According to the "Notice on Issues Concerning Value-Added Tax on Asset Management Products" (Circular No. 56), starting from January 1, 2018, VAT will be levied at a rate of 3% on VAT-taxable activities occurring during the operation of asset management products by asset management product managers.
01. Who is the taxpayer?
According to the regulations, the taxpayer shall be the asset management product manager engaged in the operation of asset management products, including banks, trust companies, public fund management companies and their subsidiaries, securities companies and their subsidiaries, futures companies and their subsidiaries, private fund managers, insurance asset management companies, professional insurance asset management institutions, and pension insurance companies.
02. Which asset management products are involved?
According to the regulations, the 3% VAT levy on asset management products covers basically all types of asset management products, including bank wealth management products, capital trusts (including collective capital trusts and single capital trusts), property right trusts, publicly offered securities investment funds, specific client asset management plans, collective asset management plans, targeted asset management plans, private equity investment funds, debt investment plans, equity investment plans, equity-debt hybrid investment plans, asset-backed plans, portfolio insurance asset management products, and pension security management products.
03. Which taxable activities are involved?
According to the regulations, a 3% VAT will be levied on the sales revenue from loan services and financial commodity transfer businesses provided by asset management product managers when conducting asset management product business.
1. Regarding loan services
Regarding loan services, fixed profits or principal-protected returns collected through investment are subject to a 3% VAT as loan services. The sales revenue for loan services is based on interest and interest-like income generated from January 1, 2018.
Among these, interest income generated from deposits, government bonds, local government bonds, (policy) financial bonds, pledged repos, outright repos, interbank certificates of deposit, interbank deposits, interbank loans, and interbank payments on behalf of others is exempt from VAT.
Example:
A trust plan issued a one-year trust loan of 50 million yuan to a financial institution on July 1, 2017, with an interest rate of 12%. The principal and interest are to be repaid upon maturity on June 30, 2018.
Under the influence of the regulations, VAT will not be levied on the total interest income of 6 million yuan of the trust plan; only the interest income generated after January 1, 2018, i.e., 3 million yuan of interest income, will be subject to a 3% VAT.
2. Regarding financial commodity transfer business
Regarding financial commodity transfer business, business activities involving the transfer (without holding to maturity) of ownership of foreign exchange, securities, non-commodity futures, and other financial commodities (funds, trusts, wealth management products, and other asset management products and financial derivatives) are subject to a 3% VAT as financial commodity transfer business.
The sales revenue for transfer business is based on the price difference income. For financial commodities purchased before December 31, 2017, the purchase price can be either the original purchase price or the closing price (valuation) on the last trading day of 2017.
Among these, price difference income generated from closed-end or open-end securities investment funds used for buying and selling stocks and bonds, QFII and RQFII entrusting domestic companies to engage in securities trading business within China, and Hong Kong market investors buying and selling Shanghai A-shares through the Shanghai-Hong Kong Stock Connect is exempt from VAT.
Example:
A fund purchased a stock index future on June 30, 2017, and sold it on March 31, 2018. The price difference income generated from the transaction (selling price minus buying price) will be used as the basis for levying the 3% VAT.
The purchase price can be either the actual purchase price on June 30, 2017, or the stock index closing price on December 29, 2017. For fund managers, a lower price difference income, i.e., a higher purchase price, is more favorable.
04. What is the impact of VAT?
According to statistics, the scale of asset management products in China exceeds 100 trillion yuan. This levy of VAT on asset management products can be described as affecting the entire asset management industry.
1. Passing on to investors
Although it is mentioned above that the taxpayer for VAT is the product manager, since product managers mainly collect service fees as remuneration for their labor and do not directly enjoy the investment returns of the products.
Therefore, the subsequent impact of levying VAT may need to be borne by product investors through relevant contract clauses.
For example, on December 25, a trust company issued an announcement on its official website stating that, affected by the VAT levy on asset management products under Circular No. 56, starting from January 1, 2018, the trust benefit amounts and transaction prices of the relevant existing and new trust products managed by the company may decrease due to tax payments.
At the same time, levying VAT on interest income generated from principal-protected asset management products imposes further pressure on principal-protected products (the "New Asset Management Regulations" issued on November 17 clearly proposed breaking the rigid redemption), which constitutes some unfavorable factors.
2. Wealth management yields tend to decline
The upward transmission of tax burden costs will lead to a decline in the yields of asset management products. Taking bank wealth management products as an example, as of the end of 2016, 44% of bank wealth management investment assets were bonds (mostly credit bonds), in addition to 17% of non-standard assets and about 8% of equity assets (data as of the end of 2015).
In terms of whether they are principal-protected, as of the end of 2016, non-principal-protected floating income products accounted for 80% of bank wealth management products. Assuming that 70% of bank wealth management holdings are allocated to credit bonds and other varieties subject to VAT, with an average coupon rate of 5%, and are temporarily treated as non-principal-protected products, if the after-tax interest spread level is maintained, the tax payment on interest income alone will roughly cause the wealth management yield to decline by about 10 basis points.
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