The following matters are covered in this issue:
- Further VAT rules for asset management products (Cai Shui  No. 56)
- Tax incentives for small loans made to farmers (Cai Shui  No. 48)
- Zero tariff for goods under Mainland-HK, Macau CEPA (Shui Wei Hui  No. 10)
- SAT to collaborate with NDRC on use of social credit ratings
- China looks to develop sharing economy (Fa Gai Gao Ji  No. 1245)
- Northbound Trading under Mainland China-Hong Kong Bond Connect launched
- The OECD pushes international tax transparency efforts
Further VAT rules for asset management products
On 30 June 2017, the Ministry of Finance (MOF) and State Administration of Taxation (SAT) jointly issued the ‘Notice of Issues on VAT on Asset Management Products’ (Cai Shui  No. 56, “Circular 56”). This further clarifies the Value Added Tax (VAT) rules for asset management products, including the range of asset management products covered by the new rules, and the methods for calculation, filing, and collection of VAT.
Prior to this, in December 2016, MOF and SAT jointly issued Cai Shui  No. 140 (“Circular 140”). This clarified that, in the asset management sector, the asset manager shall be the VAT taxpayer and it shall account for VAT on a consolidated basis in respect of all of the taxable activities occurring during the operating period for which asset management products are supplied. (See KPMG China Tax Weekly Update (Issue 49, December 2016) for details). Subsequently, on 6 January this year, MOF and SAT jointly issued supplementary notice Cai Shui  No. 2 (“Circular 2”), which postponed the commencement date of the new rules in Circular 140 from 1 May 2016 to 1 July 2017 (See KPMG China Tax Weekly Update (Issue 3, January 2017) for details).
The newly issued Circular 56 further postpones the commencement date to 1 January 2018. In the interim, the simplified VAT method will temporarily be applied to the supply of asset management products, with a VAT rate of 3%. Circular 56 clarifies, inter alia:
- The term “asset management products” includes: bank financial products, trust funds (including collective fund trusts, single fund trusts), property trusts, public securities investment funds, specific client asset management plans, collective asset management plans, targeted asset management plans, private equity funds, debt investment plans, equity investment plans, debt-equity combination investment schemes, asset-backed plans, portfolio insurance asset management products, and pension management products.
- The term “asset manager” includes: banks, trust companies, public fund management companies and their subsidiaries, securities companies and their subsidiaries, futures companies and their subsidiaries, private equity fund managers, insurance asset management companies, professional insurance asset management agencies, and pension insurance companies.
- Circular 56 stipulates that the asset manager may account for the sales amount and VAT payable on a product-by-product basis or on a consolidated basis.
- Circular 56 also stipulates that the asset manager should perform VAT filings for supplies of asset management products and supplies made in the course of other businesses, on a consolidated basis, within the prescribed timeframe.
* For detail analysis of Circular 140 and Circular 56 as well as their impact on businesses, please refer to the following KPMG China Tax Alerts:
Tax incentives for small loans made to farmers
As highlighted in KPMG China Tax Weekly Update (Issue 16, April 2017), an 19 April 2017 executive meeting of the State Council decided on a three-year extension to certain existing tax incentive policies that were due to expire by the end of 2016. The extension applies to a VAT exemption for interest income arising to large and mid-sized financial institutions from small loans made to small farmer households. The State Council also decided that this VAT exemption would now be expanded to cover small lenders, provided that their operations are conducted in compliance with relevant regulations on money lenders.
To give effect to these State Council policies, on 9 June 2017, MOF and SAT issued Cai Shui  No. 44 (“Circular 44”) and, on 28 June 2017, Cai Shui  No. 48 (“Circular 48”). Circular 44 extends the VAT exemption from 1 January 2017 to 31 December 2019 (See KPMG (China Tax Weekly Update Issue 24, June 2017) for details). Circular 48 clarifies that smaller lenders, approved by the regulators for the financial sector at provincial level and above, engaged in providing small loans to farmers are now within the in scope of this incentive. This will be effective from 1 January 2017 to 31 December 2019.
The detailed tax incentives include:
- VAT exemption for smaller lenders’ interest income from small loans to farming households (small lenders must meet certain requirements, e.g. registered capital not less than RMB5 million for limited liability companies and not less than RMB10 million for stock corporations, see Yin Jian Fa  No. 23 for details).
- For CIT purposes, just 90% of the interest income from such small loans will be included in taxable income (i.e. effective CIT rate of 22.5%, down from 25%).
- For CIT purposes, a tax deduction will be allowed for contributions to loan loss reserves in an amount not exceeding 1% of the year-end outstanding loans.
Zero tariff for goods under Mainland-HK, Macau CEPA
On 29 June 2017, the Customs Tariff Commission of the State Council (which is established under the MOF) issued Shui Wei Hui  No. 10 (“Circular 10”), granting zero tariff treatment to 6 goods types that originate from Hong Kong and 27 goods types that originate from Macau.
Circular 10 was formulated based on the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA) and Mainland and Macau CEPA. Circular 10 entered force starting from 1 July 2017. See detailed tariff rates in list1 (for Hong Kong) and in list2 (for Macau).
*CEPA is a free trade agreement concluded by the Mainland China and Hong Kong/Macau, and is also the first free trade agreement fully implemented in the Mainland. The CEPA covers four areas: trade in goods, trade in services, investment, trade and investment facilitation. On 28 June 2017, the Ministry of Commerce (MOFCOM) of Mainland China and Hong Kong Special Administrative Region Government signed the Investment Agreement and the Agreement on Economic and Technical Cooperation under the framework of Mainland and Hong Kong CEPA (See KPMG China Tax Weekly Update (Issue 26, July 2017) for details). More information about the CEPA are also available on the website of MOFCOM, click here to access.
SAT to collaborate with NDRC on use of social credit ratings
In July 2016, 29 Chinese regulatory authorities, including the National Development and Reform Commission (NDRC), SAT, People’s Bank of China (PBOC) etc., jointly signed a cooperation memorandum to grant 41 incentives to taxpayers with class-A tax credit rating (See KPMG China Tax Weekly Update (Issue 27, July 2016) for details).
On 22 June 2017, NDRC and SAT signed a joint cooperative framework agreement for the collective use of taxpayer credit ratings to drive enforcement. The new NDRC-SAT agreement is built on top of the aforesaid cooperation memorandum. According to the agreement, NDRC and SAT will work together on the following:
- Establish a mechanism for the collective use by NDRC and SAT of tax credit and social credit ratings for individuals and enterprises. Relevant information will be shared by both NDRC and SAT, including:
- A list detailing taxpayer names together with their individual tax credit ratings (ratings scale from A to D). The list will be created based on the existing SAT rating mechanism for classification and grading of taxpayers (see KPMG China Tax Weekly Update (Issue 33, August 2016).
- Details of significant tax fraud cases provided by SAT;
- Social credit information from other government authorities, collated by NDRC, e.g. credit ratings from the State Administration for Industry & Commerce (SAIC) based on compliance with business registration and other SAIC rules.
The NDRC-SAT collaborative mechanism will be initially piloted in certain cities.
- Implement joint NDRC-SAT incentive and punishment mechanisms, which are linked to taxpayer credit ratings, by conducting a joint campaign against non-compliance. NDRC and SAT will also pilot a month-long scheme of enhanced services for A-rated taxpayers.
- Create a feedback mechanism between NDRC and SAT to share positive and negative experience from using the credit rating system to drive their work.
China looks to develop sharing economy
On 3 July 2017, eight government agencies, including NDRC, Office of the Central Leading Group for Cyberspace Affairs, Ministry of Industry and Information Technology, Ministry of Human Resources and Social Security, SAT, SAIC, General Administration of Quality Supervision, Inspection and Quarantine and National Bureau of Statistics jointly issued guidance to facilitate the development of China’s sharing economy. The guidance is directed at both governmental authorities and at the platform enterprises at the core of sharing economy business models. Further, more detailed rules and guidance will be added in the course of time.
The guidance indicates that, China’s sharing economy is developing rapidly and new business models are helping to resolve overcapacity issues and create new jobs. However, additional customer safeguards are considered necessary to guide the healthy development of China’s sharing economy.
The guidance establishes new limitations on the use of sharing economy business models:
- The government will, in forthcoming regulations, strictly regulate market entry and use of sharing economy business models that are considered likely to impact the safety of life and property, social stability, and which carry financial risks.
- Platform enterprises (e.g. car-hailing platforms, such as Didi) must:
(i) protect consumers’ rights and interests; and
(ii) assist government authorities to monitor platform activity for law enforcement purposes.
- In addition, the “resource providers” (e.g. drivers registered under Didi) must fulfil information disclosure obligations in relation to their services (e.g. car information), and cooperate with scrutinizing regulatory authorities.
- Government authorities must monitor whether platform enterprises in the sharing economy sector are engaged in monopolistic activities, take action against unfair anti-competitive practices, uphold the consumer and public interests, and ensure a level playing field for new and old business models.
From a tax perspective, the guidance requires the following of governmental authorities:
- Improve tax collection measures to adapt to the sharing economy.
- Enhance collection of tax-related information from platform enterprises for use in tax risk analysis.
- Promote the utilization of electronic invoices, further informatize tax services, and enhance the capacity of the tax authorities in dealing with the sharing economy.
Northbound Trading under Mainland China-Hong Kong Bond Connect launched
As highlighted in KPMG China Tax Weekly Update (Issue 21, May 2017), on 16 May 2017, the People’s Bank of China (PBOC) and the Hong Kong Monetary Authority (HKMA) issued a joint Announcement on the launch of the Bond Connect scheme to operate between Mainland China and Hong Kong (“Bond Connect”). Northbound Trading will commence in the initial phase, i.e. overseas investors from Hong Kong and other countries and territories (overseas investors) will be permitted to invest in the China Interbank Bond Market. The Hong Kong and Mainland Financial Infrastructure Institutions will handle trading, custody, settlement etc. Southbound Trading will be explored in due course.
A recent posting to the website of central government indicated that Northbound Trading under the Bond Connect was officially launched on 3 July 2017. On that day, around 89 institutional investors traded more than RMB7.05 billion, in which RMB4.9 billion were for bond purchases.
On the launch day for Bond Connect the Agricultural Development Bank of China (ADBC) issued the first financial bond under Bond Connect. The bank raised a total of RMB16 billion through policy-based financial bonds, RMB1 billion of which were issued exclusively to overseas investors. On the same day, in addition to ADBC, another 6 institutions also issued bonds through Bond Connect. These institutions included China Development Bank, China Huaneng Group, China Three Gorges Corporation, China Unicom, Aluminum Corporation of China Limited and Malayan Banking Berhad. Foreign banks, including HSBC, Standard Chartered Bank, Deutsche Bank, also conducted trading under Bond Connect.
Before the launch of Bond Connect, about 110 foreign investors made recordal filings with the Shanghai head office of the PBOC for investing in the China interbank bond market (CIBM). More than 20 of these are institutional investors. It is expected that relevant tax policies will be in place soon, and we will keep you posted of the updates.
* To ensure that Bond Connect is rolled out in a standardized and orderly way on 21 June 2017 the PBOC issued interim measures for the Northbound Trading (see KPMG China Tax Weekly Update (Issue 25, June 2017) for details). Prior to this, the National Interbank Funding Center published the draft Trial Trading Rules for Bond Connect to seek public comments (also see KPMG China Tax Weekly Update (Issue 24, June 2017) for details).
The OECD pushes international tax transparency efforts
A posting to the website of the OECD on 28 June 2017 release a Brief on the State of Play on the international tax transparency standards (the “Brief”).
The Brief noted that, the OECD-hosted Global Forum on Transparency and Exchange of Information for Tax Purposes released the results of its Fast-Track review process noting progress by many jurisdictions towards fully implementation of the exchange of information on request standard (the EOIR standard). The Brief examines progress over the last 15 months, since the G20 Finance Ministers call to identify non-cooperative jurisdictions with respect to tax transparency. Progress to meet the automatic exchange of information standard (the AEOI standard) as well as efforts by countries to expand their network of exchange of information agreements by joining the multilateral Convention on Mutual Administrative Assistance in Tax Matters is also noted.
The Global Forum’s review process considers whether a jurisdiction has a sufficient legal and regulatory framework as well as appropriate processes and procedures in place to meet the EOIR Standard. All members of the Global Forum (today 142 countries and jurisdictions) undergo a peer review, as do “jurisdictions of relevance”, which are not Global Forum members but identified as relevant to its work to tackle tax evasion through a level-playing field based on greater transparency.The first round of Global Forum peer reviews was completed from 2010 to 2016.
At the end of the Global Forum’s review process, an overall rating is issued – “Compliant”, “Largely Compliant”, “Partially Compliant” and “Non-Compliance”. China was rated as “Compliant” in the first round of review.
In addition, the Brief also outlines the following:
- Tax transparency landscape from 2008 to today
- Effect of the “Panama Papers” incident
- Objective Criteria to identify jurisdictions not making sufficient progress on tax transparency
- New steps to support tax transparency