China Mulls Property Tax Structure

by Mary Swire, Tax-News.com, Hong Kong

06 May 2010

An annual tax on property ownership to be piloted in four of China’s largest cities this year may be different from the expected property tax.

The central government's real estate tax plans, to be piloted in the cities of Beijing, Shanghai, Chongqing and Shenzhen within the year and later applied nationally, could apply to owner-occupied as well as commercial properties, a report in the Economic Observer (EO) has surmised.

The EO reported that the People’s Bank of China, China’s Banking Regulatory Commission, the State Administration of Taxation, the Ministry of Land and Resources, the Ministry of Finance and the Ministry of Public Security have held discussions to decide when and how to impose the property tax.

What has been gleaned from these discussions is that local government revenue shortfalls are the driving force behind the intitiative and not the overheated property market. Legal obstacles and a lack of consensus on the structure of the tax have been the main stumbling block.

As a totally new tax it would need approval from the National People’s Congress, a lengthy process, but a real estate tax based on an existing tax imposed under a temporary regulation may only require State Council approval. Existing land taxes need not be affected by the introduction of such a real estate tax.

Reform of local land transfer fees is also thought to be desirable by the government, because the current system is thought to lead to too much local corruption, forced relocation, thuggery and such like.

The Chinese Academy of Social Sciences (CASS) annual "blue book" on China's real-estate market advocates an ownership tax based on a property's size and the number of properties held by the taxpayer. It also proposes a holding tax on idle land and unsold properties to damp down property speculation.

CASS recommended that China simplify its transaction tax system by eliminating some of the taxes related to property transactions, such as stamp duty. CASS suggests that there are unintended consequences with such additional taxes; transaction taxes may drive up prices and even depress supply.

At a press briefing, CASS said that residential units used as a primary residence should be exempt from the property-ownership tax, especially those with a modest floor area or price. Rented apartments could also be exempted to increase supply, it said. The prime target of such a tax would be speculative investors who keep properties vacant, a typical investment tactic in China in view of its underdeveloped capital markets.

Jia Kang, director of the Research Institute for Fiscal Science under the Ministry of Finance, when interviewed by the People's Daily said that property taxes were necessary as a "major, stable and growing source of tax revenues" to enable local government to fulfill growing responsibilities.

He approved of it as a "tax constraint" on runaway property prices and referred to the "positive effects of collecting property taxes in China where urbanization has just begun". Jia told the paper that land resources were exceptionally scarce and fluctuations in the housing market posed a significant problem. Jia also approved of the reallocation of resources effect, increasing costs to high-income people with several houses in order to improve the status of low-income people.

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