China’s asset managers will pay a reduced 3 per cent value-added tax (VAT) for returns on assets under management from January 1, 2018.
This means that fund managers in the region will enjoy another six month 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.
According to a report in the South China Morning Post, 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.
The delay and reduction of its VAT plans is a significant concession to fund mangers from the Chinese government. It follows news of China opening up of its bond market to foreign investment for the first time, as reported, earlier this week.
China originally 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 the moves were unfair.
The SCMP report said that many of the specifics on the tax code have yet to be spelled out.
US$7.94trn in assets
With assets under management by the securities sector, including fund houses already amounting to 54 trillion yuan (US$7.94trn) by the end of March, according to data from the Asset Management Association of China, the delay and reduction will be of significant cost to the Chinese government.
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, told SCMP that the reduction and the new policy, which can help reduce the burden of complex procedures involving deductible items that are difficult to obtain, is “good news for the asset management sector”, it doesn’t mean asset managers can rest on their laurels.
Stella Fu, a tax partner at professional services giant PwC in Shanghai, also said that 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 practice.