By Saikat Chatterjee
HONG KONG, Aug 29 (Reuters) - 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
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
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
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
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