In recent years, with the increase in BT (build-transfer) projects in the infrastructure sector, the issue of the levy of business tax on such projects has progressively become more prominent. There are no uniform rules for the levy of taxes on BT projects at the national level. In practice, policies at the local level on the levy of business tax on BT projects are an unmitigated mess.
Tax on BT projects
Pursuant to the Provisional Regulations for Business Tax and the Implementing Rules for the Provisional Regulations for Business Tax, payers of business tax are entities and individuals that provide the services specified in the regulations, transfer intangible assets and sell immovable assets. The tax basis for business tax is the entire price and extra-price fees charged by the taxpayer for the provision of taxable services, transfer of intangible assets, or sale of immovable assets. The business tax rate on the construction industry is 3%, and on the service industry 5%.
The BT concession model is one where a government, or an entity authorised by it, selects through the statutory procedure an investor for an infrastructure project. The investor is responsible for raising the project construction funds and for constructing the project, and once construction is completed, the government buys back the project by paying the buyback moneys. The BT model is an infrastructure construction model that combines financing and construction together. However, based on the above-mentioned business tax regulations, it is impossible to determine how business tax is to be paid on a BT project.
In recent years, various regions have issued local regulations addressing methods by which business tax on BT projects can be levied, including:
- levying the whole amount of business tax on the investor, based on the construction industry tax heading only, with Chongqing being representative. The Notice on Policies Relevant to Business Tax on the Construction Industry issued by the local taxation bureau of Chongqing municipality in 2008 expressly adopts this method;
- levying business tax on the investor based on the construction industry difference. For example, all of the regulations for business tax on BT projects issued by the local taxation bureaus of Guangxi province, Jilin province, Henan province, Hebei province, Huizhou municipality, etc., distinguish whether the investor of a BT project and the contractor are different entities. If they are the same entity, the whole amount of business tax is levied on the investor-contractor; if they are different entities, both the investor and contractor are deemed payers of business tax, with the investor’s tax base figure being the buyback moneys minus the project moneys portion, and that of the contractor being the project moneys;
- levying tax based respectively on the tax headings for the sale of immovable assets and for the construction industry, with Hunan being representative. In 2011, the local taxation bureau of Hunan province issued the Announcement on the Issue of Business Tax on BT Construction Projects, which specifies the following two circumstances: i) where the proposal for, and the construction of, a project are made and done in the name of the investor-financer and the project is delivered to the owner upon completion, business tax is levied on the income derived by the investor-financer based on the tax heading of “sale of immovable assets”, with the taxable turnover being the entire amount of the buyback moneys received; and ii) where the proposal for, and the construction of, a project are made and done in the name of the owner, the investor-financer is treated as the general contractor for the project, regardless of whether it has general contractor credentials, and business tax is levied based on current regulations for the “construction industry” tax heading. The specific levy method is identical to the method of “levying business tax on the investor based on the construction industry difference” mentioned above;
- levying tax based respectively on sale of immovable assets, construction industry and service industry, with Jiangxi being representative. The following two circumstances are specified in the Announcement on Tax Policy Issues Relevant to BT Construction Projects issued by the local taxation bureau of Jiangxi province in 2010: i) where the project proposal is made in the name of the BT project investor, business tax is levied on the BT project based on the tax heading of sale of immovable assets; and ii) where the project proposal is made and construction done in the name of the BT project owner, tax is levied on the BT project investor based on the construction industry tax heading. Additionally, Jiangxi province deems a BT project to be an entrusted construction act, for which it additionally levies business tax on the investor based on the service industry/agency tax heading.
How to respond
In the midst of the chaotic situations mentioned above, an investor when investing in a BT project should pay attention to the following points:
- Before investing, with respect to a region that has issued measures for the levy of business tax on BT projects, it should establish a solid line of communication with the tax authority to confirm the tax authority’s recognition of the BT project, to confirm the tax base figure and tax rate for business tax, and to confirm whether or not there are any relevant tax breaks;
- With respect to a region that has not issued measures for the levy of business tax on BT projects, the best approach would be to have the tax authority, before the investment, give a clear written opinion on how it levies business tax on BT projects, clearly specifying the tax base figure and tax rate, and also to seek to secure any relevant tax breaks;
- Regardless of whether the region concerned has issued measures for the levy of business tax on BT projects, the investor can consult with the local government to have the business tax that it expends in the construction of the project included as part of its investment costs, and when the government ultimately buys back the project have the business tax included in the bill.
Additionally, with respect to the current chaos in the levy of business tax on BT projects, we would much prefer to see uniform and clear regulations issued at the national level.
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