China's State Taxation Administration is standing by a contentious tax policy on offshore insurance income that earlier this week roiled a series of financial sector shares, a China-based news outlet has reported citing a tax official.
The clarification came after reports that local tax authorities were stepping up cross-border tax compliance and as debate persisted over whether existing rules give authorities a legal basis to tax offshore insurance policies.
China "treats all residents' overseas income equally, regardless of whether it is overseas insurance income or other investment income ... all income must be declared and taxed according to law," the official was quoted as saying.
The State Taxation Administration did not immediately reply to a Reuters request for comment.
INSURANCE STOCKS TOOK A HIT
Beijing and Hangzhou authorities have started to apply personal income tax rates of 20% on returns from Hong Kong insurance policies, people with direct knowledge of the matter told Reuters on Thursday.
Shares of major insurance firms offering service to Chinese investors, particularly those with sizable Hong Kong operations, fell on the tightened tax rules on Wednesday and Thursday.
Among them Prudential took the heaviest hit with Hong Kong shares down 5.4% from Wednesday to Friday, followed by a 5% drop of AIA Group (1299.HK).
Mainland Chinese authorities have escalated scrutiny of offshore investments in recent months, including imposing tax on offshore trusts, which analysts say could weigh on money flows to Hong Kong.
If policyholders surrender policies, reduce coverage, or make cash dividend withdrawals, the gains may be categorized by tax authorities as income and taxed at a 20% rate, said Wang Huaitao, a lawyer from Thinkoo Law firm.
Traditional protection-oriented Hong Kong insurance policies, primarily offering critical illness and medical coverage with no investment component or savings yield, are likely out of the scope of the tax measure, he added.
Taxing offshore-sourced income derived by Chinese tax residents, including returns on overseas insurance policies, is a common international practice and has been consistently upheld since the implementation of China's Personal Income Tax Law, the official said, according to the report.
The tightened scrutiny also weighed down on other insurance providers such as HSBC (HSBA.L), Standard Chartered (STAN.L), Manulife Financial (MFC.TO) and Hong Kong-based insurer FWD Group (1828.HK).
