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How capital gains tax will affect foreign fund managers in China

How capital gains tax will affect foreign fund managers in China

The prospect of Chinese authorities imposing a capital gains tax on equity gains and dividends on foreign investors would help provide much needed clarity in the region.

That is according to fund managers and legal experts responding to the announcement there could be a 10% tax imposed on qualified foreign institutional investor (QFII) and renminbi qualified institutional investors (RQFII) funds.

The tax, according to media reports, would be imposed for the period between November 17 2009 and November 16 2014. However, no official statement has been released by the regulatory authorities.

If the authorities do confirm this measure, industry experts have welcomed the move towards greater transparency.

‘Even before this announcement, the tax law in China was supposed to impose a 10% capital gains tax on foreign fund investors, subject to relief under applicable tax treaties,’ Rex Ho, financial services tax leader at PwC Hong Kong told Citywire Asia. ‘However, that law was never enforced.’

He added that as a result, uncertainty on whether tax was payable or not has existed over the past 10-12 years, dating back to when the QFII scheme was launched in 2003.

Citywire Asia has collated the viewpoints of two investors on either side of the argument to uncover how the implementation of the tax regime could affect foreign asset managers operating in China.

Pro: ‘It will be a positive for investors’

The possibility of the imposition of a 10% capital gains tax on foreign fund managers in China for the five years to November 2014 could be a positive for investors, according to Stratton Street fund manager Andy Seaman.

‘One of the uncertainties which had affected investor attitude towards some domestic Chinese bonds has been the questions of capital gains tax,’ Seaman, who runs the Stratton Street Ucits Renminbi Bond fund, told Citywire Asia.

‘Although technically payable, it had never been collected, making the valuation of open-ended funds tricky owing to the need to accrue for ‘potential’ taxes.’

‘Last November, it was announced that there would be no tax for RQFII funds for at least three years, which provided some clarity for the future, but the historical position was not clear. This announcement about taxes between November 2009 and November 2014 is another positive step as it provides certainty,’ he added.

Against: 'The tax will disrupt QFII demand'

Holding the opposite view are asset managers who have not made appropriate provisions for this tax and could potentially be saddled with a large tax bill.

China specialist consultancy Z-Ben Advisors believes many QFIIs are likely to be under-provisioned. It estimates managers of public funds might need to claw back as much as $1.2 billion in order to meet a 10% tax regime that permitted netting, offsetting losses against gains.

‘If netting isn’t allowed, our estimate is likely to triple or more, implying that as much as $3-4 billion might be withdrawn from a QFII-backed fund universe with approximately $30 billion in current NAV,' it noted in a recent report.

It also argued that the full payment of past taxes could prompt a disruption in QFII demand.

‘Few QFIIs have ever been able to repatriate capital because they could not provide a tax certificate. By the end of this year, every QFII should have that certificate in hand and, depending on market health, many may then choose to withdraw capital from China,’ it said.

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