My lastest understanding on the following tax issues:
1)
Deferred Tax Liability – as worked out by Forterra.
Source : On page 92 of AR2011:
http://infopub.sgx.com/Apps?A=COW_Prospe...any&F=1601
“The deferred tax liabilities in respect of the change in fair value of investment properties have been accrued at the prevailing corporate income tax rate of 25% in the PRC. This is based on changes in the carrying value of investment properties against their tax base, including the changes in fair value and depreciation charge made in accordance with the PRC tax rules during the year”
The above is the basis on which Foterra has made provision for “deferred tax liability”
2)
Capital Gains Tax liable to be paid by PRC companies on disposal of assets:
China is considered a high tax regime as far as investment property is concerned- too many property related taxes:
- Corporate tax = 25%
- Business tax = 5% on rental income
- Real estate tax = 1.2% on the 70.0% of the book value of the property
- Land use tax = between RMB1.50 and RMB30.0 per sq m per annum in respect of land area
- Stamp duty = property ownership transfer
- Deed tax = chargeable to transferees of land use rights and/or building ownership
-
Land appreciation tax = 30.0% to 60.0% of the appreciation value as defined by the relevant tax laws.
- Urban Maintenance and Construction Tax and Education Surcharge = ?
-
Sources : Page 221 – 224 of Dynasty Reits IPO Prospectus :
http://masnet.mas.gov.sg/opera/sdrprosp....B0024B59E/$File/1.%20Final%20Prospectus%20(18%20Oct%202012).pdf
Onshore assets disposal: Capital Gains Tax liable to be paid by PRC companies on disposal of assets should be based on “land appreciation tax” rate, and not corporate tax rate as calculated by Forterra.
3)
How much tax is Forterra subject to pay in PRC for selling away “Central Plaza” offshore?
PRC Tax Reporting Obligations and Consequences for Certain Indirect Transfers of Equity Interests:
“
Pursuant to the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises issued by the PRC State Administration for Taxation(國家稅務總局關於加強非居民企業股權轉讓所得企業所得稅管理的通知) on 10 December 2009 (effective 1 January 2008) and the Announcement on Enterprise Income Tax Administration on Non-PRC Resident Enterprises issued by the PRC State Administration for Taxation (國家稅務總局關於非居民企業所得稅管理若干問題的公告) on 28 March 2011, where a foreign investor or effective controlling party transfers the equity interests in a PRC resident enterprise (excluding the purchase and sale of the shares of PRC resident enterprises on the public securities markets) indirectly by way of the sale of equity interests in an overseas holding company, and such overseas holding company is located in a tax jurisdiction that: (i) has an effective tax rate which is less than 12.5% for share transfers or (ii) does not levy tax on share transfer gain, the foreign investor should report such indirect transfer to the competent tax authority of the PRC resident enterprise within 30 days of the execution of the equity transfer agreement for such indirect transfer. The PRC tax authority will examine the true nature of the indirect transfer, and if the PRC tax authority considers that the foreign investor has adopted an abusive arrangement without reasonable commercial purposes and in order to avoid PRC tax, the PRC tax authority may disregard the existence of the overseas holding company that is used for tax planning purposes and re-characterise the indirect transfer. As a result, gains derived from such indirect transfer may be subject to PRC withholding tax currently at the rate of 10.0%. As such, any gains derived arising from a disposal of the shares in the Hong Kong Holding Companies, the BVI Intermediate Companies, the Cayman Intermediate Company and/or the BVI Holding Company may be subject to tax in the PRC, currently at the rate of 10.0%”
Source: Page 224 of Dynasty Reits IPO Prospectus
Answer:
Forterra needs to pay PRC withholding tax of 10% on GAINS made from disposal of Central Plaza "offshore"(not on sales value)
Selling price of Central Plaza in 2013 = USD 266 million
Acquisition price of Central Plaza in 2007 = USD 148 million
Gains = USD 118 million
10% PRC Withholding tax = USD 11.8 million = about SGD 15 million =
very close to the reported figure of SGD 15.56 million
Source : USD 148 million acquisition price is on Page 9 of CBRE report 3Q2007:
http://www.cbre.com.sg/Publications/Docu...f_3q07.pdf
4)
Final thoughts :
a) It appears that Forterra is in full compliance with the PRC taxation rule in its offshore disposal of Central Plaza. The withholding tax is payable in PRC - not liable for any withholding tax in Hong Kong or Jersey.
b) Allowing for 25% on revaluation gain as “deferred tax liability” is considered over-provision under “offshore asset disposal transaction” – about 15% over
c) Under “onshore asset disposal transaction” based on “land appreciation tax rate” – would provision for “deferred tax liability” based on 25% revaluation gain be enough?
(Vested)