Tax risk control system for real estate businesses

Introduction

Property development has a long cash cycle, requires heavy capital and is exposed to SBT, VAT, WHT and CIT at different points in time. If tax is treated as an end-of-project matter, problems become hard to fix. This framework is divided into five phases that follow the project cycle.

Phase 1: Company formation / SPV

Controls

• Register for SBT under Section 91/12 within 30 days, subject to the conditions
• Register for VAT if there are activities subject to it, such as a hotel or management services
• Prepare a Tax Calendar stating filing dates, payment dates and the person responsible
• Open a tax reserve account before receiving money from the first customer

Risk

• Failure to register on time may result in legal liability
• An unclear SPV or JV structure may cause problems in interpreting the status of the business and of the payee

Phase 2: Presale

Controls

Booking deposits and down payments are not yet accounting revenue, but they form part of the SBT receipts that will be paid on the transfer registration date. When money is received:

1. Record Dr. Cash, Cr. Contract Liability; never record it as revenue
2. Keep a Presale ledger per unit
3. Set aside a reserve for SBT and CIT in the tax reserve account
4. When paying commission, withhold tax and remit it according to the type of recipient

Risk

• Recording down payments as revenue immediately causes revenue to be recognised in the wrong year
• Spending all the down payments before transfer day leaves no money to pay SBT and CIT

Phase 3: Construction

Controls

1. Withhold WHT from contractors according to the type of income, generally 3% for contracts for work with a juristic person, and remit it with PND 53 on time
2. Record WIP together with Cost Allocation per unit
3. Input VAT of a real estate seller that is outside the VAT system is not reclaimed and is included in cost
4. Set a clear WIP Capitalisation Policy

Too little WIP makes COGS too low and profit overstated. Too much WIP makes COGS too high and risks challenge from the auditor or the Revenue Department.

Risk

• Incorrect WIP makes COGS and CIT wrong for every unit transferred
• If WHT is not withheld, the company is jointly liable, with surcharges and possible penalties

Phase 4: Ownership transfer

Controls

1. Check the SBT base, the appraised value and the related payment evidence
2. Confirm COGS per unit
3. Calculate CIT and check the tax reserve, recording the 1% WHT as a credit
4. Pay SBT and fees
5. Recognise revenue and clear the Contract Liability

Risk

• Calculating the SBT base or fees incorrectly
• Recognising revenue in the wrong year
• Insufficient tax reserve, which is why a project can stumble even after it has sold out

Phase 5: Project closing

Controls

1. File PND 50 and pay or claim a refund within 150 days
2. When the tax liabilities are settled, transfer the remaining balance in the tax reserve back to the operating account before considering payments to shareholders
3. Withhold 10% WHT on dividends paid to individuals; in other cases, check the rate according to the recipient
4. Claim a refund of overpaid tax within 3 years as a general rule
5. Keep tax and accounting documents for the period required by law

Risk

• If WHT on dividends is not withheld, the company is liable
• Incomplete documents make it impossible to substantiate transactions
• Missing the refund deadline means losing the right to a refund

Risks to watch

Tax Control Checklist

Conclusion

Tax in the real estate business is not an end-of-project problem but a system that must be put in place from day one. Setting money aside every time it is received, recording WIP per unit and controlling the transfer day are what allow profit to actually reach the shareholders.