China’s VAT on Asset Management Accounts Delayed

Trust Bloomberg Tax's Premier International Tax offering for the news and guidance to navigate the complex tax treaty networks and business regulations.

By Mark Melnicoe

A delay in implementing a new value-added tax on the asset management industry until July will bring some breathing room for financial institutions but problems remain, practitioners say.

The delay until July 1 was jointly announced Jan. 11 by China’s Finance Ministry and State Administration of Taxation following wide protest by asset management companies.

Companies in the sector took issue with a Dec. 21 circular (Circular Caishui [2016] No. 140) released by the authorities, stating that assets they manage were subject to the VAT, with retroactive effect to May 1, 2016.

Since a historic final round of VAT reform took effect May 1 affecting financial services, real estate and other services, the agencies have made periodic updates to clarify the complex rules.

Contracts Didn't Anticipate VAT

“That was a big problem for the financial institutions,” Liqun Gao, indirect tax leader for eastern China for Deloitte, told Bloomberg BNA in a Jan. 13 interview.

“They had entered into contracts with their customers for some products. And I believe that in those contracts they never anticipated this VAT. There was no mention of who was bearing this VAT cost.”

Among the concerns is the potential for double taxation—for example, gains or income subject to VAT from the holding of the underlying products or assets in a fund or trust, and then VAT potentially being payable again when distributed to investors.

Banks, Trustees, Fund Managers Affected

Any business providing asset management services is potentially affected, including specific asset managers, fund managers, trustees, and banks providing various wealth-management services or selling financial products.

The 6 percent VAT is to be levied on interest income, on net gains from trading in financial products and on fee-based financial services, such as fees charged by banks for account services.

Capital management companies until now had been “in the blind zone of tax regulation,” said a report in the state-run Shanghai Security News, quoting from Circular 140.

In a note to clients, KPMG China said the rules can impact companies both onshore and outside of China if they hold assets in China, or the funds or trust interests are held by Chinese investors.

“Put simply, they can lead to significant unforeseen liabilities for those managing assets, and require careful implementation for the benefit of investors,” KPMG said.

Challenges Ahead Despite Reprieve

Now, under a new policy announced Jan. 11, the asset managers are being given what amounts to a 14-month reprieve. Any VAT already paid can be deducted off future payments due after July, the SAT and Finance Ministry said.

“This is good news because they can have a transition period and they don’t need to worry about the products they have already issued and how to calculate returns for the products already invested,” Gao told Bloomberg BNA.

“But going forward, I think they still have a challenge,” said Gao, who is based in Shanghai.

“Even if effective July 1 of this year, the financial institutions still need to consider how to agree with their customers for the sharing of VAT costs and how to account for the VAT for different types of products and how they are going to handle the VAT compliance for different products.”

Question of Who Bears Tax Burden

Professionals say a key consideration arising from the changes introduced in Circular 140 is that asset managers will need to review the terms of their contracts and trust deeds with investors to ensure they can recover the VAT, so they don’t alone bear the tax burden.

“In typical asset management products, they agree with customers about return,” Gao said.

“It’s an issue of pricing, so when the asset management company agrees on a return with its customers, it will take into consideration the additional VAT. They may reduce the return or incorporate the tax into their pricing.”

New Products a Complicating Factor

All of this is uncharted territory, partly because of a proliferation of new products in the past year.

“Previously under the Business Tax rules, there were not so many different types of asset management products,” Gao said. “It seems like the old rules cannot cover these new types of transactions.”

She cited the example of a bank hiring a capital management firm to manage some of its money. Gao said banks give a certain amount to the asset management company, and the company is supposed to return a certain amount to the bank.

“Banks didn’t consider that amount as their own fund, so they were not considering that they should be paying the fee. Asset management companies also were not considering that they should be paying the VAT because they were managing somebody else’s assets. So who’s going to pay the VAT?”

More Guidance Sought

Going forward, Gao said the tax authorities will be heard from again.

“I think there still needs to be more detailed guidance about how to implement this new regulation because there are many different types of asset management products,” she told Bloomberg BNA.

“When there is a return for this product, we still need more guidance to reflect the nature of the return.”

She noted that there is still no clarity as to what the VAT-taxable transactions are.

“If they make a loan to someone and earn interest, it’s clear they should be paying VAT on that loan interest. But if they invest the amount in other activities and get other types of returns, what should be the VAT expectations?”

“I guess in the implementation, there will be a lot of practical questions.”

Growing Pains

Some analysts see this as expected growing pains, given the historic nature of China’s VAT reforms.

“The Chinese government is among the first countries in the world to impose a VAT on financial services – given this, it was inevitable there would be some challenges along the way,” Lachlan Wolfers, a Hong Kong-based partner and head of indirect tax for KPMG China, told Bloomberg BNA in a Jan. 12 e-mail.

“However, the government is showing a willingness to listen to the needs of an evolving asset management sector in China, in better enabling them to manage the tax burden impact and offer competitively priced products,” Wolfers said.

To contact the reporter on this story: Mark Melnicoe in Shanghai at correspondents@bna.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bna.com

For More Information

The Finance Ministry's Circular Caishui [2016] No. 140, detailing the VAT on asset management accounts, is in Chinese at: http://szs.mof.gov.cn/zhengwuxinxi/zhengcefabu/201612/t20161221_2494189.html

The Finance Ministry's announcement of the reprieve until July 1, also in Chinese, is at: http://szs.mof.gov.cn/zhengwuxinxi/zhengcefabu/201701/t20170106_2515807.html

Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.

Request International Tax