Gui Minjie, Member of the CPPCC National Committee and Chairman of the Governors of the Shanghai Stock Exchange (SSE), has recently submitted 2 proposals at the NPC and CPPCC sessions, namely, the “Suggestion on Specifying Tax Policies for Asset Securitization” and the “Suggestion on Establishing Financial Court in Shanghai”.
For the second proposal, Gui held that the existing judicial trial faces great challenges in dealing with the financial cases which are highly professional and influential and result in new issues and rules. Judicial authorities should research in such aspects as subject, expression, application of law, judgment execution and case effect for the international disputes and lawsuits caused by finance internationalization. In the new situation of financial reform and development, it is essential and pressing to establish a special financial court.
To solve professional financial cases requires a professional trial team; to enhance judicial guarantee for the registration system requires a consistent trial standard; and the importance of judgment result asks for a special trial organization. All these factors make it necessary to establish a financial court. By taking advantage of the judicial reform, the solid foundation in financial trial and the experience in centralized jurisdiction, Shanghai is qualified to establish a special financial court in the process of speeding up the building of the international finance center.
Therefore, Gui suggested that referring to the practice of co-establishing Shanghai Intellectual Property Right Court and Shanghai No. 3 Intermediate People’s Court (including the railway intermediate court; one organization with three titles; “independent trial and integrated administration”), Shanghai Financial Court should be established in the principle of “streamlined, high efficiency and delayering” in Shanghai No. 1 Intermediate People’s Court at the first stage, so as to handle appeals about financial cases from Shanghai grass-root courts and accept first-trial financial cases within the jurisdiction of the intermediate court, before establishing an independent financial court at a proper time.
In addition, Gui also advised that related departments should further determine the tax policies for asset securitization.
To separate risks, a procedural section has been designed in asset securitization to transfer underlying assets to special purpose vehicle (SPV) and have SPV operate and conduct income distribution.
Gui held that since SPV is not a real entity and its income will be completely transferred to the ultimate holder, it should not be regarded as an independent subject of tax payment. SPV will not cause repeated taxation in asset securitization, which is called the “principle of tax neutrality”. This principle, widely adopted in the mature markets, is a key factor in promoting the development of asset securitization and lowering investment and financing costs of participating entities.
Therefore, Gui suggested that the Ministry of Finance, the State Administration of Taxation and the Legislative Affair Office of the State Council should specify the tax policies of asset securitization for Chinese enterprises by referring to domestic and overseas taxation systems in asset securitization as well as China’s legal environment for taxation. Specifically, it includes 3 aspects:
First, we should refer to the “principle of tax neutrality” in the “Notice of Taxation Policies for Credit Asset Securitization” (Cai Shui [2006] No. 5 Document) when offering equal preferential taxation policies to enterprise asset securitization and credit asset securitization, so as to avoid double taxation by specifying the taxation policies in each link of enterprise asset securitization.
Second, we should develop specific taxation policies for SPV by referring to practices in mature markets such as the U.S. market to provide preferential policies at system level for SPV engaging in asset securitization, thus facilitating the structural design of asset securitization, and supporting the development of asset securitization.
Third, we should refer to the practices adopted by Taiwan and Hong Kong and study to reduce the tax burden of securitization business with real estate as the underlying assets through separate legislation or amending such laws and regulations as the “Provisional Regulations on Business Tax”, the “Provisional Regulations on Land Value-added Tax” and the “Provisional Regulations on Contract Tax”, so as to liquidize such existing assets as real estates.