NEW TAX TO HURT HEDGE FUNDS
3pc value-added levy seen adding more pressure on industry
HEDGE funds may be the biggest l osers from a new three per cent tax on some investment returns in China.
The new value-added l evy, which will take effect on Monday, is part of a broader shift in how companies pay tax in China.
While there were still uncertainties around how the tariff would be implemented, what’s known about the type of activities to be taxed suggested that hedge funds might be the asset managers hit the hardest, said Natalie Yu, from Deloitte LLP. “Hedge funds may face a bigger impact.”
The strategies that hedge funds used meant it was likely that more of their returns would be taxable under the new rules compared with other asset-management vehicles, she said.
Further, rival products such as mutual funds are partly exempt from the new charge.
It would add to the pressure on China’s hedge fund industry, which has also been coming under increasing regulatory scrutiny. The China Securities Regulatory Commission said earlier this month it was investigating 10 cases of alleged wrongdoing in the industry and was seeing a “trend of rising legal violations”.
Last month, China unveiled a proposal to overhaul regulation of asset-management products that would mark the “beginning of a new era” in Chinese financial supervision from 2019.
Dai Ming, a fund manager at Hengsheng Asset Management Co in Shanghai, said the changes might be an attempt to eliminate smaller funds by increasing their costs. “There are many hedge funds in the market right now, even after 10,000 of them are gone there are still 10,000 left,” he said.
The tax comes from mainland China shifting company tariffs to value-added levies, changes that have seen many industries end up paying less.
“It’s a problem how to tell my clients about the three per cent tax, which came with no obvious reasons,” said Dai.
“We need to figure out who should pay for it or how to split it, and the process by which we pay it.” Reuters