How to prevent VAT compliance risks of asset management products

Following the promulgation of the Circular on National Implementation of the Pilot Program of Levying Value-added Tax in lieu of Business Tax (the [2016] No. 36 Circular) that included the financial industry into the pilot program, the Ministry of Finance and the State Administration of Taxation released the Circular on Clarifying Value-added Tax Policies for Financial, Property Development, Education and Auxiliary Services Sectors (the [2016] No. 140 Circular) on 21 December 2016, the Supplementary Circular on Issues Concerning Value-added Tax Policies for Asset Management Products (the [2017] No. 2 Circular) on 10 January 2017 and the Circular on Issues Concerning Value-added Tax on Asset Management Products (the [2017] No. 56 Circular) on 30 June 2017, marking formation of a value-added tax (VAT) framework for asset management products (AMPs). In order to apply VAT policies for AMPs properly and prevent VAT compliance risks, asset managers should keep the following issues top of mind:

VAT payers. Asset managers shall be the VAT payers for any VAT taxable activities arising out of AMP operations. This was first explicitly specified in the [2016] No. 140 Circular, and later in the [2017] No. 56 Circular, which went further to categorize managers (or in other words, VAT payers) by AMPs. Despite being defined as VAT payers, asset managers are not withholding agents. Taxpayers and withholding agents have different legal statuses, rights and obligations. As VAT payers, asset managers have a responsibility to pay VAT. But they can structure their agreement with clients so that the VAT imposed on AMPs are passed on to, and ultimately borne by, their clients.

Managers’ VAT taxable activities. VAT taxable activities of asset managers are classified mainly into two categories, the first being AMP operations, which include lending services and transfer of financial commodities. The second is known as “other” activities, including asset management services for clients (i.e. directly charged financial services), and any activities other than AMP operations and asset management for which VAT is payable.

Liu Yungang is a partner at AllBright Law Offices