions. The above two types of companies charge project construction management fees in accordance with the standards agreed in the contract.

Business model 2: the above two types of companies as the main body of financing and undertake the construction management function, in order to solve the financial problems of enterprises in infrastructure construction, the government for infrastructure construction to establish a corresponding interest compensation mechanism, the two parties signed an entrusted construction agreement, by the above two types of companies to pay the construction expenditure in advance, the government in stages to return the company's costs, after the completion of the project as a whole and then liquidated, the above two types of companies to charge the project construction management fees as profits.

The second business model of entrusted construction is the embodiment of the special functions of the above two types of companies as government project financing platforms. There is a big difference with model 1, model 1 does not have the function of financing, while model 2 needs to undertake financing and construction functions at the same time, and even a large number of land demolition compensation work has been handed over to the above two types of companies to complete, and because the entrusted party directly signed a contract with the construction party, the invoices of the construction party were issued to the entrusted party, resulting in the enterprise paying VAT according to the agency service, but at the same time obtaining a large number of input invoices, due to the existence of a large number of detained invoices or input tax credits in the tax system, the tax authorities have questions about the accounting and tax treatment of the entrusted construction business of the above two types of enterprises, which in turn leads to disputes between tax and enterprises。 The entrusted construction business discussed in this article refers to the entrusted construction business model 2.

2. How to recognize the income of the entrusted construction business

How to recognize the revenue of the entrusted construction business, and whether it is based on the gross amount method or the net method?

The gross and net methods are popular terms in accounting. The Accounting Standard for Business Enterprises No. 14 (hereinafter referred to as the "New Revenue Standard") issued by the Ministry of Finance further standardizes the method of revenue recognition. Article 34 of Chapter 5 of the New Revenue Standards stipulates that if an enterprise is able to control the goods before transferring them to customers, the enterprise is the principal responsible person and shall recognize revenue according to the total amount of consideration received or receivable;

The above-mentioned provisions are mainly distinguished by whether the enterprise is the main responsible person or the agent. If the enterprise is primarily responsible, revenue is recognized using the gross method, or if the enterprise is only an agent, revenue is recognized using the net method. So, how to determine whether the enterprise is the main responsible person or the agent? The key is to see whether the enterprise has control over the goods before transferring them to the customer.

The circumstances in which an enterprise can control a commodity before transferring it to a customer include: the enterprise obtains control of the commodity or other assets from a third party and then transfers it to the customer, the enterprise can lead the third party to provide services to the customer on behalf of the enterprise, and the enterprise transfers the commodity to the customer by providing significant services after obtaining control of the commodity from the third party, and integrating the commodity with other commodities into a certain combined output by providing significant services. When specifically determining whether a company has control over a commodity before transferring it to a customer, an enterprise should not be limited to the legal form of the contract, but should consider all relevant facts and circumstances. These facts and circumstances include: the enterprise bears the primary responsibility for the transfer of the goods to the customer, the enterprise assumes the inventory risk of the goods before or after the transfer of the goods, the enterprise has the right to determine the price of the goods to be traded, and other relevant facts and circumstances.

In practice, enterprises (or governments) may set different conditions for entrusted construction, and it is impossible to frame the income of entrusted construction with a completely unified standard. Since the entrusted construction business enterprises do not have the right to determine the price independently, it is not a complete market behavior, and the final settlement needs to be carried out according to the approval price of the financial final accounts, so most enterprises adopt the net method to recognize the income of the above-mentioned agency construction municipal engineering projects.

There is no difference between the gross or net method of revenue recognition, but it has a greater impact on the company's operating income, gross profit margin and certain pre-tax deductions based on total revenue.

3. How to handle VAT on behalf of the entrusted construction business

What is agent construction and how to deal with tax treatment?

Before the VAT reform, Guo Shui Han [1998] No. 554 stipulated that "after the real estate developer (hereinafter referred to as Party A) obtains the land use right and goes through the construction procedures, the construction shall be carried out according to the requirements of other units (hereinafter referred to as Party B), and the construction progress shall be collected from Party B in advance, and after the completion of the project, Party A shall handle the formalities such as property right transfer for Party B."

If Party A builds the house with its own construction force, it shall levy business tax according to the tax item of "construction industry". ”

After the VAT reform, the State Administration of Taxation did not clarify the behavior of "agent construction", and scattered relevant documents or answers from local tax bureaus, such as Jiangxi, Hebei, Shaanxi, Henan, Anhui and other provinces have relevant answers.

1. Jiangxi Province

Notice of the Office of the Leading Group of the Jiangxi Provincial State Taxation Bureau on Issuing the < of the Jiangxi Provincial State Taxation Bureau's Answers to Questions on the Comprehensive Implementation of the VAT Reform Policy (Construction Service Industry) > (Gan Guo Shui VAT Reform Ban Fa [2016] No. 51)

13. How does the construction agency issue VAT invoices?

Answer: According to the pilot policy of replacing business tax with value-added tax and the spirit of Guo Shui Han [1998] No. 554, the agency construction business shall be handled according to the following principles:

(1) If the construction unit and the owner sign the construction contract, the construction agency is only responsible for the agency procedures and project supervision, and the management fee charged by the construction agency is subject to value-added tax according to the provision of agency services.

(2) If the construction unit of the project and the construction agency sign a project construction contract, and the construction agency and the owner do not need to go through the property rights transfer procedures, the construction agency shall be taxed according to the provision of construction services and issue a value-added tax invoice to the owner;

(3) If the construction unit and the construction agency sign a project construction contract, and the construction agency and the owner need to go through the property rights transfer procedures, the construction agency shall be taxed according to the sale of immovable property and issue a VAT invoice to the owner;

2. Hebei Province

Notice of the Hebei Provincial State Taxation Bureau on Issuing < > of the Answers to Policy Questions Concerning the Comprehensive Implementation of the VAT Reform (VIII)

6. On the issue of how to levy VAT on taxpayers' behavior of "building houses on behalf of others" after the comprehensive implementation of the VAT reform

Taxpayers who accept the entrustment of the building unit to build houses on behalf of them shall be subject to VAT according to the tax item of "brokerage agency services", and the sales amount shall be charged by the taxpayer to the entrusting party for the construction fee. The act of building houses on behalf of others referred to here must meet the following conditions at the same time:

(1) Handle the housing project and related formalities in the name of the entrusting party;

(2) There is no transfer of land use rights and property rights with the entrusting party;

(3) Sign a contract with the entrusting party in advance;

(4) Do not handle the project settlement in the name of the entrusted party.

3. Shaanxi Province

"Shaanxi National Tax Reform Pilot Policy Q&A (11)" real estate

Question 1: If a real estate company is entrusted by the local government to build a demolition and resettlement house, can it pay VAT according to the brokerage agency service?

Answer: Under normal circumstances, the agency construction of the house is in the name of the entrusting party (government or enterprise) for the project, the land and subsequent construction procedures are registered in the name of the entrusting party, and the entrusted party generally does not advance funds, but the entrusting party bears all the construction costs.

The real estate enterprise signs a contract with the entrusting party and is entrusted with the construction of the house on behalf of the client, and in actual operation, there may also be situations such as initiating the project on behalf of the client and paying the construction funds in advance. Therefore, real estate enterprises should pay VAT according to the nature of the business they actually engage in.

(1) If it is only engaged in the management of the agency construction project, it shall pay VAT on the income from the agency construction management fee according to the "brokerage agency service".

(2) If a real estate enterprise initiates a project in its own name, obtains land and constructs a house in subsequent construction application procedures, it is an act of developing real estate on its own, and when the project is completed and handed over to the entrusting party, it shall pay VAT according to the "sale of immovable property".

(3) In addition to the agency construction management, if the real estate enterprise advances all or part of the construction funds for the agency construction project, it shall pay VAT on the income from the capital occupation fee (interest nature) obtained by it according to the "loan service".

4. Henan Province

Henan Provincial State Taxation Bureau's Special Issue 1 of the Rapid Handling Mechanism for the Problem of Replacing Business Tax with VAT

Question 21 After the full implementation of the VAT reform, how to levy VAT on the behavior of real estate development enterprises "building" houses on their behalf?

Answer: Before the VAT reform of real estate development enterprises, the provisions of Guo Shui Han [1998] No. 554 on the act of "agent construction" are: "After the real estate development enterprise [hereinafter referred to as Party A] obtains the land use right and goes through the construction procedures, it shall carry out the construction according to the requirements of other units [hereinafter referred to as Party B], and collect the housing payment from Party B in advance according to the construction progress, and after the completion of the project, Party A shall handle the formalities such as property right transfer for Party B." If Party A builds the house with its own construction force, it shall also levy business tax on Party A's self-construction behavior according to the tax item of 'construction industry'. ”

After the VAT reform, if a real estate development enterprise only provides its own construction force to build the house and does not go through the property rights transfer procedures for Party B, it shall be levied VAT according to the construction industry tax item, and if it builds the house with its own construction force and goes through the property rights transfer procedures for Party B at the same time, it shall be levied VAT according to the sales of real estate tax item.

5. Anhui Province

Anhui Provincial State Taxation Bureau's Hot and Difficult Issues in Replacing Business Tax with VAT (Real Estate)

34. After the comprehensive implementation of the VAT reform, how to pay VAT for the behavior of real estate development enterprises "building" houses on their behalf?

Answer: Before the VAT reform of real estate development enterprises, the provisions of Guo Shui Han [1998] No. 554 on the act of "agent construction" are: "After the real estate development enterprise [hereinafter referred to as Party A] obtains the land use right and goes through the construction procedures, it shall carry out the construction according to the requirements of other units [hereinafter referred to as Party B], and collect the housing payment from Party B in advance according to the construction progress, and after the completion of the project, Party A shall handle the formalities such as property right transfer for Party B." If Party A builds the house with its own construction force, it shall also levy business tax on Party A's self-construction behavior according to the tax item of 'construction industry'. ”

After replacing business tax with value-added tax, the real estate development enterprise [hereinafter referred to as Party A] shall obtain the land use right and go through the construction procedures according to the requirements of other units [hereinafter referred to as Party B], and collect the housing payment from Party B in advance according to the construction progress, and after the completion of the project, Party A shall handle the property rights transfer and other formalities for Party B. The above-mentioned "construction of houses on behalf of real estate development enterprises" is only calculated and paid VAT in accordance with the relevant tax policies for the sale of immovable property. If a real estate development enterprise has not obtained the right to use the land and only accepts the entrustment of other units to organize construction forces to build houses on behalf of the company, it shall calculate and pay VAT in accordance with the relevant tax policies for construction services.

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Since the regulations of local tax authorities on how to pay VAT on behalf of construction agencies are not completely consistent, in practice, it is necessary to choose to apply the corresponding tax items and tax rates to pay VAT according to the requirements of local tax authorities and the specific situation of the agency construction business.

By understanding the local policies, we can roughly summarize the following basic conditions for the standard "entrusted construction" business

1. The entrusting party shall initiate the project by itself;

2. There is no transfer of land use rights or property rights;

3. The construction agent does not advance funds, and separately charges the construction fee or management fee;

4. The construction agent has signed a contract with the entrusting party in advance;

5. The construction party will issue the construction service invoice to the entrusting party.

If the above five basic conditions are met at the same time, it is the standard "entrusted construction" business recognized in the tax area, which requires the entrusting party to sign an entrusted construction contract with the construction agent, and pay the project construction agency handling fee or management fee according to the terms of the contract, and the construction agent is responsible for the process management of the overall project project, and the business essence is that the agent construction party provides a special project management service, and the VAT shall be paid in accordance with the "modern service industry-business auxiliary service-brokerage agency service" for the construction fee or management fee income obtained, and the tax rate is 6% The levy rate for small-scale taxpayers is 3%, and VAT invoices are issued to the entrusting party.

In terms of revenue recognition, most enterprises adopt the net method, that is, only the agency construction management fee and financing interest are recognized, and the revenue is not recognized in accordance with the financial final account amount recognized by the government, and the corresponding development costs are carried forward at the same time.

There is no clear provision in the tax regulations regarding the application of the gross or net method, and the judgment is currently mainly based on the new revenue standard. For example, Jiangxi Province stipulates that for entrusted construction projects that go through the formalities for the transfer of property rights, the construction agent shall calculate and pay the VAT according to the "transfer of immovable property"; for the entrusted construction projects that do not need to go through the procedures for the transfer of property rights, the construction agent shall pay the VAT according to the "construction services" To calculate and pay VAT, the construction party can deduct the input VAT by obtaining the special VAT invoice issued by the construction party at the same time, while the construction agent calculates and pays the VAT according to the provision of brokerage agency services, and the invoice of the construction party is issued to the owner instead of the construction agent.

We are clear about how to calculate and levy VAT on behalf of the entrusted construction business, and how to confirm the basis of VAT calculation? This is the point where enterprises and tax authorities have the most disputes. The Q&A documents of the local tax authorities only stipulate the tax items applicable to the agency construction business, but do not mention the tax basis, and only Shaanxi Province has given a clear answer to the financing agency construction business, that is, the income from the capital occupation fee (interest nature) obtained shall be subject to VAT according to the "loan service".

In the author's opinion, the VAT basis of the entrusted construction business needs to be determined according to the nature of the business actually engaged. At the same time, pay attention to reasonableness and compliance requirements to avoid tax risks. The following is a list of judgment methods for several common situations for the reference of enterprises. If you encounter uncertain matters, it is recommended to communicate with the competent tax authorities in a timely manner to resolve them.

The first common situation is that the construction agent initiates the project in its own name and obtains the allocated land use right, and after the construction is completed, the property right is handled under its own name and then transferred to the entrusting party, which is no longer a real construction agent, but a real estate project developed by the construction agent itself. When the project is completed and handed over to the entrusting party, the entrusted party (the construction agency) shall pay the value-added tax, land appreciation tax and enterprise income tax according to the "sale of immovable property", and issue a value-added tax invoice to the owner;

The second common situation is that the construction agent initiates the project in its own name and advances the construction funds, which does not involve the transfer of property rights. If the agent also advances all or part of the construction funds for the agency construction project in addition to the agency construction management, it is recommended that the agency construction business be split and the entrusted construction contract and the loan contract are signed respectively, then the agent construction party shall pay VAT on the income from the agency construction fee or management fee obtained as "construction services", and at the same time, it shall pay VAT on the income from the capital occupation fee (interest nature) obtained by it as "loan services". In this case, it is necessary to pay attention to the signing of contracts separately and the accounting is separate.

The third common situation is that the construction agent initiates the project in its own name, advances the construction funds at the same time, and pays the land demolition compensation fee on behalf of the relevant government departments (or the land reserve management department is responsible for the payment of land acquisition and storage and demolition compensation fees, but the construction funds and demolition compensation expenses are advanced by the construction party), and there is no need to transfer property rights after the construction is completed. For this kind of agency construction of municipal projects including financing, construction, agency and other contents, it does not belong to the real sense of agency construction, and according to the opinions of local tax authorities, it belongs to the provision of construction services. However, due to the fact that the local tax authorities are not as complicated as the actual business in the implementation of the policy of the construction project, and do not regulate the land demolition compensation fee collected and paid on behalf of the local tax authorities, whether the land demolition compensation fee paid by the construction party on behalf of the construction party is used as the basis for calculating business tax or value-added tax?

First of all, the author believes that it can be implemented with reference to the document (which has been repealed in full by Announcement No. 10 of 2023 of the State Administration of Taxation since June 16, 2023), that is, "in the process of a taxpayer entrusted to carry out building demolition, land leveling and pay demolition compensation to the original land use right holder on behalf of the entrusting party, the income obtained by providing building demolition and land leveling services shall be subject to business tax according to the tax item of "construction industry"; The business tax shall be calculated and paid on the basis of the turnover of all the income obtained from the provision of agency services minus the demolition compensation paid on behalf of the entrusting party. That is, before the VAT reform, the demolition compensation paid on behalf of the relevant government departments is not used as the basis for calculating the business tax of the agency business, and needs to be deducted from the income.

In the Q&A of the local tax authorities after the VAT reform, the Hebei State Taxation Bureau, in the answers to questions on first-class land development, held that the income obtained by taxpayers from providing services for building demolition and land leveling belonged to the tax item of "construction services", and the payment of demolition compensation fees to the original land use right holder on behalf of the entrusting party belonged to the tax item of "brokerage agency".

The calculation of VAT on brokerage agency services adopts the method of differential taxation, that is, the sales amount of brokerage agency services = all the price obtained and off-price expenses - government funds or administrative fees collected from the entrusting party and paid on behalf of the client. With reference to the above-mentioned tax policies, the demolition compensation paid on behalf of the relevant government departments does not belong to the scope of value-added tax, and should not be included in the development cost in the accounting treatment, but should be treated as the nature of collection and payment for tax treatment, but it should be noted that the contract pricing agreement in the entrusted construction contract and the invoicing mode in line with the collection and payment on behalf of the government should be noted.

In addition, according to the policy of replacing business tax with value-added tax, if a taxpayer is concurrently engaged in the sale of goods, services, services, intangible assets or immovable property, and different tax rates or levy rates are applicable, the sales amount subject to different tax rates or levy rates shall be calculated separately;

Therefore, different tax rates may be applied to the entrusted construction business at the same time, and the contract valuation should be clearly stipulated in the entrusted construction contract of the second or third mode, and the accounting should be carried out separately to avoid the tax-related risk of high application.

4. Compliance suggestions for entrusted construction business

The entrusted party is engaged in the construction of municipal engineering business in its own name, and the tax-related business is more complicated. For agency construction projects, the relevant tax laws and regulations of the state and local governments are not very clear, and there is great uncertainty at the implementation level. Therefore, when accepting the agency construction business of government municipal engineering, enterprises not only need to undertake the preliminary work of the project, bidding management, project management, completion acceptance, but also responsible for financing, collection and payment of land demolition compensation fees, etc., in order to avoid the tax-enterprise dispute that the financing interest income and the collection and payment of demolition compensation fees are considered as off-price expenses for providing construction services, it is necessary to split the business, sign the entrusted construction contract and the loan contract respectively, and the agency construction management fee, financing interest, The expenses of the nature of collection and payment are valued separately and accounted for separately, and the compensation bills for demolition and relocation are directly issued to the entrusted party (relevant government departments). According to the Cai Shui [2016] No. 36 document and the implementation caliber of the local tax authorities, the entrusted construction of municipal projects can strive to apply the tax rate of 9% (3% for old projects) for the provision of "construction services", 6% for the provision of "loan services", and 6% for the provision of "brokerage agency services". In this way, it not only avoids the risk of entrusting the VAT policy on behalf of the agency, but also minimizes the VAT tax burden.

Author: Xiong Juan, Unit: Zhonghui Tax Agent Office (Jiangxi). The content of this article is for general information purposes only and is not intended as formal auditor, accounting, tax or other advice, and we cannot guarantee that such information will remain accurate in the future. No person should act on the basis of the information contained herein without having due regard to the relevant circumstances and obtaining appropriate professional advice. The articles reproduced in this issue are for academic exchange purposes only. The original copyright of the article or material belongs to the original author or original copyright owner, and we respect copyright protection. If you have any questions, please contact us, thank you!