The "red line expenditure" usually refers to the expenditure incurred for the construction of public facilities or other projects outside the boundary of the project construction land. For example, expenses incurred for the construction of roads, bridges, parks, schools, hospitals, greenery and other facilities outside the project planning. So is this type of expenditure allowed to be deducted by real estate development enterprises during land value-added tax liquidation? There is no clear regulation at the level of the General Administration, and some provinces and cities have introduced local policies that either agree to deduct or prohibit deductions. So, what should be done for most provinces and cities that do not have regulations? This article elaborates on its viewpoints for readers' reference.

1、 The law stipulates that the "actual costs incurred" of real estate development projects should be deducted

According to Article 4, Paragraph 1 of the Notice of the State Administration of Taxation on the Management of Land Value Added Tax Liquidation for Real Estate Development Enterprises (Guo Shui Fa [2006] No. 187), when real estate development enterprises handle land value added tax liquidation, the calculation of deduction project fees related to liquidation projects shall be carried out in accordance with Article 6 of the Provisional Regulations on Land Value Added Tax and Article 7 of its implementation rules. Unless otherwise specified, legal and valid vouchers must be provided to deduct the amount paid for obtaining land use rights, real estate development costs, expenses, and taxes related to the transfer of real estate; Those who cannot provide legal and valid vouchers will not be deducted.

Article 6 of the Provisional Regulations on Land Value Added Tax stipulates that the deduction items for calculating the value-added amount include: (1) the amount paid for obtaining the land use right; （2） The cost and expense of developing land; （3） The cost and expenses of new houses and supporting facilities, or the evaluation price of old houses and buildings; （4） Taxes related to the transfer of real estate; （5） Other deduction items specified by the Ministry of Finance.

According to Article 7 of the Implementation Rules of the Provisional Regulations on Land Value Added Tax, the cost of developing land and newly built houses and supporting facilities (hereinafter referred to as "housing value added development") refers to the actual cost incurred by taxpayers in real estate development projects (hereinafter referred to as "housing value added development cost"), including land acquisition and demolition compensation fees, preliminary engineering fees, construction and installation engineering fees, infrastructure fees, public supporting facilities fees, and indirect development expenses.

According to the above regulations, whether it is the "Interim Regulations on Land Value Added Tax" as the upper level law or the "National Taxation Commission [2006] No. 187" as a normative legal document, the unified caliber is "the actual costs incurred by taxpayers in real estate development projects should be deducted as items for calculating the value-added amount", and the law does not set "inside and outside the red line".

If the tax authority determines that "expenses beyond the red line cannot be deducted", it increases the tax burden of taxpayers and indirectly collects more taxpayers' taxes. Article 3, Paragraph 2 of the Tax Administration Law stipulates that no government agency, unit, or individual shall, in violation of laws and administrative regulations, make decisions on the initiation or cessation of tax collection, as well as on tax reduction, exemption, refund, supplementary tax, or other decisions that conflict with tax laws and administrative regulations. That is to say, no authority has the right to expand or limit the interpretation of tax laws to increase or reduce taxpayers' taxes in the absence of clear legal provisions.

Since the law specifies the actual costs incurred by taxpayers in real estate development projects, they should be deducted as a deduction for calculating the value-added amount. So the author believes that as long as the actual development costs incurred by real estate development enterprises, whether within or outside the red line, should be allowed to be deducted in accordance with the law.

2、 Law Enforcement Standards for "Whether to Allow Import Deduction of Red Line Expenditures" in Various Regions

In practical operations, some tax authorities in certain regions have made regulations on whether to allow deductions for expenses beyond the red line. The author lists them here for readers' reference.

（1） Provinces and cities that allow deduction of expenses outside the red line

1. Hainan Province allows deductions

According to Article 13 of the Announcement of the Hainan Provincial Taxation Bureau of the State Administration of Taxation on the Administration of Land Value Added Tax Clearing and Review by the Hainan Provincial Taxation Bureau of the State Administration of Taxation (Announcement No. 7 of 2021 of the Hainan Provincial Taxation Bureau of the State Administration of Taxation), the amount paid for obtaining land use rights shall be treated in accordance with the following provisions: (2) Expenses incurred for the construction of public facilities or other projects for the government outside the boundary of the project construction land, If documents issued by relevant government departments can be provided to prove that the expenditure is directly related to the construction of this liquidation project (including the acquisition of land use rights related to the project), deduction is allowed.

2. Deduction allowed in Guangxi Zhuang Autonomous Region

Article 40 of the Announcement of the Local Taxation Bureau of Guangxi Zhuang Autonomous Region on the Administration Measures for Land Value Added Tax of Real Estate Development Projects in Guangxi Zhuang Autonomous Region (Trial) (Announcement No. 1 of 2018 of the Local Taxation Bureau of Guangxi Zhuang Autonomous Region) stipulates that, in addition to the principles stipulated in Article 39 of these Measures, the deduction of project amounts shall comply with the following provisions: (1) the amount paid for obtaining land use rights, It refers to the land price paid for obtaining land use rights and the relevant fees paid in accordance with national unified regulations. 4. When obtaining land use rights, taxpayers shall bear the municipal construction expenses such as roads and bridges outside the red line as required by the government, provide proof materials related to this project, and deduct the actual amount based on legal and valid vouchers. The income obtained shall be used to offset the corresponding deduction project amount.

According to Article 2 (13) and Article 40 (1) (3) of the Interpretation Draft of the "Management Measures for Land Value Added Tax on Real Estate Development Projects in Guangxi Zhuang Autonomous Region" in Annex 9 of the Announcement No. 1 of 2018 issued by the Local Taxation Bureau of Guangxi Zhuang Autonomous Region, in order to obtain the land use right of this project, the real estate development enterprise shall bear the municipal construction expenses of roads, bridges, and other urban construction expenses outside the red line at the request of the government, which belong to the consideration paid for obtaining the land use right, Compliance with relevant regulations can be included in the cost of obtaining land use rights. Proof materials related to this project: firstly, the "State owned Land Use Right Transfer Contract" or "State owned Land Use Right Bidding and Listing Transfer Announcement" that stipulate or indicate that the real estate development enterprise shall construct public facilities or other projects outside the construction land boundary of this project in response to government requirements; The second is the direct basis for the association with the project (such as the construction and expansion of municipal roads and bridges to and from the community) and the official documents of the people's government at or above the county level (including the county level and urban areas under the jurisdiction of the city). For municipal construction expenses outside the boundary of the construction land of this project that do not meet the above conditions, including expenses incurred by real estate development enterprises in renovating the surrounding greenery and roads to improve the environmental quality of the project and promote the sales of development products, they shall not be included in the deduction amount of this project.

3. Deduction allowed in Chongqing

The Notice of the Chongqing Municipal Finance Bureau and the Chongqing Local Taxation Bureau on Issuing the Opinions on the Implementation of Property Behavior Tax Policies such as Land Value Added Tax (YCS [2015] No. 93) stipulates that in the development of real estate projects, if public facilities are constructed in adjacent areas due to unified planning and overall development needs, as stipulated in the land transfer contract, The construction expenses incurred can be deducted as the "amount paid for obtaining land use rights". Real estate enterprises should provide relevant documents, resolutions, and planning certification materials from the people's governments at or above the county level.

4. Qingdao City Allow Deduction

Article 22 of the Announcement of the Qingdao Municipal Taxation Bureau of the State Administration of Taxation on the Administration Measures for Land Value Added Tax Clearing of Real Estate Development Projects by the Qingdao Municipal Taxation Bureau of the State Administration of Taxation (Announcement No. 6 of 2022 of the Qingdao Municipal Taxation Bureau of the State Administration of Taxation) stipulates that in order to obtain the right to use state-owned land, development enterprises shall, in accordance with the requirements of government departments at or above the county (city, district) level, construct resettlement housing projects outside the boundary line of project construction land The demolition compensation and engineering expenses incurred by public service facilities, which are clearly stipulated in the land bidding and auction announcement or the state-owned land use right transfer contract (agreement), shall be included in the amount paid for obtaining the land use right and allowed to be deducted.

5. Guangzhou City Allow Deduction

According to Article 3 of the Notice of the Guangzhou Local Taxation Bureau on Issuing the Guidelines for Handling Issues Related to the Settlement of Land Value Added Tax in 2014 (Sui Di Shui Han [2014] No. 175), which states that in order to obtain land use rights, taxpayers incur expenditures for government construction of public facilities or other projects outside the red line of project construction land, According to the relevant principle determined in Article 4 (1) of the Notice of the State Administration of Taxation on the Management of Land Value Added Tax Clearing for Real Estate Development Enterprises (Guo Shui Fa [2006] No. 187), if taxpayers can provide agreements or supplementary agreements from the land and housing management department, or proof documents issued by relevant government authorities, they are allowed to deduct the amount paid for obtaining land use rights.

6. Deduction allowed in Jilin Province

On June 19, 2014, Jilin Local Taxation clarified the relevant business issues of land value-added tax at the provincial land value-added tax liquidation work meeting. Article 11 of the "Can the expenses incurred by construction facilities outside the red line be deducted during the liquidation of this project?" stipulates that when calculating land value-added tax, real estate development enterprises need to include the expenses incurred by construction facilities outside the red line in the land transfer contract, There are clear provisions proving that the construction expenses incurred outside the red line are additional conditions for obtaining the land use right, and are public facilities such as squares, parks, and roads constructed by the government, which can be deducted as land costs during the land value-added tax settlement of this project.

（2） Provinces and cities that prohibit deduction of expenses beyond the red line

1. Shandong Province does not allow deductions

According to Article 29 of the Announcement of the State Administration of Taxation and the Shandong Provincial Taxation Bureau on the Administration Measures for Land Value Added Tax Clearing of the State Administration of Taxation and the Shandong Provincial Taxation Bureau (Announcement No. 10 of the State Administration of Taxation and the Shandong Provincial Taxation Bureau in 2022), the deduction items of land value added tax shall be handled according to the following provisions: (1) the amount paid for obtaining land use rights, This includes the land price paid for obtaining land use rights and relevant fees paid in accordance with national unified regulations. 4. For real estate development enterprises that have agreed with the government to construct supporting houses within the project and transfer them to government designated units for free during the land "bidding, auction, and listing" process, the construction and installation fees incurred in the construction of supporting houses shall be deducted as land costs in the land value-added tax settlement.

2. Deduction not allowed in Fujian Province

On October 9, 2019, the State Administration of Taxation 12366 Tax Service Platform Fujian Taxation replied: Taxpayers engaged in real estate development who construct public facilities or other projects for the government or other units outside the boundary of the project construction land (outside the "red line" approved by relevant national departments), while taxpayers engaged in real estate development calculate the land value-added tax of this project, The expenses incurred for the construction of public facilities or other projects for the government or other units outside the boundary of the project construction land shall not be included in the deducted project amount of this project.

3. Shanxi Province does not allow deductions

According to Article 19 (3) (4) of the Announcement of the Local Taxation Bureau of Shanxi Province on the Administration Measures for Land Value Added Tax Clearing of Real Estate Development Enterprises (Announcement No. 3 of 2014), expenses for greening, road construction, supporting facilities outside the land red line shall not be deducted.

4. Deduction not allowed in Nanchang City

According to Article 2 of the Reply of the Nanchang Taxation Bureau of the State Administration of Taxation to the Proposal No. 98 of the Sixth Session of the 15th Municipal People's Congress, in accordance with Article 7 (2) of the Implementation Rules of the Provisional Regulations on Land Value Added Tax, it is stipulated that "infrastructure fees include expenses incurred in the development of roads, water supply, power supply, gas supply, sewage discharge, flood discharge, communication, lighting, sanitation, greening and other projects within the residential area. The expenditure incurred by real estate development enterprises in constructing public facilities or other projects outside the boundary of the project construction land (i.e. outside the "red line") can be divided into two categories. One is the construction of public facilities or other projects for the government outside the red line, which is a condition attached to the enterprise's bidding and land acquisition. The other is the construction of buildings or infrastructure outside the red line by the developer to improve the quality of the property within the red line. Regardless of the situation, expenditures incurred outside the red line are theoretically not "within the development community" expenditures as stipulated in the Implementation Rules of the Provisional Regulations on Land Value Added Tax. In summary, the red line expenses of real estate development enterprises are not included in the deduction of land value-added tax settlement and will not be deducted.

5. Deduction not allowed in Langfang City

In 2016, Article 24 of the Interpretation of the Langfang Local Taxation Bureau on the Implementation Standards of Several Policies on Land Value Added Tax stipulates that "deduction of developers' red line expenditures" refers to construction expenditures incurred outside the boundary of real estate development projects approved by relevant government departments. The "red line" is determined by the defined scope marked on the land use certificate obtained by the project. Expenses outside the red line cannot be included in the deduction item amount.

Based on the comprehensive policies of various regions, it can be seen that the tax authorities in different regions have varying laws and regulations on whether to allow real estate development enterprises to deduct costs when clearing land value-added tax. The author believes that before local documents are legally abolished, local enterprises conducting land value-added tax liquidation still need to comply with local policies and be cautious of tax risks.

3、 Regions without documents prohibiting deduction of costs beyond the red line should allow deduction during land value-added tax liquidation

Without prohibition by law, there is freedom. In the absence of clear provisions by law, tax authorities should provide explanations that are beneficial to taxpayers. This principle was confirmed by the Supreme Court in the German case.

The Administrative Judgment of Guangzhou Defa Real Estate Construction Co., Ltd. and the First Inspection Bureau of Guangzhou Local Taxation Bureau in Guangdong Province, issued by the Supreme People's Court (2015) Xingti Zi No. 13, holds that according to the basic requirements of lawful administration, without the provisions of laws, regulations, and rules, administrative organs cannot make decisions that affect the legitimate rights and interests of administrative counterparts or increase their obligations; When there are multiple interpretations of legal provisions, the first consideration should be to choose the interpretation that is beneficial to the administrative counterpart.

Therefore, in areas where there is no clear prohibition on deducting costs beyond the red line in the absence of documents, real estate development enterprises should be allowed to deduct them during land value-added tax liquidation.

conclusion

The issue of whether "off the red line expenses" can be allowed for cost deduction during land value-added tax liquidation varies among different regions in terms of law enforcement. The author suggests that during the effective period of documents issued by local tax authorities, local real estate development projects should also follow local policies when clearing land value-added tax.

If there is no local document specifying whether to deduct expenses beyond the red line, real estate development enterprises can hire a professional tax law service team to communicate with local tax authorities and strive to obtain the maximum benefits within the scope permitted by law.