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Many fund executives from Singapore and Hong Kong said Beijing has required them to pay business and income taxes if their firms are classified as a “permanent establishment,” reported Asian Investor. The managers said it is the first time Chinese tax authorities have asked them to pay said taxes.

Until 2009, fund managers can avoid paying 5% tax on gross fees if they declare that their investments were done offshore. But a new tax measure introduced in early 2009 removed any onshore-versus-offshore categories, and charges all businesses done by foreign financial companies.

“It’s only 5% of the gross fee, so it’s not really a big deal,” says one institutional sales head at a big US asset manager. But tax authorities in Beijing are not just enforcing a long-standing business tax on financial services transactions, the above-mentioned 5% is on gross. And should Chinese tax authorities deem these fund management offices as permanent establishments, they can be charged with income tax ranging between 15 to 50% on profits; tax on services currently stands at 25%

But the taxes don’t stop there, LS Goh, a China tax expert at PricewaterhouseCoopers in Hong Kong, warned of more taxes on individuals. Chinese law says that employees of permanent establishments should pay mainland income tax even if they work for only one day. That rate can be as high as 45%, and if the individual does not pay, the employer is held responsible, it was reported by Asian Investor.

Tax a contentious issue among fund managers, hedge funds
The issue of taxation has always been a contentious one among hedge funds. In the U.S., two prominent hedge fund managers Stephen Schwarzman, the co-founder of Blackstone, and Daniel Loeb, founder of the hedge fund Third Point, heavily criticized the Obama administration for introducing a new round of taxes to hedge funds. Schwarzman compared the move to Adolf Hitler’s 1939 invasion of Poland, while Loeb condemned President Obama for “operating from a playbook quite different from the one we are used to as American business people.”

Last month, lobbyists and lawyers working for hedge funds warned that a Congressional Democrat-drafted bill that aimed to tax the profits of private equity and hedge fund managers as ordinary income, could derail some of the largest U.S. public companies that operate joint ventures.

But the largest association of hedge funds, the Alternative Investment Management Association (AIMA) predicted that even with the introduction of tax legislations, hedge funds would not leave the U.S.. Todd Groome, chairman of the London-based AIMA said in June that these new tax measures can be managed and he does not expect hedge funds to “change their lives over that.”

Also last month, New York legislators backtracked on their proposal to tax hedge fund managers who work in New York but live out of state, after hedge fund managers threatened to transfer their operation elsewhere, particularly Connecticut.

Gov. David Paterson and Mayor Michael Bloomberg opposed the bill on concerns that affected hedge fund managers might be swayed by the persistent wooing of rival state Connecticut with an offer of a better tax regime.

UK too fears mass exodus of rich families because of higher tax
Ronnie Ludwig, one of UK’s leading tax expert and a partner at accounting firm Saffery Champness, warned early this year that at least 600,000 wealthy individuals are expected to leave the UK in 2010 to avoid paying higher taxes.

Ludwig said that majority of those who will leave the UK will be middle class professionals and wealthy business owners or, as he calls them, “wealth creators”. As expected, Geneva has positioned itself as a better alternative for the expected rich families who will leave London. Since as early as May of this year, Swiss government officials and Geneva-based financial advisers have been visiting London to lure rich residents to attract them to relocate by offering them lower taxes, safer streets, private-banking options and convenient ski weekends.

Martin Meyer, head of economic development for the Swiss canton Valais, which borders Lake Geneva said: "We are here to make it easier for you to come to Switzerland.
- Precy Dumlao
PD