HONG KONG Aug 29 Hong Kong's stock exchange has asked Chinese regulators to give investors time to adjust to any tax rules agreed upon as part of a closely watched cross-border share trading scheme, two people briefed by the city's stock market operator said.
Foreign investors are concerned that the new tax rules could come into force immediately after the scheme is launched, allowing them no time to make the necessary adjustments. There are also worries that the Chinese authorities would apply any taxes retroactively.
The Hong Kong Exchanges and Clearing Ltd is currently negotiating the terms of the scheme, called Hong Kong Shanghai Connect, with the China Securities Regulatory Commission (CSRC), the mainland stock regulator. The scheme is likely to be launched in October.
"Our communication to them is very clear that if and when the new tax rules become effective, we need an exemption period to implement those rules and the new rules shouldn't be with retrospective effect," one of the sources present at a briefing with HKEx told Reuters.
The person declined to be named due to the sensitivity of the matter. The HKEx declined to comment. The CSRC was not immediately available for comment.
The scheme will allow investors to trade Shanghai-listed shares via the Hong Kong stock exchange while mainland investors will be able to trade Hong Kong-listed shares via the Shanghai Stock Exchange.
Currently, China slaps a 10 percent capital gains tax on all stock purchases made on the mainland, but this tax has never been collected on shares purchased under a range of cross-border foreign investment programs, including the Qualified Foreign Institutional Investor (QFII) and the Renminbi Qualified Foreign Institutional Investor (RQFII) schemes.
Hong Kong does not impose capital gains tax on share purchases.
China's tax regime for QFII and RQFII has been in limbo since the schemes were first introduced because its tax rules only recognise investors from countries with which Beijing has a tax agreement.
The exemption period requested by the HKEx would allow both regulators more time to enforce a uniform tax regime for all trading schemes, the sources said.
The regulators will begin market rehearsals on the Hong Kong Shanghai Connect trading scheme this weekend.
James Badenach, partner at the financial services tax unit of Ernst & Young in Hong Kong, said the final decision on the tax rules may not rest solely with the CSRC as China's State Administration of Tax and finance ministry, as well as the Hong Kong regulator, all have a say.
"They are one of a few key stakeholders in the tax policy deliberations," he said. (Additional reporting by Michelle Price; Editing by Miral Fahmy)