China Developers Deny CCTV Report on Unpaid Land Taxes

Chinese property developers including Gemdale Corp. and Beijing Capital Development Co. denied a China Central Television report, which claimed they were among 45 firms that failed to pay at least 3.8 trillion yuan ($624 billion) in land taxes between 2005 and 2012.

Gemdale doesn’t owe land appreciation taxes and its results have fairly reflected its financial position and business performance, it said in a filing to the Shanghai stock exchange today. Beijing Capital Development, BBMG Corp and Beijing Vantone Real Estate Co. also made similar clarifications in stock exchange filings today. All four were mentioned in the CCTV report.

The CCTV report cited calculations by Li Jinsong, a Beijing-based lawyer. It claimed Agile Property Holdings Ltd. owes the government 8.3 billion yuan in land appreciation taxes, and Soho China Ltd., the biggest developer in Beijing’s central business district, owe the most among the 45 developers that failed to pay.

Other companies that owe the tax include China Vanke Co., the country’s biggest developer listed on mainland exchanges, the state television said. Vanke said the report was based on a “misunderstanding”.

The report was questioned by analysts from Credit Suisse Group AG and CIMB-GK Securities Research who said it was either a miscalculation or didn’t take into account the timing of the tax payments.

“Although the news may put Chinese developers’ shares under pressure, I don’t expect it to immediately prompt all local governments to enforce” full payment of the tax, known as LAT, Jinsong Du, a Hong Kong-based property analyst at Credit Suisse wrote in a note to clients today. “The TV program ignored the dynamics between developers and local governments, which often allow developers to pay LAT over an extended period of time to incentivize the developers to buy more land.”

Tax Misunderstanding

The report was based on a “misunderstanding,” which wrongly assumed the company’s provision for the tax as an immediate obligation for payment of the tax, a spokeswoman for China Vanke, who asked for anonymity due to company rules, said in an e-mailed reply. “They are different concepts. Developers will only pay LAT after property projects are completed, while before that we make a provision for LAT payment.”

Investment relations spokesmen at Agile and Soho China, who asked for anonymity because of company rules, wouldn’t immediately comment on the report. Vanessa Wang, investment relations officer at Guangzhou R&F Properties Co., another developer cited in the report, said by phone today that their tax filings are all conducted according to Hong Kong and mainland China regulations, and the company won’t comment on the CCTV report.

Agile dropped 2.6 percent to HK$8.72 in Hong Kong, the lowest since Oct. 7, at the close of trading, while China Vanke fell 1 percent to 8.61 yuan in Shenzhen.

Chinese developers’ land appreciation tax owed isn’t a concern for rated issuers, Fitch Ratings analysts led by Andy Chang wrote in a note to clients today after the CCTV report. Such practices are “normal and consistent” in China, while the payables arise from the timing gap between when property is delivered and taxes are paid, according to the report.

Questionable Calculations

Li, the lawyer from Beijing Yitong law firm, previously worked in auditing firms and started tracking payment of the tax since 2006, he said in a phone interview today. He referred to a document on the firm’s website for the methodology he used and declined to give details.

Li’s calculation method is “questionable” because property developers in China usually set aside a provision for the tax of about 7 percent to 8 percent of gross sales, said Johnson Hu, a Hong Kong-based property analyst at CIMB-GK.

Based on Li’s estimates of the tax payments owed, the developers would have had to record contracted sales of at least 54 trillion yuan in the past eight years, Hu said. China’s housing sales last year, the highest during the period between 2005 and 2012, totaled 5.4 trillion yuan, according to the National Bureau of Statistics.

— With assistance by Bonnie Cao

Before it's here, it's on the Bloomberg Terminal.