Investors in China face bureaucratic headache paying dividend taxes

PUBLISHED : Thursday, 23 April, 2015, 12:26pm
UPDATED : Thursday, 23 April, 2015, 6:35pm

China’s first batch of foreign investors may face a cumbersome administrative process of settling tax payments for dividends they received in the five year period to November of last year. The difficult part is to get the dividend tax certificates from more than 500 companies which had already imposed a 10 per cent withholding tax regarding whether you are foreign or domestic players.

“It is a compliance nightmare in QFII tax filling,” said a Shanghai-based investment consultancy Z-Ben Advisors, which estimates the bills running between US$3 billion and US$4 billion, given that the regulator does not allow losses to offset gains in their calculations.

Getting the dividend tax certificates requires an old-school method by adopting the door-to-door approach, since those documents are rarely issued to investors or required of them in China. According the Z-Ben, 80 per cent of the 75 listed companies they contacted say they are able to issue those papers to QFII investors, albeit not quickly. For the remaining companies, investors might have to contact the local tax bureaus but there is no guarantee that the central tax authorities would accept the papers issued by local authorities.

Foreign investors have long been upset by Beijing’s reluctance to clarify how previous trading profits would be taxed, while holding the right to tax them later, making it hard to accurately value portfolios.

The decision to tax the RQFIIs and QFIIs was announced last year when the Chinese government wanted to properly address and enforce its tax rules after the Hong Kong-Shanghai stock connect programme, which would exempt foreign individual investors from paying income tax for three years.

Can the clerical job of filling the tax forms be outsourced to other service providers? The answer varies. Custodian banks and brokers declined to do this work for QFIIs, in part because the work is a time-consuming process of identification involving 500-plus companies. For big four accounting firms, they might be charging as much as US$1000 per company, with no guarantee of success.

Analysts at Z-Ben explain that QFII’s custodians received dividend payments (net of tax) on behalf of their clients, with an electronic tag confirming that the tax has been paid, but they do not receive any confirmation of tax payment from the Chinese tax bureau.

“As a consequence, custodians can’t offer proof of tax payment, nor do they see obtaining dividend tax certificates as part of the tax reclamation work they sometimes undertake for clients,” they said.

Besides the bureaucratic paper work, many foreign investors in the QFII programme are unaware of their responsibility for dividend tax collection as some thought their tax preparers would be working on it.

Stephen Baron, deputy director at Z-Ben, said the clock is obviously ticking against the QFII funds since there are fewer than 70 business days from the deadline on July 31.

China launched the QFII programme in 2002, making it the first channel for foreign investors to access the onshore capital markets. Though late March, foreign investors were granted US$72 billion of qualified foreign institutional investor quota in total and more than 100 overseas firms were granted US$53 billion of renminbi qualified foreign institutional investor quota, according to China’s foreign-exchange watchdog.

It is also unclear whether the tax enforcement is related to speculation that China may allow the QFII funds to move capital in and out of the country on a daily basis from the current weekly regime, giving an extra boost to inclusion of the Chinese currency in the IMF’s special drawing rights basket.