• China to tighten regulation of private investment funds
• China commences trust registration (Yin Jian Fa [2017] No. 47)
• Draft Tobacco Tax Law in development 
  

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On 30 August 2017, the legislative affairs office of the State Council issued the draft Interim Regulations for the Administration of Private Investment Funds (the “Draft”) to solicit the public comments by 30 September 2017. The Draft clarifies the following:

The Draft also sets out obligations for private fund custodians, rules for investment operation, provision of information, supervision and administration of private funds, and special provisions for venture capital investment funds.

* Asset manager VAT treatments was recently clarified in circulars Cai Shui [2016] No.140 (Circular 140) and Cai Shui [2017] No. 56 (Circular 56), issued by the Ministry of Finance (MOF) and State Administration of Taxation (SAT) in December 2016 and June 2017. These provide that private fund managers, which are classified as providers of asset management products, are the VAT taxpayers for private fund businesses and subject to the 3% simplified VAT method. However, a VAT exemption is provided for returns from holdings of non-principal protected financial products until maturity. 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:

• China Tax Alert: New VAT rules applicable to Asset Management Products (Issue 22, July 2017)
• China Tax Alert: Significant retrospective changes introduced to clarify VAT reform policies (Issue 38, December 2016)

On 25 August 2017, the China Banking Regulatory Commission (“CBRC”) issued Administrative Measures on Trust Registration (the “2017 Measures”).  The 2017 Measures come into effect from 1 September 2017 and require trust companies as well as other institutions authorized by the banking regulatory authorities of the State Council to register trust products which they have created and issued. This is built on the 2014 CBRC measures (Yin Jian Ban Fa [2014] No. 99) and clarifies that:

• Trust registration includes pre-registration, initial registration and registrations for alteration/rectification of previously registered matters. Trust companies are required to record their trust products and beneficial owners of the products with the state-owned China Trust Registration Co., Ltd (China TRC). This was established in 2016 on approval of the State Council and CBRC. 
• Set-up and administration of beneficial owners’ accounts will be dealt with by China TRC. CBRC and other government authorities will be in a position to access these records. However the records will not be open to the public. It might be noted that there is a global trend towards establishing obligations for the registration/recordal of the beneficial ownership of trusts with public authorities, with the EU and OECD both developing rules and frameworks in this space. As such, China’s new rules in line with the global trend, and should prove of use to efforts against tax evasion. It might be noted though that the proposals in some EU countries look to establish public registers of trust ownership – the Chinese trust register does not yet go this far. 
• An unique code will be granted to the registered trust product by China TRC. This will facilitate regulatory authorities to oversee the whole business chain of the trust product.  
• Basic information on trust plans involving pooled funds (funds from two or more investors) must be publicized by China TRC on their website. 
  

A three-month transitional period is set out in the 2017 Measures. Where a new trust product is released in the course of the 1 September to 30 November 2017 period, both the 2017 Measures and the 2014 Measures (Yin Jian Ban Fa [2014] No. 99) may be applied. For an existing trust product, which is still in existence by 1 July 2018, the trust registration is also required. 

The Standing Committee of the National People’s Congress (NPC) on 6 September 2017 reviewed the Draft Tobacco Tax Law (the “draft bill”) and released the draft bill to solicit public comments by 5 October 2017. Placing existing Chinese taxes on a statutory basis is part of a wider Chinese government effort to reinforce the ‘rule of law’. Taxes such as arable land occupation tax and VAT are also undergoing a similar transition. 

Tobacco tax is currently based on 2006 State Council-issued rules and these will be replaced by statutory law issued by the NPC. Under the current rules, when taxpayers purchase tobacco leaves from tobacco growers, tobacco tax is triggered and is levied at 20% of the tobacco leaves purchase price. It should be noted that, an input VAT credit may be treated as arising from the purchase of tobacco leaves, and can be offset against the output VAT on onward sale of these tobacco leaves, or supplies made out of them, by the taxpayers. This is despite the fact that no VAT will have been levied on the supply from the tobacco growers to the initial purchaser of the tobacco leaves. The input VAT credit calculated by multiplying 13% by the purchase price plus the tobacco tax. 

The framework of the existing tobacco tax, and its tax burden, will remain basically unchanged, but certain clarifications are made:

In addition, the draft bill also clarifies the timing of tax liabilities, filing deadlines and location for tax filing and payment.