China to impose 3% VAT on asset management

Asset managers will be levied with a new 3 percent value-added tax (VAT) for returns on assets under management from January 1, 2018, instead of the previously noticed 6 percent rate from July 1, 2017.

The delay was jointly announced by China's Finance Ministry and State Administration of Taxation on Friday, following complaints from the asset management industry, reiterating that asset managers should bear the burden to pay the tax.

China has stepped up the implementation of VAT, replacing the business tax, as the country’s only indirect tax since 2012, which was hailed as the most significant tax reform in over two decades.

The latest round of VAT reforms, which took effect on May 1, 2016, has affected financial services, real estate and other services, prompting authorities to make periodic updates to clarify the complex rules.

Capital management companies had been “in the blind zone of tax regulation” until the Finance Ministry and the State Administration of Taxation issued Caishui [2016] No.140 (Circular 140) on December 21, 2016,

Friday's announcement indicated that any business providing asset management services is potentially affected, including specific asset managers, fund managers, trustees and banks that provide wealth-management services or selling financial products.

Taxes that have already been paid under the new tax system can be used to deduct from those that will begin in January 2018.

This move may come as both good and bad news for asset managers.

The good news is that the delay will bring some breathing room for financial institutions so that they can negotiate with investors on the sharing of tax liabilities, while on the downside some potential problems remain.

The possibility of double taxation is one of the concerns. For example, incomes 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.

Asset managers would have to ensure they can recover the VAT by reviewing the terms of their contracts with investors. Since an asset management company typically agrees with its customers on a return, the company may reduce the return or incorporate the tax into their pricing after taking the additional VAT into account.

These problems are seen as expected growing pains by experts, as China is one of the first countries in the world to have a VAT applied broadly to the finance industry, including on the transfer, issuance and redemption of financial products.

Assets under management across the Chinese mainland rose by 36 percent to 51.8 trillion yuan (7.53 trillion US dollars) in 2016 according to data from the Asset Management Association of China (AMAC).