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China’s Business Environment & MNCs in China Making the Right Moves
Grand Hyatt Hotel , Beijing 26 November 2014
MNCS IN CHINA Making the right moves
MNCs IN CHINA | SILK ROAD ASSOCIATES | 3
CASE STUDY
Blue Moon: a nimble private competitor
MNCS IN CHINA
Key Takeaways
A still growing but more complex China
Selling to China’s many cities is not as easy as it looks
New business models are disrupting multinationals
Finding new efficiencies in a slower growing China
Talent management and labour shortages
China’s changing role in global strategy
MNCs IN CHINA | SILK ROAD ASSOCIATES | 4
The opportunities in China remain vast compared to other emerging markets, even the other BRICS
China’s economy is larger than the combined value of Russia, Brazil, and India.
China’s economy has grown by $1.5tn in the
past two years.
BRAZIL $2.3 TN
RUSSIA $2.0 TN
INDIA $1.9 TN
That’s equivalent to the combined output of Sweden, South Africa,
and Nigeria
CHINA $8.4 TN
MNCs IN CHINA | SILK ROAD ASSOCIATES | 5
GUANGDONG
JIANGSU
SHANDONG
HONG KONG
GDP, $bn
The opportunities in China remain vast compared to other emerging markets, including neighbouring markets
MNCs IN CHINA | SILK ROAD ASSOCIATES | 6
MNCs are in ‘China for China’. But does their global strategy reflect the change?
The primary reason to be in China is to serve the China market, or to be ‘in China for China’.
Source: American Chamber of Commerce in Shanghai & European Chamber of Commerce in China.
American firms
69%
European firms
75%
MNCs IN CHINA | SILK ROAD ASSOCIATES | 7
>10 million 1 million to 10 million < 1 million
Source: Silk Road Associates, local statistical authorities
MNCs are having to reconsider how they tap into the country’s many ‘smaller’ cities
Population by city Circles denote relative population size
Shanghai FTZ
Anti-graft measures
E-commerce
Rising affluence
Shadow banking
Big data Digital media
South China Sea
Chaori
Higher capital costs
MNCs IN CHINA | SILK ROAD ASSOCIATES | 9
6
8
10
12
14
2000 2002 2004 2006 2008 2010 2012
Boom! Growth reaches it’s peak of 14% in early 2008 ahead of the Olympics and global crisis
Real GDP growth % change
A new focus on efficiency, not (just) volumes as GDP growth slows on a structural basis
The early years Earlier reform measures and WTO-entry kick-start a decade of growth
Bust (?) Fiscal stimulus produces a mini-recovery, but growth rates remain on structural decline
Source: Silk Road Associates, China National Statistical Bureau
MNCs IN CHINA | SILK ROAD ASSOCIATES | 10
85
65
65
60
50
45
35
25
25
20
The speed of ageing is unprecedented as the region’s youth population declines steeply
The speed of ageing in Asia will be traumatic.
2020
2030
2035
2060
2070
2095
2005
2010
2015
2035
Thailand
Vietnam
China
Indonesia
India
Philippines
Germany
U.K
France
U.S.
Year median age reaches 40 yrs & number of years taken to rise from 30 to 40 yrs
Source: United Nations Population Division
MNCs IN CHINA | SILK ROAD ASSOCIATES | 11
0.3 1.3 2.1 5.8 4.7
6.0 10.0
15.7 8.5
16.6
3.4
14.5
GDP ($bn)
2000 2012 Africa
Latin America
Japan
United States
European Union
Emerging Asia
China
GDP ($bn)
MNCs are having to rethink China’s role in their global and regional strategies
THE RISE OF THE AEC | SILK ROAD ASSOCIATES | 12
Helping our clients grow their commercial footprint in China, Southeast Asia, and the Middle East
About Silk Road Associates Silk Road Associates is a strategy consultancy helping clients grow their commercial footprint across the Silk Road region with a focus on China, Southeast Asia, and the Middle East. We provide a range of services from business strategy, market studies and operational support. Our directors include experienced consultants, business strategists, economists, and operational specialists. Our clients are present in a variety of industries and include multinationals, mid-market companies, and financial institutions. Founded by Ben Simpfendorfer, a world-leading specialist in the commercial rise of Asia and the Middle East, we understand the challenges of operating across multiple countries and within an increasingly interconnected region. With offices in Hong Kong, Beijing, and Melbourne, we also provide insightful and independent local knowledge on the region’s fast changing markets. Visit us at www.silkroadassoc.com
Hong Kong 1801 Wheelock House 20 Pedder Street, Central +852 2293 2236 Melbourne 8/350 Collins Street Melbourne, 3000, Victoria +61 (3) 8601 1135
MNCs in China Strategies in an
Urbanizing China
David Frey Partner, Head of Strategy & Operations
KPMG in China
October 7, 2014
MNCs in China Making the Right Moves
Recent report assessing current challenges and opportunities for multinationals in China
1 A still growing but more complex China
2 China’s changing role in global strategy
3 New business models are disrupting multinationals
4 Selling to China’s many cities is not as easy as it looks
5 Finding new efficiencies in a slower growing China
Top 50 in both 2007 & 2025 Entering by 2025 Exiting by 2025
China’s cities are rapidly transforming
Athens Barcelona Denver Detroit Hamburg Lille Melbourne Munich
Minneapolis-St. Paul Nagoya Oslo Rhein-Main Rio de Janeiro Stuttgart Taipei Vienna
Exiting the Top 50 by 2025
Bangkok Beijing Chengdu Chongqing Delhi Doha Foshan Guangzhou
Hangzhou Mumbai Nanjing Shenyang Shenzhen Tianjin Wuhan Xi-an Source: McKinsey Global Institute; KPMG Analysis
Entering the Top 50 by 2025
75% of all newcomers
will be in China
China’s New Urbanization Objectives: Foreign Investment, Technology & Knowhow as Critical Drivers to Improving Sustainability
Foreign Direct Investment (FDI) and Domestic Direct Investment (DDI) Attraction Strategies
Investment Requirem
ents Funding Sources Debt Structure (e.g. Municipal Bond Financing) –
Domestic and International Investment Communities
Financial Management Capability Development
Skills
Urbanization Path
Enhanced Health Care, Livability, and Work-Life Balance
Smart City: Transportation and Resource Efficiency
Infrastructure Development
Urban Planning and Design
Strategy
Rural to urban: Transferring population bases from rural environments to cities and towns 1
Improved city planning: Optimize the layout and form of urban areas 2
Environmental sustainability: Enhance sustainable urban development 3
Better integrated society: Properly integrate rural and urban developments to improve living standards outside existing city areas
4
Reform of social institutions: Improve efficiency of the social institutions that will manage urban development. This will include reforming the Hukou system
5
China’s ‘New-type’ urbanization: What is it?
The stated goals of China’s ‘New Type’ urbanization plan 2014-2020
M3 Global Direct Dialogue
• The Development Research Center of the State Council
• Ministry of Finance
Government participation by: Main Urbanization Topics: • Priorities for China's reform
• Infrastructure & Global City System Reform
• Fiscal reform
Working relationships with the architects of urbanization in China
Infrastructure Finance
KPMG-PRC Government Joint Local Bond seminar (closed door)
Main topics: • The development of a bond
market for China’s local government, and the risk prevention measures for local debt
• Pilot reform cities
• KPMG’s suggestions on a path to issuing local bonds was submitted to the Premier’s office in 2013
New Urbanization
Joint seminar by KPMG Cities CoE leadership team and DRC Urbanization team
Main topics: • World urbanization trends
and the potential of smarter greener urbanization in China
• Sustainable urbanization and the role of the government
• Urbanization financing strategies
Main topics:
• Sustainable building and technology standards
• Understanding the intelligent city
• What makes a city work from a global perspective?
• How can Chinese cities attract local and international funding?
City Development and Planning
Mayors forum on urban development and planning in July 2013
Shaping the debate on China’s urbanization KPMG’s perspective and context
In the news on urbanization & infrastructure
January 24, 2014
David Frey, KPMG China Head of Strategy & Operations Consulting CCTV, following a speech at The People’s Hall on “The Social Impact of China’s New Urbanization”
Given the recent slowdown and fears over repercussions from infrastructure-induced government debt, managing that kind of economic redirection may seem tricky. But then again, so does doubling the country's length of high-speed rail between 2011 and 2015 -- and that goal is on track so far. Says Stephen Ip, KPMG China's lead Partner for Government and Infrastructure: “A lot of things happen in China that you don't think could.”
China’s urban future: Financing a new eraof urbanization
Principal Authors:
David FreyPartner, Head of Strategy &OperationsConsultingKPMG ChinaEmail: david.frey@kpmg.comTel: +86 10 8508 7039
According to China’s National New-TypeUrbanization Plan (2014-2020), released in March 2014, approximately RMB42 trillion(USD6.75 trillion) will be required to finance China’s urbanizationefforts over the next seven years.1 China’s Premier, Li Keqiang,acknowledged that “the scale of China’s urbanization isunprecedented throughout human history”, and this New-TypeUrbanization would unleash enormous consumption demand torestructure the economy and increase national development.2
The methods China employs to financeurbanization in apotentially transformative era will be critically important for centralgovernment policymakers to ensure sustainablegrowth andeconomic stability. Through a recent series of reforms,China’spolicy planners have demonstrated that they are facing toughissues by adopting critical measures in forwardthinking ways.Asa result, dramatic opportunities now exist to transform themethods by which China allocates and deploys capital toincrease economic efficiency.
This article focuses and expands on the diverse elementsunderlying future financing mechanisms to support a new era ofurbanization in China, including:
“China needs to learn more about the world, and the world also needs to know more about China.”- Xi Jinping, President of China, speech at the Chinese and foreign
reporters’ conference of the new Central Politburo Standing Committee ofthe Communist Party of China, November, 15, 2012
Richard DawsonPartner, Head of Asia Pacific Debt AdvisoryKPMG ChinaEmail: richard.dawson@kpmg.comTel: +852 2140 2392
Simon GleavePartner, Head of Asia Pacific Financial ServicesKPMG ChinaEmail: simon.gleave@kpmg.comTel: +86 10 8508 7007
Published May 21, 2014
62 pilots Li Keqiang recently announced 62 pilot areas
for China’s new-type urbanization
Key purposes of the pilots: 1. Develop an urbanization cost-sharing mechanism between
corporations and central, provincial, and municipal levels of government
2. Set up a more diversified urbanization financing regime to rebalance the reliance on land sales
3. Improve the “City setup” model to lower the administrative costs of upgrading “counties” to “cities”
4. Address Hukou challenges for the newly urbanizing agrarian population
Recent significant developments in China’s urbanization initiatives 62 pilot locations for the New-Type Urbanization Plan
THE RISE OF THE AEC | SILK ROAD ASSOCIATES | 20
>70 cities Chinese cities and counties recently dropped
GDP as primary KPI
What removing GDP as the primary goal means: 1. Significant step away from “growth at all costs”, and a
refocusing on quality of growth and poverty reduction 2. Use of newly developing sustainability KPIs for government
officials
Recent significant developments in China’s urbanization initiatives >70 cities announce shift focus from GDP to quality growth
“We can no longer simply use GDP growth rates to decide who the (party) heroes are” -- President Xi Jinping
What does it all mean? Emerging opportunities for MNCs
Finance Minister Lou Jiwei officially addressed the further development of Public Private Partnerships in the
National Fiscal Conference in December 2013
Sectors experiencing significant transformation from New Type Urbanization policy development
Education 3
1 Greentech (new energy, advanced building materials, etc.)
Financial services & public finance
5
4 Infrastructure & project finance – public private partnerships (PPP)
2 Health care
6 Logistics
…..as well as those sectors benefitting more generally from rising consumption and creation of services industries
Central Government Positioning – Gaining Prominence, Recognition, and Enhancing the Strategic Value Proposition 1
Understanding Urban Demand Shifts – targeting emerging population centers of the future with data driven approaches
2
Logistics and Supply Chain: Developing the future operating model in a China shifting inland 3
Industry Cluster Investment Planning: Understanding government industry plans and aligning corporate strategies to future government direction
4 Health Care, New Energy and Sustainability: Positioning new technologies and knowhow into China’s transforming value chains (both for new entrants and new innovations from long-established operators)
5
How is KPMG helping clients to gain strategic traction in an urbanizing China?
Some examples of current work with and around MNCs in China:
© 2014 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong. The KPMG name, logo and ‘cutting through complexity’ are registered trademarks or trademarks of KPMG International Cooperative (KPMG International).
David Frey +86 (10) 8508 7039 David.Frey@kpmg.com
China Business Environment: Moderating optimism due to increased
competition and persistent policy challenges
John Lenhart The US-China Business Council
November, 2014
Today’s Agenda
• Challenges and Opportunities: USCBC 2014
Business Climate Survey
• Key Issues: Anti-corruption campaign Competition policy enforcement US-China relations
• Open Discussion – Q&A
25
Market Performance and Outlook
USCBC 2014 China Business Environment Surve
26
Five-year outlook for business in China shows clear trend of moderating;
10% per year shift over past 3 years
27
57% 58% 48%
39% 31%
37% 33% 42%
49% 54%
4% 8% 6% 7% 14%
2% 1% 4% 3%
1% 2%
2010 2011 2012 2013 2014
Pessimistic Somewhat pessimistic Neutral Somewhat optimistic Optimistic
USCBC 2014 China Business Environment Surve
China remains prominent in overall company strategy
28
18% 23% 22%
15% 22%
74% 71% 72%
81%
71%
6% 4% 5% 3% 7%
2% 2% 1% 1% 0%
2010 2011 2012 2013 2014
Top priority Among top five priorities One of many non-key priorities Not a priority
USCBC 2014 China Business Environment Sur
Are your China operations profitable? Overwhelmingly, companies still say YES
29
87% 85% 89% 91%
83%
13% 15% 11% 9%
17%
2010 2011 2012 2013 2014
Yes
No
USCBC 2014 China Business Environment Surve
But profitability compared to previous years is trending down
30
58% 62%
55%
30%
44%
28% 28%
35%
49%
29%
14% 10% 10%
21%
27%
2010 2011 2012 2013 2014
Increased
Remained essentially unchanged
USCBC 2014 China Business Environment Surve
As is profit margin rate of China-based operations compared to overall operations
31
USCBC 2014 China Business Environment Surve
68%
60%
45%
31%
42%
20% 19%
30% 30% 27%
12%
20% 25%
39%
31%
2010 2011 2012 2013 2014
Better Same Worse
Company resource commitment in next year is not shrinking, but less companies are accelerating their investments
32
USCBC 2014 China Business Environment Survey
66%
73% 67%
52% 50%
34%
26% 31%
41%
48%
0% 1% 2% 7%
2%
2010 2011 2012 2013 2014
Will accelerate
Will remain unchanged
Will be curtailed
Primary Restraint on Increased Profitability in China
33
6%
1%
8%
8%
21%
26%
31% Competition
from domestic competitors
Rising costs
PRC government policy/regulation
Competition
from international competitors
Insufficient
managerial or other personnel
Insufficient
capacity to meet
USCB 2014 China Business Environment Survey
Top Challenges Faced in China Market
USCB 2014 China Business Environment Survey
34
Top 10 Challenges
1. Competition with Chinese companies in China
2. IPR Enforcement
3. Foreign investment restrictions
4. [Tie] Human resources: Talent recruitment and retention
4. [Tie] Cost increases
6. Uneven enforcement/implementation of Chinese laws
7. Licensing
8. Transparency
9. Nondiscrimination/national treatment
10. Overcapacity in China market
35
USCBC 2014 China Business Environment Survey
Overlapping concerns with rising competition and protectionism run throughout Top 10
1. Competition with Chinese companies in China
2. IPR Enforcement
3. Foreign investment restrictions
4. [Tie] Human resources: Talent recruitment and retention
4. [Tie] Cost increases
6. Uneven enforcement/implementation of Chinese laws
7. Licensing
8. Transparency
9. Nondiscrimination/national treatment
10. Overcapacity in China market
36
USCB 2014 China Business Environment Survey
Who are your competitors in China?
37
USCBC 2014 China Business Environment Survey
91%
79%
61%
US and other foreign companies
Chinese non-state-owned and private companies
Chinese state-owned enterprises (SOEs)
Competition with Chinese Companies
Are non-SOE Chinese competitors receiving the same benefits?
Yes 14%
Suspect but not certain
67%
No 19%
38
USCBC 2014 China Business Environment Survey
Signs of Protectionism in China
39
Multiple responses allowed
13%
2%
21%
26%
26%
36%
39%
42%
46%
54%
56% Discriminatory enforcement
Licensing
Standards setting
Government pressure to favor Chinese firms
Subsidies
Government procurement/buy
local
Chinese media investigations
M&A Approvals
Adjudication in commercial courts
Other
USCB 2014 China Business Environment Survey
40
USCB 2014 China Business Environment Survey
Intellectual property protection continues to be priority concern
1. Competition with Chinese companies in China
2. IPR Enforcement
3. Foreign investment restrictions
4. [Tie] Human resources: Talent recruitment and retention
4. [Tie] Cost increases
6. Uneven enforcement/implementation of Chinese laws
7. Licensing
8. Transparency
9. Nondiscrimination/national treatment
10. Overcapacity in China market
Not concern
ed 9%
Somewhat
concerned
43%
Very concern
ed 48%
Intellectual Property Rights Protection
Level of Concern about IPR Enforcement
IP Infringement of Greatest Concern
Trade Secrets
33%
Trademark
28%
Patent 27%
Copyright 7%
Other 6%
41
USCB 2014 China Business Environment Survey
Over the past year, China’s protection of IPR has…
42
0%
37%
59%
3% 1%
3%
53%
43%
1% 0% 3%
48%
44%
4%
0% 1%
41%
54%
4%
0% 2%
37%
57%
4%
0%
Greatly improved
Somewhat improved
Remained unchanged
Somewhat deteriorated
Greatly deteriorated
2010 2011 2012 2013
USCBC 2014 China Business Environment Survey
Impact of China’s IPR Enforcement on Types of Activities Companies Undertake in China
43
Multiple responses ll d
48%
38% 37%
30%
23%
Limits R&D activities in China
Limits products co-manufactured or licensed
in China
No impact
USCBC 2014 China Business Environment Survey
Rising costs continue to put pressure on company margins
1. Competition with Chinese companies in China
2. IPR Enforcement
3. Foreign investment restrictions
4. [Tie] Human resources: Talent recruitment and retention
4. [Tie] Cost increases
6. Uneven enforcement/implementation of Chinese laws
7. Licensing
8. Transparency
9. Nondiscrimination/national treatment
10. Overcapacity in China market
46
USCBC 2014 China Business Environment Survey
Are rising costs a concern for your company operations n China?
45
Yes 90%
No 10%
USCBC 2014 China Business Environment Survey
Top Cost Concerns
46
Multiple responses allowed
USCBC 2014 China Business Environment Survey
1%
15%
26%
26%
30%
30%
32%
33%
Other
Payroll taxes/social insurance for expats
General inflation outlook
Rising tax burden
Land purchase or rental costs
Rising costs of product/operational compliance
Rising costs of materials
Rising costs of energy and utilities
Human resources costs 94%
Wage Increases in the Past Year
47
1%
7%
57%
29%
7% 6%
12%
61%
18%
3% 7%
16%
63%
13%
1%
Did not raise wages
Less than 5 percent
Between 5-10 percent
Between 10-15 percent
Over 15 percent
2012 2013 2014
USCBC 2014 China Business Environment Survey
At what level was turnover most acute?
48
1%
36%
31%
16% 16%
1%
39%
32%
19%
9%
2%
42%
25%
17%
14%
Senior management White collar entry level staff Entry-level factory operator/technician
2012 2013
USCBC 2014 China Business Environment Survey
Thank you !
The US-China Business Council
John Lenhart, Chief Representative, Beijing Email: jlenhart@uschina.org.cn
Focus Issues in 2014: Anti-corruption campaign
Enforcement of Competition Law US-China relations
• Top-down campaign to tackle corruption and bribery at all levels Aimed at improving
operating systems for the Communist Party
Accompanying measures reduce travel, limit extravagance, restrict power
• “Tigers” and “Flies”: investigations active from working level to highest levels
• Watch for 4th Plenum developments on “rule of law”
Source: http://views.ce.cn/view/ent/201401/16/t20140116_2141078.shtml
Anti-corruption campaign
51
Corruption
Source: http://www.economist.com/news/china/21595029-communist-partys-anti-graft-campaign-has-had-surprising-impact-new-report-shows-how; http://www.bbc.com/news/blogs-china-blog-26864134; http://www.businessinsider.com/chinas-corruption-crackdown-impacts-fai-2014-6
Retired and active officials, ranging from the highest levels of the central government to local cadres have all been
investigated:
Corruption
• Change in official behavior • Reduced luxury spending • Slowdown in economic activity • Systemic impact remains unclear…
• 182,000 officials disciplined in 2013 • Nearly 50 high-level officials have come under investigation
this year • 31 senior SOE executives in sectors including oil and
telecom
52
Impact
Key Drivers • Expanding domestic
regulatory capacity – shift from regulation via “approvals” to regulation via “supervision”
• Chinese citizen and company concerns – maintenance of affordable prices
• Industry and policy-related drivers – some cases appear to be motivated by concerns beyond fair competition
Key Characteristics
• Investigations tend to focus on consumer-facing sectors; not focused solely on foreign companies
• Key company concerns: Lengthy review times for
acquisitions Calculation methods for
pricing and merger conditions
Participation of legal counsels and due process
Competition Enforcement Trends
• Companies seeking to understand more information – concerned with potential
• Preparing staff to interact with investigators maybe important in consumer driven sectors
• Media reports likel e aggerating the se erit of foreign firm 53
Implications
Competition Law Enforcement
Very concern
ed 25%
Somewhat
concerned
61%
Not concern
ed 14%
Concern about China’s Competition and Antitrust Legal and
Enforcement Environment
54
Most Significant Concern about Competition
and Antitrust Issues in China
Legal and
regulatory
framework
36%
Enforcement
56%
Other 8%
SCBC 2014 China Business Environment Survey
Competition Law Enforcement
Biggest Challenges in AML Enforcement
55
3%
20%
27%
33%
34%
54%
59%
64%
Other
Inability to have representation by legal counsel
AML provisions that limit common business practices
Insufficient capacity among enforcement agencies
Lack of due process in AML enforcement proceedings
Excessive focus on foreign companies
Lack of clarity on AML review key criteria and definitions
Lack of transparency in AML reviews
4 China Business Environment Survey; multiple responses allowed
Competition Law Enforcement
US-China Relations
56
Current relations marked by difficult balance between competition and cooperation
• “New Great Power Paradigm” – Highest levels recognize the importance of maintaining stable cooperative relations
• Political tensions remain, structural shifts changing – Traditional tensions are complicated by a structural shifts that make conflicts more consistent and complicated
• Cyber Security – Potential threat to stable commercial relationship
• Bilateral Investment Treaty (BIT) – Important opportunity for substantive progress in commercial relations
Bilateral Relations
USCBC analysis in our Reform Scorecard reveals few
concrete policies have been released that make significant progress on foreign company issues.
Reform progress?
57
Economic Reforms
2014 China Tax Updates
David Ling Partner in Charge, NCN Tax 2014.11
Economic Environment
60
Tax revenue (2013.1-9 vs. 2014.1-9)
Data source: Ministry of Finance website
Unit: CNY100million
0
5000
10000
15000
20000
25000
2014. 1-9 2013. 1-9
Domestic Value Added Tax (VAT)
Business Tax
Domestic Consumption Tax (CT)
Import VAT&CT Corporate Income Tax
Individual Income Tax
Others
61
Tax revenue vs. tax inspection revenue for 2008-2013
2008-2013 Tax revenue 2008-2013 Tax inspection revenue
Data source: Ministry of Finance website and tax news
Unit: CNY100million Unit: CNY100million
0
20000
40000
60000
80000
100000
120000
2008 2009 2010 2011 2012 2013 0
200
400
600
800
1000
1200
1400
2008 2009 2011 2012 2013
International Tax
Agenda
1) Developments in China’s tax treaty network
2) BEPS and the impact on China tax policy development
1) Developments in China’s tax treaty network
Belgium
France
Switzerland
Netherlands
2013.5 2013.9 2013.11 2013.12
PRC-Belgium DTA effective
from 29 Dec 2013
2014.3
Germany
2009.10 2011.6
U.K. PRC-UK DTA
effective from 13 Dec 2013
Belgium UK Netherlands Switzerland France Germany Russia
Date of signature 1 Oct 2009 27 Jun
2011 31 May 2013 25 Sept 2013 26 Nov 2013 28 Mar 2014 13 Oct 2014
Effective date 29 Dec 2013 13 Dec
2013 31 Aug 2014 15 Nov 2014 Not yet effective
Not yet effective
Not yet effective
Dividend 5% (direct shareholding >= 25%); otherwise 10%
Interest 10% 5%
Royalties 7% 6% / 10% 6% / 10% 9% 6%/10% 6%/10% 6%
Capital gains 0% (shareholding < 25% over 12-month period and non-land-rich); otherwise 10% 0%*
Subject to beneficial ownership test
Re-negotiated treaties with European countries
2014.11 2014.8
PRC-Netherlands DTA effective
from 31 Aug 2014
PRC-Switzerland DTA effective
from 15 Nov 2014
2014.10
Russia
* Note:the transferred company should be non-land-rich, otherwise 10%
Description/Income stream 1984 DTA New DTA (Applicable from 1st Jan 2014)
Active income
Construction PE 6 months 12 months
Services PE No provision 183 days
Technical fees Could be taxable in China at 7% on service income even though no PE in China
Deleted
Passive income
Dividends 10% 5% for shareholding of at least 25%
Interest 10% 10%
Royalties 10% / 7% 10% / 6%
Limitation of Benefits
No provision An LOB paragraph is added to the three passive income Articles
Capital gain
Property-rich companies
Taxable in China under domestic tax rules
Taxable if “50% value threshold” is exceeded
Non-property-rich companies
Taxable if at least 25% shares held over the latest 12 months
New UK-China Double Tax Agreement
2) BEPS and the impact on China tax policy development
What is the Base Erosion and Profit Shifting (BEPS) Action Plan? ■ Commissioned by G-20 and issued by OECD in
July 2013 − Clarification OECD Model Tax Treaty and OECD
TP Guidelines − Recommend changes in domestic rules and tax
treaties to align taxation of profits with economic activities/value creation
■ Purpose of BEPS Action Plan − Aims to create a single set of consensus-based
international tax rules to address BEPS, to protect tax bases while offering increased certainty and predictability to taxpayers
■ An aggressive timeline
OECD BEPS Action Plan Action Deadline
1 Addressing the tax challenges of the digital economy Sept ’14
2 Neutralise the effects of hybrid mismatch arrangements Sept ’14
3 Strengthen CFC rules Sept ’15
4 Limit base erosion via interest deductions/other financial payments Sept/Dec ’15
5 Counter harmful tax practices more effectively taking into account transparency and substance
Sept ‘14 & Sept/Dec ’15
6 Prevent treaty abuse Sept ’14
7 Prevent the artificial avoidance of PE status
8 Assure that TP outcomes are in line with value creation: intangibles
Sept ‘14 & Sept ’15
Action Deadline
9 Assure that TP outcomes are in line with value creation: risks/capital Sept ’15
10 Assure that TP outcomes are in line with value creation: other high-risk transactions
11 Establish methodologies to collect and analyse data on BEPS/actions to address it
Sept ’15
12 Require taxpayers to disclose their aggressive tax planning arrangements Sept ’15
13 Re-examine TP documentation Sept ’14
14 Make dispute resolution mechanisms more effective Sept ’15
15 Develop a multilateral instrument Sept ‘14 & Dec ‘15
Sept 2014 deliverables OECD released Discussion Drafts - 31 Oct & 3 Nov 2014
Sept ’15
Sept ’15
Cross border intra-group payments under scrutiny
-
Authorities targeting deductions for outbound services/royalties • OECD ‘substantial activities’ requirement leads to questions on “value add” • SAT Directive 146 (July 2014) requires scrutiny of service fees/royalty payments prior to
extensive audits
Greater information gathering of cross border payments
• Automatic information exchange platform, supported by China’s recent adherence to Multilateral Convention
• Inclusion of related party service fees, interest and royalties in Chinese version of CbC?
Sustainability of recharge, IP holding and shared service arrangements • MNE internal review needed, particularly for foreign IP holding companies in low tax
jurisdictions, with transferred patents and brand rights
Other implications of 2014 Deliverables More rigorous tax enforcement of outbound investment
• BEPS work intersects with increased Chinese focus on outbound investment • SAT Announcement 38 (July 2014) beefs up reporting on Chinese MNEs’ overseas CFCs
Prevention of “Double non-taxation” of offshore share transfers
• Circular 698 supported by BEPS concepts for indirect share transfers • “Double non-taxation” principle guides both reporting and capital gains tax enforcement
China tax authorities draw BEPS support for treaty abuse approach
• BEPS Action plan can be read in support of Chinese rules (e.g. Circular 601 on beneficial ownership)
• Large scale examination of dividend DTA WHT relief claims launched with Shui Zong Han [2014] No. 317 (August 2014)
China authorities’ international EoI commitments
■ Multilateral Convention on Mutual Administrative Assistance in Tax Matters on 27 August 2013 − China became the 56th signatory to this Multilateral Convention on 27 August 2013, allowing China to:-
o Exchange information with other signatories more readily/automatically o Co-operate with overseas countries in joint tax investigations o Seek foreign assistance in recovering delinquent taxes
■ China’s agreement with the US on FATCA, and “China FATCA” (Circular 642) − China has reached an “agreement in substance” for a Model 1 IGA with the US, effective 26 June 2014
■ 7th Meeting of the Global Forum on Transparency and Exchange of Information for Tax Purposes on 28-29 October 2014 − Commitments by majority of members to implement the new international standard on automatic
exchange of information (AEOI) − China and Hong Kong indicated willingness to undertake the first exchanges of information by 2018
Exchange of information (EoI) commitments for China
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David Ling Partner in Charge, Tax Northern China, KPMG +86 10 8508 7083 david.ling@kpmg.com
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David Frey Head of Inbound, KPMG China
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David Ling Partner, KPMG China
The image cannot be displayed. Your computer may not have enough memory to open th John Lenhart Director & Chief Representative, US-China Business Council
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Ben Simpfendorfer Managing Director, Silk Road Associates
Panel Discussion
Moderated by Anson Bailey The image cannot be displayed. Your computer may not have enough memory to open the image, or the image may have been corrupted. Restart your computer, and then open the file again. If the red x still appears, you may have to delete the image and then insert it again.
Principal, Business Development KPMG China
Bernie Stefan Vice President Strategy & Business Development Nestlé Great China Region
Thank You
China’s Business Environment & MNCs in China Making the Right Moves
Grand Hyatt Hotel , Beijing 26 November 2014
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