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7/31/2019 Doing Business in China - TIAG
1/37
Beijing Shanghai Shenzhen Guangzhou Tianjin Hong Kong Mongolia
London (Sales) Macau (Assoc)
WWW.LEHMANBROWN.COM
Doing business in China
Russell Brown FCMA
Managing Partner, LehmanBrown
International Accountants
http://www.lehmanbrown.com/http://www.lehmanbrown.com/7/31/2019 Doing Business in China - TIAG
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Beijing Shanghai Shenzhen Guangzhou Tianjin Hong Kong Mongolia
London (Sales) Macau (Assoc)
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Beijing Shanghai Shenzhen Guangzhou Tianjin Hong Kong Mongolia
London (Sales) Macau (Assoc)
China is a vast country, though its population is 1.3billion, each province is in a different stateof development. Therefore disposable income is different and consequently the market forproducts.
Taiwan is part of China, one country two systems.
Hong Kong and Macau are Special Administrative Regions (SARs).
Tibet is an Autonomous Region.
China has 29 provinces, special regions and municipal cities.
China has many different minorities, the largest being Han.
Geograhpical region of Peoples Republic of
China
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London (Sales) Macau (Assoc)
Know Your Government Agencies
NDRC-National Development and Reform Commission
CSRC-China Securities Regulatory Commission
MOFCOM-Ministry of Commerce
SAFE-State Administration of Foreign Exchange
SAIC-State Administration for Industry and Commerce (also known as AIC)
SASAC-State Asset Supervision and Administration Commission
SAT-State Administration of Taxation
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Beijing Shanghai Shenzhen Guangzhou Tianjin Hong Kong Mongolia
London (Sales) Macau (Assoc)
1. Types of legal entities and operations in China
2. Corporate considerations
3. Tax environment
4. Areas of risk doing business in China
5. The state of financial records
6. The Accounting system
7. Transfer pricing
8. Foreign currency repatriation
Contents
WWW.LEHMANBROWN.COM
http://www.lehmanbrown.com/http://www.lehmanbrown.com/7/31/2019 Doing Business in China - TIAG
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Beijing Shanghai Shenzhen Guangzhou Tianjin Hong Kong Mongolia
London (Sales) Macau (Assoc)
China Holding Company (CHC): Min. asset value US$30m within 2 years, total investment within 5 years
Can make strategic RMB investments into subsidiaries.
Can carry out HQ functions and oncharge to subsidiaries
If CHC has RHQ status, can provide leasing or financing on own account
Wholly Foreign Owned Enterprise (WFOE) or Foreign Invested Commercial Enterprise (FICE): 100% shares owned by foreign parties, offshore or holding companies. Different industries
have different registered capital (equity and investment requirements)
Equity Joint Venture (EJV):
E.g. 70% equity, 70% profit.
Cooperative Joint Venture (CJV):
E.g. 50% equity, 80% profit. Contract can include many things, therefore flexible.
Representative Office (RO):
Like an overseas branch, although not allowed to conduct business, only allowed to providesales, marketing and support services.
Types of legal entity available to foreign enterprises in China:
There are a number of different operating
structures in China, depending on business
strategy and capital
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London (Sales) Macau (Assoc)
Manufacturing Contract:
Can incorporate into contract conditions, e.g. quality checks, intellectual property.
Is registered under Chinese law and therefore enforceable.
Does not require any capital investment
Can have contract specify requirement for adhoc independent audit
Cooperation Agreement:
Establish cooperation with Chinese entity
Set up bank account under their name, with independent control by accounting firm
Does not require any capital investment, not tied to partner firm if things do not work out
An alternative to establishing own entity is to establish a relationship via contract
Contact manufacturing
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London (Sales) Macau (Assoc)
Industries are split into the following categories:
1) Prohibited this means no foreign investor allowed. E.g. Media, Oil and Gas field ownership. In suchindustries it is common for foreign investors to establish entities that can provide services to Chineseowners, or to have companies under nominee shareholding, or piggy back someone's license.
2) Restricted Joint Venture only. E.g. Recruitment (maximum foreign ownership is 49%). If a foreign firm
wishes to have 100% ownership and control then use of nominees.
3) Encouraged Can be WFOE or JV, and tax concessions can be obtained.
4) Conventional Can be WFOE or JV, but no or limited local tax concessions.
For tax concessions, an entity must be classified as a Foreign Invested Enterprise (FIE). To be classified as anFIE the foreign investment much be 25% or greater.
The are no laws in relation to nominees and use of, therefore though provided above, this actually just refers tosomeone or something owns shares on behalf of foreign investor and there being a contractualrelationship in place in this regards.
Industry segmentation
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London (Sales) Macau (Assoc)
Main Forms of Business Establishment
WhollyForeign Owned
Enterprises (WFOE)
Joint VenturesCompanies
Foreign InvestmentCompanies
Limited by Shares
Purchase of sharesin Chinese
Share Companies
Equity JVCompanies (EJV)
Contractual JVCompanies (CJV)
Market entry assupplier/contractor
RepresentativeOffice (RO)
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Beijing Shanghai Shenzhen Guangzhou Tianjin Hong Kong Mongolia
London (Sales) Macau (Assoc)
1. Types of legal entities and operations in China
2. Corporate considerations
3. Tax environment
4. Areas of risk doing business in China
5. The state of financial records
6. The Accounting system
7. Transfer pricing
8. Foreign currency repatriation
Contents
WWW.LEHMANBROWN.COM
http://www.lehmanbrown.com/http://www.lehmanbrown.com/7/31/2019 Doing Business in China - TIAG
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Beijing Shanghai Shenzhen Guangzhou Tianjin Hong Kong Mongolia
London (Sales) Macau (Assoc)
Regulations In House
Transfer Pricing - docs
Accounting Regulations
Taxation Regulations
Service Contracts - Offshore
FOREX Regulations
Transfer Pricing Reviews
Internal Control and Review
Taxation Reviews
Rules and Regulations
Accounting Policies
Choosing and maintaining the right structure involves.
???
Corporate considerations..
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Beijing Shanghai Shenzhen Guangzhou Tianjin Hong Kong Mongolia
London (Sales) Macau (Assoc)
Companies should review their operating
structure and strategies in light of the
industry regulations
Manufacturers:
Impact of reduced customs duty on imported raw material (sourcing opportunities)
Need to change holding company (WHT implications on dividends, interest etc)
Buying out Chinese partners in existing JVs
Traders:
Ability to set up 100% owned trading companies from Dec 2004
Lowering of equity thresholds from US$150k-US$200k to RMB500k
Can establish anywhere in the country, not just in a trade zone
Service Providers:
WFOE structures possible? Upgrading Rep Offices to WFOE?
Expansion of current approved business scope
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Beijing Shanghai Shenzhen Guangzhou Tianjin Hong Kong Mongolia
London (Sales) Macau (Assoc)
1. Types of legal entities and operations in China
2. Corporate considerations
3. Tax environment
4. WTO accession and tax concessions available
5. Areas of risk doing business in China
6. The state of financial records
7. The Accounting system
8. Transfer pricing
9. Foreign currency repatriation
Contents
WWW.LEHMANBROWN.COM
http://www.lehmanbrown.com/http://www.lehmanbrown.com/7/31/2019 Doing Business in China - TIAG
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Beijing Shanghai Shenzhen Guangzhou Tianjin Hong Kong Mongolia
London (Sales) Macau (Assoc)
China is a Civil Law country:
Rules are codified
Judges cannot set rules or principles
Lower courts not bound by higher court decisions
Taxation rules:
Set by State Administration of Taxation (SAT) power of a ministry
Governed by State Council (SC) which is under the National PeoplesCongress( NPC)
State Tax Bureau:
Responsible for collection of state tax
Local Tax Bureau
Responsible for collecting provincial tax
Reports to the SAT
The current tax system in China is regulated
by the SAT, but taxes are still collected at
both state and local levels
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Chinas tax system experiences great changes in 1994, governing at boosting the countrys economic
development and encouraging foreign investment.
Rapid economic development has created a necessity for the tax system to grow and adapt.
New laws are continually being implemented to replace outdated laws.
According to Commissioner of the State Administration of Taxation, one of the main tasks for the 11th
five-year plan is to carry out further and continued reform on the tax system.
Chinas accession to WTO required changes in areas such as import duties. These changes are driving
other changes in order to maintain revenue balance.
Improved collection and management systems are being implemented
Taxation and WTO accession
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Under WTO, import duties are declining, therefore revenue to be received.
The Government is therefore panicking a little as they need $$$s. Olympics, Beijing
infrastructure enhancement, country development etc.
New directive by Government to bureaus:
Continue to crack down on fraud, using police and justice departmentsfor assistance.
Clamp down on IIT avoidance (annual Eee filing now required).
Taxing branches at rate in location of operation (.e.g Shanghai 15%tax, but branch in Beijing 33% tax)
Two groups targeted:
1. Foreign companies
2. Wealthy Chinese individuals and expatriates
Tightening of tax collection and crackdown
on fraud
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Tax exemption/reduction
Production-oriented - exempt from corporate income tax for 2 years and 3 years at 50% tax rate,
from time of cumulative profit.
Industry based incentives
Export-oriented enterprises - If the export value of an FIE is more than 70% of its output, a50% reduction is available in calculating the tax payable.
Encourage industries and Advanced technology enterprises taxed at the rate of 15%.
Geographical based incentives
Special Economic Zones (SEZs) - All FIEs in SEZs should pay tax at the rate of 15%.
Coastal Open Economic Zones (COEZs) - FIEs established in the COEZs may pay tax atthe rate of 24%.
Tax concessions provided to foreign
companies (up to 31st December 2007)
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The new regulation has been approved, the interpretation for implementation is currentlytaking place, and is still to be finalised.
Current country wide tax (excluding economic zones is 33%. This will reduce to 25%.
Some special zones will remain at 15%.
Some industries will remain at 15%.
Tax holidays will be grandfathered for a period of time.
New tax holidays will be granted to encouraged industries, with a catelog of theseupdated annually.
Taxation from 1st January 2008
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Beijing Shanghai Shenzhen Guangzhou Tianjin Hong Kong Mongolia London (Sales) Macau (Assoc)
1. Types of legal entities and operations in China
2. Corporate considerations
3. Tax environment
4. Areas of risk doing business in China
5. The state of financial records
6. The Accounting system
7. Transfer pricing
8. Foreign currency repatriation
Contents
WWW.LEHMANBROWN.COM
http://www.lehmanbrown.com/http://www.lehmanbrown.com/7/31/2019 Doing Business in China - TIAG
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Beijing Shanghai Shenzhen Guangzhou Tianjin Hong Kong Mongolia London (Sales) Macau (Assoc)
Keys areas:
- Market Risk Competition, innovations, price
- Human Risk Stealing, fraud, unions
- Economic Risk Government Policy changes, economics, investigations
- Management Risk Incompetence, nepotism and influences.
- Business Risk Internal controls, suppliers, logistics.
- Legal Risk Ownership, scope of business, asset ownership, IP.
Each businesss risk can be broken down into the above areas
Areas of risk for investors in China
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Political instability
Currency risk
Cultural barriers
Constitutional Documents,Government Approvals andOperating Licenses
Company Structure 2 to 4 sets of Accounting
books
Source: LehmanBrown
Risks and barriers of market-entry
in China (in % of high risk)
2325
10 10
18
7
15
32
0
5
10
15
20
25
30
35
Language
Culture
Market Know-how
Politicalinstability
Currency
Tax Exposure
Off-Book
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Reasons behind the business fraud environment in the PRC:
Corporate Governance is often poor
Lack of internal controls
The Chinese legal system has significant grey areas which can be exploited
China currently has large amounts of speculative capital flowing around the country,
particularly related to booming property investment
The get rich quick attitude has emerged with booming economic growth
Low salary earned by employees. I disserve a better treatment. Steeling from a
company is not like steeling an individual. Companies have money!
Language barrier big problem for foreign enterprises. Very often the CFO or the
auditor must rely on the translation of the person who does the fraud.
Respect of the authority level, NEVER challenge the boss about what hes doing
Business Fraud
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Beijing Shanghai Shenzhen Guangzhou Tianjin Hong Kong Mongolia London (Sales) Macau (Assoc)
1. Types of legal entities and operations in China
2. Corporate considerations
3. Tax environment
4. Areas of risk doing business in China
5. The state of financial records
6. The Accounting system
7. Transfer pricing
8. Foreign currency repatriation
Contents
WWW.LEHMANBROWN.COM
http://www.lehmanbrown.com/http://www.lehmanbrown.com/7/31/2019 Doing Business in China - TIAG
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Beijing Shanghai Shenzhen Guangzhou Tianjin Hong Kong Mongolia London (Sales) Macau (Assoc)
Typical reviews of companies involve financial due diligence.
Weaknesses in developing economy:
- There are usually more than one set of books.
- Financial information does not take into account accuracy of future
projections.
- Non-financial information is just as important, such as competency of
management.
Investors should perform business due diligence addressing all areas
of risk as well as financial (audit)
Business Due Diligence
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State Owned Enterprises require audit:
- Usually report cannot be trusted.
- Focus areas of due diligence are related party transactions.
- Purchaser should consider asset purchase with selective employee transfer
Domestic Companies normally do not require auditing, unless they are loss making or listed:
- Financials prepared for Taxation Bureau and Annual Inspection
- Domestic company accounting rules and tax rules different, forcing two sets of books
- Therefore, reconstruction of books needs before due diligence
- Purchaser could consider purchase of company
- Post purchase, need immediate internal and financial controls
Poor transparency and unreliable
financial information
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Beijing Shanghai Shenzhen Guangzhou Tianjin Hong Kong Mongolia London (Sales) Macau (Assoc)
1. Types of legal entities and operations in China
2. Corporate considerations
3. Tax environment
4. Areas of risk doing business in China
5. The state of financial records
6. The Accounting system
7. Transfer pricing
8. Foreign currency repatriation
Contents
WWW.LEHMANBROWN.COM
http://www.lehmanbrown.com/http://www.lehmanbrown.com/7/31/2019 Doing Business in China - TIAG
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StandardsConcepts
Definitions
Presentation
Transparency
Comprehensive
Reporting FrameworkNew Accounting System
Prudence
Consistency
Completeness
The New System defines certain accounting fundamentals such as consistency, timeliness,understandability, accrual basis, matching, materiality etc.
China moving towards adopting International Standards for accounting and reporting.
Has 39 new regulations effect from 2007, bringing in line with HK GAAP (basically IFRS)
The Chinese accounting system is
also going through huge ideological
changes at the moment
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Quarterly for profit and loss, balance sheet and cashflow to Tax
Bureau.
Monthly to Ministry of Statistics in some locations and for some industries.
Annual Audit accounts to be registered with:
- Tax bureau
- Administration of Industry and Commerce (for biz license renew)
- Ministry of Commerce
It is not possible to obtain a copy of filed reports from Government
Statutory filing in China for foreign
companies
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Beijing Shanghai Shenzhen Guangzhou Tianjin Hong Kong Mongolia London (Sales) Macau (Assoc)
1. Types of legal entities and operations in China
2. Corporate considerations
3. Tax environment
4. Areas of risk doing business in China
5. The state of financial records
6. The Accounting system
7. Transfer pricing
8. Foreign currency repatriation
Contents
WWW.LEHMANBROWN.COM
http://www.lehmanbrown.com/http://www.lehmanbrown.com/7/31/2019 Doing Business in China - TIAG
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Beijing Shanghai Shenzhen Guangzhou Tianjin Hong Kong Mongolia London (Sales) Macau (Assoc)
Why engage in Transfer Pricing in China?
Profit Repatriation
Ipso Facto sale of goods
Allocation of corporate costs
Group Profits
Tax Efficiencies
Transfer Pricing Business
Sense
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Beijing Shanghai Shenzhen Guangzhou Tianjin Hong Kong Mongolia London (Sales) Macau (Assoc)
Regular Transfer Pricing Reviews
Tax authority has the right to make reasonable adjustments to the pricing of any transactions deemed not
to be conducted at arms length
Transfer pricing review will be targeting companies with:
Continuing losses (greater than 2 years)
Marginal profits or losses with expanded operations
Erratic Profits
Lower than average profit margins
Payment of unreasonable fees
Sudden drop in profits after tax holiday
Circular 49 Companies with interco transactions greater than US$12k in a year
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Sales of products
Consulting agreements
Purchase of rawmaterials
Services providedoffshore on behalf
of onshore
Intellectual propertySubsidiary to holding
company
Transfer Pricing
Purchase of products
Royalties agreements
Services provided
onshore on behalfof offshore
Types of Transfer Pricing Arrangements
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Beijing Shanghai Shenzhen Guangzhou Tianjin Hong Kong Mongolia London (Sales) Macau (Assoc)
1. Types of legal entities and operations in China
2. Corporate considerations
3. Tax environment
4. Areas of risk doing business in China
5. The state of financial records
6. The Accounting system
7. Transfer pricing
8. Foreign currency repatriation
Contents
WWW.LEHMANBROWN.COM
http://www.lehmanbrown.com/http://www.lehmanbrown.com/7/31/2019 Doing Business in China - TIAG
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Beijing Shanghai Shenzhen Guangzhou Tianjin Hong Kong Mongolia London (Sales) Macau (Assoc)
Foreign Exchange (Forex) is strictly regulated in China by SAFE regulations.
Transactions up to US$200k without prior approval from SAFE okay, and below US$50k without tax
bureau approval at time of payment (need to obtain later)
Foreign companies can transfer out for product purchase and services, just need the correct paperwork
It is easier than before to get money out of country
For companies not in China but needing to receive revenue in RMB, can use escrow services.
Escrow provider will arrange transfer less applicable taxes.
Foreign Exchange Repatriation
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Beijing Shanghai Shenzhen Guangzhou Tianjin Hong Kong Mongolia London (Sales) Macau (Assoc)
Russell Brown FCMA
Beijing
Tel: +86 10 8532 1720Fax: +86 10 6532 3270
Harby Janagol FCMA
London
Tel: 020 8755 5829
Fax: 0871 221 6102
WWW.LEHMANBROWN.COM
Any questions?
7/31/2019 Doing Business in China - TIAG
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Beijing Shanghai Shenzhen Guangzhou Tianjin Hong Kong Mongolia
Russell Brown /
Dickson Leung
BeijingTel: +86 10 8532 1720
Fax: +86 10 6532 3270
James Chang /
Borys Priadko
Shanghai
Tel: +86 21 6288 1635
Fax: + 86 21 6288 1636
WWW.LEHMANBROWN.COM
Any questions?