Practical financial, tax and accounting issues affecting international SMEs during the early stages

[ By Echo Jia, Manager, and Alberto Vettoretti, Managing Partner, Dezan Shira & Associates ]

Foreign companies have long looked to China as a means of lowering manufacturing costs and gaining access to a large, developing market. Abundant natural resources, cheaper labor, big local markets and a developed supply chain base combined with local government incentives including tax breaks, special investment treatment and repatriation of profits have been attracting international small-medium sized enterprises (SMEs) to China since the early 80s. Investing halfway across the globe is not without its challenges though, and there are many problems and difficult issues a China ?first-timer? will encounter. For SMEs especially, understanding these problems and issues will be the difference between making and losing money on the mainland.

Recent economic factors affecting international SMEs

1. New policies announced by the Chinese government

Over the past year, the Chinese government has announced several new customs policies and taxation policies, including a new corporate income tax law that took effect on January 1, 2008 and a VAT rebate reduction on some 2,891 types of products in July, 2007. Regarding foreign direct investment, the aim of these measures is to encourage high, value-added foreign industries into China and move away from pollution-causing, low-tech manufacturing. In the future, the Chinese government will become increasingly selective of foreign investors. Local governments will welcome high-tech, high value-added, low-polluting, low-natural-resource-consuming foreign investors; and be more restrictive over low-value-added, low-tech, labor intensive and resource intensive industries. Furthermore, from 2008, foreign companies no longer receive preferential tax treatment, as they did under the old Foreign Enterprise Income Tax, unless they qualify as a high/new technology enterprise, in which case the company?s tax rate will be 15 percent.

2. Influence of RMB?s appreciation

From a global viewpoint, possible influences may be:

Asset value increase in China
Advantages for importation
Disadvantages for exportation
Cost increase on RMB loans
Conversion of earned profits from RMB into US$
Investment in China will now require more US$ injection
Labor cost in China may increase

Next :
Financial, tax and accounting issues

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For more information on China’s legal and tax issues or to ask for professional advices in related matters, please write to info@dezshira.com

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