China takes hard line on taxing foreigners on share gains – sources

BEIJING/HONG KONG - China's tax authorities have alarmed foreign investors with a proposed capital-gains tax which would take 10 per cent of their share trading profits without taking into account any of their trading losses, according to sources briefed by tax officials.

The plan would apply to investors who have traded stocks and other equity-based instruments through China's two largest portfolio investment schemes for foreigners, and would be levied retrospectively on profits made over the past five years, the sources said.

Investors in the schemes, representing a total $116 billion in investment, had been long expecting a retrospective tax to be imposed and had set aside some of their profits in anticipation. But many of them assumed it would be levied on net rather than gross gains, in keeping with international tax norms.

That means the money they have set aside over the past few years is likely to fall short of their actual tax bill, possibly by as much as $4 billion, according to Shanghai-based investment analysts Z-Ben Advisors.

The details of the tax plan were revealed to investors on Thursday at a briefing in Beijing by municipal representatives of the State Administration of Taxation, the sources said.

A slide shown at the briefing and seen by Reuters said:"Transactions of equity investments are taxed based on gains from each transaction, and the applicable tax rate is 10 per cent. Netting of multiple transactions is not allowed." The tax applies to investors in the Qualified Foreign Institutional Investor (QFII) programme and the renminbi-denominated version of the same programme (RQFII) between Nov. 17, 2009 and Nov. 16, 2014.

"It is likely that the majority of QFII investors will find themselves under-provisioned not least because the agreement appears not to include netting and most QFIIs have provisioned based on netting," said Michael McCormack, executive director at Z-Ben Advisors.

"We expect a wave of net asset value clawbacks by fund managers and also a short-term wave of redemptions from QFII funds as investors attempt to escape prior to the tax clawbacks," he said.