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When it comes to taxation laws and regulations, the tax and fee burdens of small companies are quite heavy. Consequently, some companies engage in tax evasion or avoidance. The tax law enforcement has become stricter. As with other officials, one has to keep good relations to avoid being targeted.
Last year the simplified sales tax rate for small businesses, regarded as small-amount taxpayers, was reduced in Beijing. However, the definition of small-amount taxpayers was also changed. A manufacturing company with sales volume exceeding 500,000 yuan is no longer considered a small-amount taxpayer in Beijing. Sales or trading companies, if their sales volume exceeds 700,000 or 800,000 yuan, are treated as general taxpayers and pay a much higher rate.
Property market service providers are relatively reliable since their information is proven by the market and can be checked by comparing information available through websites and listings in newspapers and other sources. However, some real estate agents use certain tricks in releasing their price information. For instance, agents often initially reveal a low price in relation to market price for customers purchasing or renting a property. If the customers call to follow up on that listing, they might say that that property is sold or rented already, and recommend other, higher priced properties instead.
Real estate developing companies frequently run their own property management companies that manage business properties sold to customers. These property management companies are often not trustworthy. For example, they may change part of the green spaces into parking areas, or change underground air defense facilities into shops or parking places to collect fees without the owner’s knowledge or approval.
Goal – A comprehensive regulatory regime that is transparent, efficient, simple in its implementation and that leads to accurate reporting of property values and prudent protection from market risks
Core Question: Do market participants feel the overall tax rate is fair and participate in formal transactions? Weak – business tax rates are high and Land Value Appreciation tax, reintroduced to cool down the real estate market, adds to the tax burden. Also the deed tax per transaction is perceived as high (3% of the contract value). Underreporting of contract values is pervasive to lessen taxation.
6.1.1 What is the total property transfer tax including all duties and payments? 3.6% – StrongOverall Tax
6.1.2 What is the overall tax rate on entrepreneurs (as a percentage of profits)? 63.5% – Ranking – 122nd out of 183, Weak – Trend↓
Source: Doing Business 2012 – Paying Taxes & Registering Property, World Bank www.doingbusiness.org/data/exploreeconomies/china
SQ 24: What is the tax on profits for foreign investors when divesting property? 20% capital gains tax + land value appreciation tax of 30% or more – Weak
Source: State Administration of Taxation www.chinatax.gov.cn/n6669073/n6669088/6888416.html
SQ 25: Are property valuers licensed and/or certified by the government? Yes – Strong.
SQ 26: How effective are mechanisms in place to discipline valuers who engage in misconduct? Strong – valuers do not want to lose their government license, so they generally do not engage in misconduct.
Civil Society Resource: China Institute of Real Estate Appraisers and Agents www.cirea.org.cn/
Brokers & Agents
SQ 27: Are real estate brokers and agents licensed and/or certified by the government? Yes – Weak, licensing of agents is relatively new. There are many unlicensed brokers and agents.
SQ 28: How effective are mechanisms in place to discipline brokers or agents who engage in misconduct? Weak, very few sanction mechanisms are in place.
Civil Society Resource: China Institute of Real Estate Appraisers and Agents www.agents.org.cn/
SQ 29: Are mortgage professionals licensed and/or certified by the government? No – Weak, it is not a separate profession outside traditional banks.
Source: China Banking Regulatory Commission www.cbrc.gov.cn/english/index.html
SQ 30: How effective are mechanisms in place to discipline mortgage professionals who engage in misconduct? Unknown.
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6.3.1 How restricted is the flow of capital into and out of the country? Very Weak – Score 25 out of 100, capital account transactions are tightly regulated.
Source: Index of Economic Freedom 2011, Heritage Foundation www.heritage.org/index/Country/China
6.3.2 Is the regulation of securities exchanges transparent, effective and free of influence from government and industry? Yes – Strong, Ranking 53rd out of 142; Score 4.52 out of 7
Source: The Global Competitiveness Report 2011-2012, World Economic Forum
6.3.3 What is the depth of asset-backed securities, mortgage backed securities, high-yield bonds and highly leveraged
loans? Very Weak – 55th out of 57 countries
Source: Financial Development Report, World Economic Forum http://www3.weforum.org/docs/WEF_FinancialDevelopmentReport_2010.pdf
FQ23: What is the level of taxation for small businesses? Are any of those taxes an excessive burden on small businesses? Are any tax discounts provided for small businesses?
There are more than 60 different sorts of taxes and fees for real estate sector in China. Including all the taxes and fees such as those associated with profit from sale, land transfer revenue, etc. businesses can pay close to 50% of the sales price in taxes and fees. For small businesses: 3% VAT without any tax base deduction; 25% corporate income tax and some further surcharges. Tax burden of small scale tax payers is normally lower than regular tax payers. However, many market participants find that the tax and fee burdens of small companies are quite heavy, if they pay taxes and fees (including social insurance fees) according to laws and regulations. Some companies engage in tax evasion or avoidance, although the tax law enforcement has become stricter than before. Small businesses have to keep good relations with the tax officials and other government departments, including the city management inspectors (cheng guan). At the same time, they feel that they are imposed with taxpayers’ liability without enjoying taxpayers’ rights.
FQ24: What is the experience of small businesses in dealing with professional property market service providers such as real estate agents, brokers and valuers?
These property market suppliers and service providers are relatively reliable since their information has to be to some degree in accordance with the real place and time information on properties. However, they use certain tricks in releasing their price information. They often quote a quite low price for customers purchasing or renting a property. If the customers inquire further, they might say that that property is sold or rented out already, and then recommend other, pricier properties.They sometimes provide biased information and hide some real information on sales situation. For instance, they might tell a buyer that the desired property is unavailable even if that is not true in order to wait for a better time to sell to them at a higher price. Or they may say that this is the last apartment available – even if that is not the case – to negotiate a higher price. Real estate developing companies also often run often their own property management companies that manage business properties sold to customers. Those companies frequently pursue their own interests at cost of the property owners’ interests and are generally not trustworthy. The government entrusts only large and certified valuation companies with work. Fearing potential punishment from the government (withdrawing the license etc.) most large companies perform well. However, they have to discuss the values of the assessed properties with the government. Therefore, values are relatively reliable but in favor of the government.