Government demolition compensation tax

The Ministry of Finance regulates the relevant finances for enterprises that need to relocate due to urban planning, reservoir area construction and other public interests and receive corresponding compensation payments from the government. Deal with the problem. The notice issued stipulates that enterprises receiving relocation compensation funds allocated by the government should be accounted for as special accounts payable; the interest on the relocation compensation deposits will also be transferred to special accounts payable. Fixed assets that are sold, scrapped or damaged due to relocation are accounted for as fixed asset liquidation business, and their net losses are written off as special payables. Expenditures used to resettle employees are directly written off as special accounts payable. After the relocation is completed, if there is any balance in the special accounts payable, it will be treated as an increase in the capital reserve fund, and the increased capital reserve fund will be shared by all shareholders*; if there is any shortage in the special accounts payable, it should be recognized as a loss for the current period. Therefore, the key to whether relocation compensation can generate profits lies in whether the relocation compensation is allocated by the government, which will fundamentally determine the nature of the relevant transactions. The main provisions on tax-related matters related to demolition compensation are:

1. Business tax

House (or land) demolition compensation and other subsidies obtained by demolition units and individuals due to demolition Business tax shall be levied on houses resettled with fees or compensation, except in the following two situations.

1. The demolished units and individuals who receive house (or land) demolition compensation and other subsidies paid by the government financial department are temporarily exempt from business tax.

2. The compensation fees obtained by demolished individuals due to the demolition of ordinary houses for their own use or the exchange of property rights of the house and other areas during the demolition process are temporarily exempt from business tax.

Since there is currently no unified policy on the tax treatment of business tax on relocation compensation fees, it is recommended that enterprises communicate with the competent tax authorities and their special administrators when encountering such business, and determine how to proceed based on the communication results. Tax treatment.

II. Land Value-Added Tax

According to Article 8 of the "Interim Regulations on Land Value-Added Tax", real estate requisitioned and recovered in accordance with the law for national construction needs is exempt from land value-added tax. Article 11 of the "Implementation Rules of the Interim Regulations on Land Value Added Tax" further stipulates: The real estate requisitioned and recovered in accordance with the law for the needs of national construction referred to here refers to the real estate approved by the government to be requisitioned or recovered due to the needs of urban implementation planning and national construction. land use rights. According to Article 11 of the "Implementation Rules of the Interim Regulations on Land Value-Added Tax", units and individuals that meet the above tax exemption regulations must submit an application for tax exemption to the tax authorities where the real estate is located. After review by the tax authorities, they will be exempted from the collection of land value-added tax.

It can be seen from the above regulations that the relocation compensation received by the enterprise from the government is exempt from land value-added tax in most cases. However, the exemption in such cases should be based on the tax of the location of the original real estate. The approval document from the agency shall prevail. In actual work, we need to pay attention to whether we have obtained tax exemption approval from the tax authorities. If the approval has not been received, it shall be regarded as a sale or transfer of real estate, and the land value-added tax payable shall be accrued.

3. Corporate income tax

1. Income tax treatment of the balance of relocation compensation. As of now, the Domestic Enterprise Income Tax Law has no special provisions on the tax treatment of relocation compensation. In terms of income tax for foreign-invested enterprises and foreign enterprises, the most important document regulating the tax treatment of relocation compensation is the State Administration of Taxation's Reply on the Tax Treatment of Relocation Compensation Income Obtained by Foreign-Invested Enterprises and Foreign Enterprises.

(1) If an enterprise obtains relocation compensation income and re-purchases or builds fixed assets of the same or similar nature and purpose as before relocation (hereinafter referred to as replacement fixed assets) after relocation, the above-mentioned relocation shall be The balance of the compensation income plus the sales revenue of various types of demolished fixed assets minus the depreciated value and disposal costs of various types of demolished fixed assets is used to offset the original price of the enterprise's replacement fixed assets.

(2) If an enterprise obtains relocation compensation income and no longer replaces fixed assets of the same or similar nature and use as before the relocation, it shall be deemed to According to the provisions of Article 44 of the Implementing Rules of the Foreign Enterprise Income Tax Law, the balance of the above relocation compensation income plus the sale income of various types of demolition fixed assets minus the depreciation value and disposal expenses of various types of demolition fixed assets shall be included in the The enterprise's taxable income for the current period is calculated and paid as corporate income tax.

In practice, the tax treatment of relocation compensation fees received by domestic-funded enterprises is in many cases based on Guoshuihan [2003] No. 115. Many local tax authorities have made regulations on the tax treatment of relocation compensation fees for domestic-funded enterprises in their regions by referring to the spirit of this document.

2. Income tax treatment of losses incurred during relocation

(1) For domestic-funded enterprises, when the relocation compensation is not enough to cover the expenses and losses incurred by the enterprise due to relocation , according to the provisions of the State Administration of Taxation Order No. 13 "Administrative Measures for the Pre-Income Tax Deduction of Enterprise Property Losses", it can be deducted as a pre-tax deduction for property losses after approval by the tax authorities.

If a domestic-funded enterprise encounters such a situation, it should use the approval document from the tax authority as the basis for determining whether it is necessary to make income tax adjustments for the loss.

(2) For foreign-invested enterprises, according to the State Administration of Taxation’s “Notice on Cancellation and Delegation of Follow-up Management Issues for Certain Tax Administrative Approval Projects for Foreign-Invested Enterprises, Foreign Enterprises and Foreign Individuals” (State Administration of Taxation [2004] No. 80), the pre-tax deduction for property losses of foreign-invested enterprises has been changed from the approval system to the filing system starting from July 1, 2004. If an enterprise suffers property losses, when submitting its annual income tax return to the competent tax authority, it should provide a written explanation of the type, extent, quantity, price, reasons for the loss, deduction period, etc. of the property losses, and attach a copy of the report from the relevant internal departments of the enterprise. Proof of property loss appraisal, etc. If the property loss is caused by outside the enterprise, the proof of property loss appraisal by relevant departments and institutions outside the enterprise should also be attached. When the competent tax authorities inspect the status of corporate income tax payments, they should focus on inspecting corporate property losses. For the property losses reported by the enterprise, if the above-mentioned information is not provided and there is no way to actually obtain evidence, tax adjustments can be made.

Therefore, whether the property loss caused by the relocation compensation of a foreign-invested enterprise is insufficient to cover the expenses and losses incurred by the enterprise due to relocation is pre-tax deductible depends more on professional judgment.

3. Differences in tax treatment and financial treatment of income tax involved in enterprise relocation. From the above provisions, the financial treatment and tax treatment of receiving relocation compensation are quite different. Mainly reflected in:

① Financial regulations stipulate that the balance of relocation compensation after writing off relevant expenses and losses should be included in the capital reserve, which means that it will not affect the profits and losses of the relocated enterprise, but this is stipulated in taxation The balance should be offset against the original price of the replacement fixed assets, that is, it should be included in the taxable income in subsequent years by reducing the depreciation that can be charged before tax. Therefore, when the same or similar fixed assets are replaced, taxable temporary differences will be formed in subsequent years. For the sake of robustness, for enterprises that use the tax impact accounting method to calculate income tax, when transferring the balance of relocation compensation to capital reserves, they should set aside a deferred tax credit based on the balance amount multiplied by the applicable tax rate (instead of The entire amount of the balance will be included in the capital reserve), and the credit will be written off year by year based on the differences in depreciation provisions under accounting and tax laws.

② There are no clear financial provisions on the treatment of the balance when the same or similar fixed assets are no longer replaced after relocation, but according to the tax law, such situations should be regarded as regular fixed assets and intangible assets. Asset disposals are subject to tax treatment.

③ The expenses and losses that can be deducted from the relocation compensation fee include the disassembly, transportation, reinstallation, debugging, etc. of removable machinery and equipment. However, the tax does not clarify that such expenses can be included in the relocation compensation fee. Deducted before tax as property loss.

④ Financial regulations stipulate that the cost of relocating employees can be directly written off as relocation compensation. We understand that the resettlement fee mentioned here mainly includes one-time compensation for "buying out the length of service". According to the provisions of the State Administration of Taxation documents, one-time compensation can in principle be deducted before corporate income tax. However, the document also stipulates that if the amount of various compensatory expenditures is large and the one-time amortization has a greater impact on the current year's corporate income tax revenue, it can be amortized evenly in subsequent years. The specific amortization period is determined by the provincial tax bureau based on local actual conditions. Therefore, if some employees are involved in "buying out their seniority" or paying other compensation during the relocation process, attention should also be paid to whether the tax authorities allow a one-time pre-tax deduction for the seniority buyout payment. If the tax authorities require annual deductions, deductible temporary differences (that is, deferred tax debits) will appear under the tax impact accounting method. When confirming the deferred tax debit, special attention should be paid to Article 107 of the Accounting System for Business Enterprises, which stipulates that sufficient taxable income should be expected to be generated within the future reversal period of the difference (generally 3 years).