Mainland adviser urges fund tax reform: deferred pension taxation modelled on US 401(k)

CPPCC member and Guangdong securities regulator chief Hou Wailin told China Securities Journal his proposal urges mainland authorities to clarify that fund sales charges are not fund-company income for tax purposes, overhaul fund-industry tax rules, and push deferred taxation for pensions.

Why clarify sales-charge taxation?

Fear of retroactive local tax bills disrupting fund companies. When funds are sold, management companies and distributors charge subscription and redemption fees, split under distribution agreements. Subscription fees go entirely to distributors, as does most of the redemption fee; local tax bureaus have generally accepted not taxing these as fund-company income. But the rules don’t say so explicitly — and retroactive taxation by some local bureau could severely disrupt fund companies.

What about risk reserves?

Allow pre-tax provisioning to lighten the tax load. CSRC rules require fund companies to provision at least 10% of management-fee income monthly as risk reserves — currently done after tax, while insurers’ catastrophe reserves and UnionPay’s special reserves are deducted pre-tax. Hou proposes letting fund companies do the same, cutting their tax burden and encouraging provisioning.

What is deferred pension taxation?

Copy America’s 401(k): no tax on the way in, tax on the way out. Hou noted mainland pension funds barely participate in capital markets, mainly because employer pension contributions count as wage income taxed before entering pension accounts. Abroad, deferred taxation applies — income and capital-gains tax only when employees withdraw at retirement or otherwise, lightening the real burden. He proposes modelling US 401(k) and IRA arrangements with deferred individual income tax on pensions to spur employer and employee contributions. He also urged clarifying that QFIIs face no capital-gains tax, keeping domestic and foreign investors on equal tax footing.

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