Prevent the tax-related risks of real estate supply chain financial asset securitization

In the securitization of supply chain financial assets, the additional interest expenses paid by real estate development enterprises due to deferred payment of payables cannot be included in the development cost according to regulations, otherwise it may lead to LAT risks.

The author has recently found that some real estate development enterprises have tax-related risks in the accounting treatment of relevant capital expenditures in the process of financial innovation, which should be brought to the attention of all relevant parties.

In recent years, many real estate development enterprises have actively carried out financial innovation and financing through supply chain financial asset securitization.

Supply chain financial asset securitization refers to the conversion of specific assets of core enterprises in the supply chain, such as accounts receivable of corresponding suppliers, into tradable securities through the asset securitization process. This method can revitalize the stock of accounts receivable of real estate development enterprises, improve the efficiency of capital utilization and improve the financial structure. At the same time, it can balance the interests of the middle and upstream suppliers with weak bargaining positions in the supply chain and the real estate enterprises as core enterprises, and promote the healthy development of the entire industrial chain.

However, in this process, some enterprises include the capital expenses that should be included in the interest expense into the development cost, which may lead to the risk of double deduction of pre-tax interest expenses of LAT tax.

Take a case that I learned about not long ago as an example: Company A, which was established in August 2008, is a general VAT taxpayer and is mainly engaged in real estate development and sales. In December 2023, when conducting a risk analysis of Company A, the tax cadres found that the balance of accounts payable and other accounts payable was huge, and the project development cost was significantly higher than that of its peers, judging that Company A might have tax-related risks.

As a result, the tax cadres checked the detailed accounts payable accounts, bank deposit payment records, large-amount contracting, purchase and sale contracts and other materials of Company A, and found that Company A was involved in a supply chain financial asset securitization business. The specific business model is as follows: Company A signs a construction contract with contractor Company B, and Company B provides construction services and other related services to Company A, and agrees on the contract project payment. Company B and the factoring company C signed the Accounts Receivable Transfer Registration Agreement, and paid the accounts receivable of Company B in a factoring manner that was lower than the amount of the accounts receivable (i.e., the amount of the project payment agreed in the construction contract). Company A readjusts the project cost with Company B according to the actual discounted cost, and Company B issues a project invoice to Company A, and Company A pays Company C according to the adjusted and increased project price. Subsequently, Company A did not include the interest expense in the interest expense of the funds due to the deferred payment of the project money by using supply chain financing in the accounting process, but included it in the development cost, deducted the full amount, and enjoyed the tax preference of an additional 20% deduction.

In this way, there is a risk of LAT in this way.

Article 6 stipulates that the deductions for calculating the value-added include: (1) the amount paid for obtaining the land use right, (2) the cost and expense of developing the land, (3) the cost and expense of the newly built house and supporting facilities, or the appraised value of the old house and building, (4) the tax related to the transfer of real estate, and (5) other deduction items stipulated by the Ministry of Finance. Article 7 of the Detailed Rules for the Implementation of the Provisional Regulations on Land Appreciation Tax specifically clarifies the deduction items for calculating the value-added amount, such as (1) the amount paid for the acquisition of land use rights refers to the land price paid by taxpayers for the acquisition of land use rights and the relevant fees paid in accordance with the unified provisions of the state. (2) The cost of developing land and new houses and supporting facilities (hereinafter referred to as real estate development) refers to the actual cost of real estate development projects of taxpayers (hereinafter referred to as real estate development costs), including land acquisition and demolition compensation, preliminary engineering costs, construction and installation engineering costs, infrastructure costs, public supporting facilities fees, and development indirect costs. (3) The cost of developing land and new houses and supporting facilities (hereinafter referred to as real estate development expenses) refers to the sales expenses, management expenses and financial expenses related to real estate development projects. The interest expenses in the financial expenses are allowed to be deducted according to the facts if they can be calculated and apportioned according to the transferred real estate project and the financial institution certifies it, but the maximum amount shall not exceed the amount calculated according to the loan interest rate of the same type of commercial bank for the same period. Other real estate development expenses shall be calculated and deducted within 5% of the sum of the amounts calculated in accordance with the provisions of subparagraphs (1) and (2) of this Article. If the interest expense cannot be calculated and apportioned according to the transferred real estate project or the certificate of the financial institution cannot be provided, the real estate development expenses shall be calculated and deducted within 10% of the sum of the amount calculated in subparagraphs (1) and (2) of this article. This article also stipulates that a 20% deduction shall be added to the sum of the amounts calculated by taxpayers engaged in real estate development in accordance with the provisions of subparagraphs (1) and (2) of this article.

According to the above provisions, the actual costs incurred by taxpayers in real estate development projects are allowed to be deducted in full when calculating the LAT deduction, and can be used as the basis for an additional 20% deduction. The interest expense in the financial expenses needs to be deducted or calculated according to the actual situation in accordance with the regulations.

It is not difficult to restore the business essence of Company A's case to find that in the supply chain financial asset securitization, the original contract project payment is the actual development cost of the real estate enterprise. The increased project cost after the adjustment is essentially the additional interest expense paid to the contractor by the real estate enterprise due to the change of account period or payment method and the delay in payment of the payable. This part of the increased cost is not based on construction engineering reasons such as the increase in construction difficulty or the increase in the amount of construction and installation work, and will not increase the cost of housing construction or increase the value of the goods sold, and shall not be included in the development cost according to the regulations, and then be fully deducted and enjoy an additional 20% deduction.

The tax cadre asked Company A to provide a reasonable basis for the increase in the project cost, but Company A could not provide it. Finally, under the guidance of the tax department, Company A recognized that in the process of supply chain financial asset securitization, the capital interest expenses incurred due to the deferred payment of the goods should be included in the real estate development expenses as interest expenses, and the LAT tax and late fees of millions of yuan should be paid by itself.

It is understood that in practice, accounting treatment such as Company A has a certain degree of representativeness among real estate development enterprises involved in the supply chain financial asset securitization business. The above cases show that enterprises should clarify the essence of the relevant business in the accounting treatment and handle the relevant interest expenses in strict accordance with the regulations.

The tax department should also actively pay attention to the development and changes of the real estate industry, carry out key analysis of innovative businesses, analyze and judge business processes, invoice flows, capital flows and business substances, timely investigate potential risks in the industry and system, and continuously improve the level of professional supervision of key industries through prior publicity and supervision, process tracking management, risk monitoring and early warning, and guide taxpayers to consciously handle tax-related business in accordance with the law.

Source: China Tax News, April 30, 2024, Edition: 07, Author: Wang Jie, Author's Affiliation: Office of the Commissioner of the State Administration of Taxation in Beijing. 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!