Across The Border

China to impose 3 pc VAT on asset managers’ returns from January

The 3 pc VAT, imposed on returns of funds under management, is lower than a 6 pc rate that was due to come into effect on July 1

PUBLISHED : Wednesday, 05 July, 2017, 3:28pm
UPDATED : Wednesday, 05 July, 2017, 10:37pm

After more than a year of drawn-out negotiations, the mainland’s tax authorities announced it will levy a lower value-added tax (VAT) for returns on assets under management next year, a move to ensure long-term growth of the finance industry.

The new tax regime will benefit millions of mainland investors, such as mutual fund buyers, who had a combined 100 trillion yuan (US$14.7 trillion) of capital managed by the institutions.

The State Administration of Taxation announced that 3 per cent VAT will be levied on asset management firms from January 1, 2018, replacing the 6 per cent rate proposed initially.

Aside from the reduction in the rate, the tax authorities also gave a six-month reprieve to the asset managers since the tax was expected to take effect on July 1.

It will be the first time that such a tax based on investment returns from asset management products is imposed.

An official at the Asset Management Association of China, a government-backed consortium of financial institutions, said that the 3 per cent rate was “the best result” that the syndicate could achieve after numerous rounds of discussions with the state tax administration.

It is believed that the VAT tax will be eventually be passed onto investors, hence dragging down their investment return.

“The association should be given credit for their hard work because the finalised VAT system appears to be much better than the old one,” said Wang Feng, chairman of Shanghai-based financial services firm Ye Lang Capital. “It is another example of how policies have an impact on the market and market players.”

Beijing implemented a groundbreaking VAT reform in May 2016, requiring all service firms to pay VAT tax based on the value they add to finished products or services, instead of sales tax based on total sales.

Chinese small businesses divided over whether tax reforms will kick-start their firms amid slowing economy

The state tax authorities said the reform could save companies in the service sectors a combined 500 billion yuan in tax payments a year.

However, for institutions managing assets for clients, the reform is a new tax burden since no tax was levied before based on growth of assets under their management.

Amid a chorus of complaints, the state taxation administration gave a 14-month grace period to help asset managers prepare for the new system. i

The asset management association lobbied the tax authorities to support sustainable growth of the industry.

It was estimated that more than 101.5 trillion yuan of assets were managed by the mainland’s financial institutions at the end of 2016, according to the Economic Observer.

Meanwhile, investors who buy and sell shares on the stock market directly are not liable for capital gains tax.

“After all, institutions still treat the new VAT policy as a positive thing because the tax rate was halved,” said He Yan, a hedge fund manager with Shanghai Shiva Investment. “But the outlook for a market-based reform is still cloudy because the market still lacks fairness and transparency.”

Beijing has been pushing for liberalisation of the securities sector, giving market forces full play in pricing and trading.

But in some cases, new policies have turned out to have unforeseen consequences, damaging to investor confidence.

At the beginning of 2016, a circuit-breaker mechanism caused two trading suspensions in the first trading week of that year with the Shanghai Composite Index tumbling 10 per cent as panic selling dominated the market.

In 2015, Chinese tax authorities proposed a 10 per cent capital-gain tax on qualified foreign institutional investors (QFIIs).

Talks about the potentially tougher-than-expected tax plan on QFIIs affected foreign institutions’ confidence in A shares.

It was reported that QFIIs’ equity investments would be taxed based on gains from each transaction, not based on the netting of multiple transactions.

The policy is yet to be implemented.

In 2012, Shanghai began a trial programme of the VAT reform with information technology and logistics businesses required to pay A VAT tax instead of sales tax in what the local government touted as a measure to ease their sales burden.

A poll conducted by the China Federation of Logistics and Purchasing showed that two-thirds of the respondents paid more under the new business-tax regime in the first three months after the new rates took effect.