China Said to Tax Past Capital Gains by International FundsBloomberg News
China plans to collect capital gains taxes from foreign money managers that invested in mainland markets during the five years through November 2014, a move that may compel funds to claw back more than $1 billion from investors to pay the government.
Authorities plan to collect the 10 percent tax on so-called QFII and RQFII funds, according to people with knowledge of the matter who asked not to be identified as they weren’t authorized to speak publicly about the rules. The levy means managers of public QFII funds may need to claw back $1.2 billion, an amount that could triple depending on how the tax is calculated, according to research firm Z-Ben Advisors Ltd.
While the plan would saddle some funds with a one-off bill, it also brings more clarity to Chinese tax laws that have led to confusion among international investors and spurred MSCI Inc. to keep mainland shares out of its global indexes last June. Authorities in the world's second-largest economy said three months ago that foreigners would get a “temporary” tax waiver on trades executed from Nov. 17, 2014.
The capital gains tax policy “has caused a lot of misunderstanding and confusion for many years,” Aaron Boesky, the Hong Kong-based chief executive officer at Marco Polo Pure Asset Management, said in an e-mail today.
While the nation’s laws had suggested foreign equity investors were subject to a capital gains tax, the government has never collected it, according to PricewaterhouseCoopers. Confusion over the policy since China’s quota system for a limited number of foreign institutions began more than a decade ago has led to a mishmash of compliance, with some setting aside cash for the liability and others anticipating it won’t be implemented.
“It’s a disappointment,” Ryosuke Kawahata, a Tokyo-based money manager at Mizuho Asset Management Co., which oversees about $37 billion, including QFII money, said by phone from Tokyo. “There’s not many examples around the world where you’re chased for your past tax.”
Taxes will be collected on individual transactions, and funds will be barred from consolidating gains and losses over several trades. The levies won’t apply to debt securities, while taxes on convertible bonds will only be collected after the debt is converted, the people said. China’s Ministry of Finance didn’t immediately respond to a faxed request seeking comment.
China’s plan may spur a rush by QFII fund investors to withdraw their money to avoid getting hit by the tax bill, Michael McCormack, an executive director of Shanghai-based Z-Ben Advisors, said in a phone interview. It may also impact brokerages who use their QFII quotas to provide derivatives to clients, Z-Ben said in a report.
“Some investors are going to be left angry, either because a bunch of other investors disappeared and left them to shoulder the entire burden of the call back, or because they were prevented from going,” McCormack said. “Investing in QFII backed funds is going to be treated with some suspicion.”
Exchange-traded funds in Hong Kong that may be impacted by the tax include the E Fund CSI 100 A-Share ETF and the China AMC CSI 300 Index ETF, said Hao Hong, a Hong Kong-based strategist at Bocom International Holdings Co. China’s benchmark Shanghai Composite Index has surged 62 percent during the past 12 months, the most among major indexes worldwide.
The CSOP FTSE China A50 ETF, which invests in mainland shares through the RQFII program, has set aside enough funds to cover the tax liability, said Jack Wang, a Hong Kong-based managing director at CSOP Asset Management Ltd. He said clarity on tax rules is “great news” because it may lure investors who were avoiding China funds due to uncertainty over the levies.
The country is counting on demand from foreign money managers to boost equity valuations, turn Shanghai into a global financial center and increase global use of the yuan. Tax policy was one of several market-structure shortcomings, including capital controls and rules against same-day trading, cited by investors when MSCI gathered views on mainland shares for its June index decision.
The $70 billion Qualified Foreign Institutional Investor program has allowed professional money managers to buy local securities since 2002, while a similar system using offshore yuan, known as the Renminbi Qualified Foreign Institutional Investor program, began in 2011. The Shanghai-Hong Kong exchange link, which started in November and permits a net 23.5 billion yuan ($3.7 billion) of daily cross-border purchases, has expanded access to the Shanghai exchange from a limited number of institutions to anyone with a Hong Kong brokerage account.
“Tax on the gains of QFII and RQFII has always been an issue,” said Wang Tao, the chief China economist at UBS Group AG in Hong Kong. “The rules are that they will be taxed, but in practice it has not been clear how this was going to be done, at what rate.”
Reuters reported the tax collection plan earlier.
— With assistance by Steven Yang, and Heng Xie
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