China establishes 3 pc value added-tax on asset managers, effective Jan 1
China’s asset managers will face a new 3 per cent value-added tax (VAT) for returns on assets under management from January 1, 2018, enjoying another half-year reprieve on top of a 14-month grace period that expired at the end of June, according to a joint notice from the Ministry of Finance and State Administration of Taxation on Friday.
Under the new regime, a 3 per cent simplified tax will be applied, instead of a more complicated 6 per cent VAT levy that was due to come into effect on July 1, retroactive to May 2016.
China completed its VAT reform on May 1, 2016, requiring the remaining four industries – finance, construction, property and consumer services – to pay VAT instead of a business tax.
However, authorities delayed the levy on asset managers twice, amid industry complaints that it was unfair.
Market watchers say that many of the specifics on the tax code have yet to be spelled out in the rapidly evolving industry, estimated to be worth more than 100 trillion yuan (US$15 trillion). Among them, the assets under management by the securities sector including fund houses already amounted to 54 trillion yuan by the end of March, according to data from the Asset Management Association of China.
Stella Fu, a tax partner at professional services giant PwC in Shanghai, said she is seeking clarification in some areas, including how the interest income from bonds shall be taxed.
“We expect further clarifications from the tax authorities,” she said. “More fundamentally, a question mark still remains as to whether it’s fair for assets managers to be responsible for the tax and bear the risk because the ultimate beneficiary is investors.”
As it currently stands, asset managers are responsible to recover the VAT on investment products held by their clients, although it is not clear how this system will function in practise.
China is amongst the first countries in the world to have a VAT applied broadly to the finance industry, including the transfer, issuance and redemption of financial products.
Kenneth Leung, greater China indirect tax managing partner at professional services firm EY, also noted that the relief, though a boost for the sector, doesn’t mean asset managers can lay back for now.
“The new policy comes as good news for the asset management sector,” said Leung, noting that it can help reduce the burden of complex procedures involving deductible items that are difficult to obtain.
Yet, it still requires significant amount of time and manpower for the industry to keep tinkering their transactions system to cope with the new policy and prepare for possible tax risks, he said.
Under the current regime, assets managers can be exposed to tax risks because they lack the support of a legal framework to allocate a provision to cushion possible tax risks such as administrative fines.