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Top 10 rules for Doing Business In China Top 10 rules for Doing Business In ChinaComments Off

Doing business in China for Western firms is still hard in 2015.

 

Difference of Education

This is a primary function of Western business education in China today as much as, or even more, strictly business. I wonder if Western management in China really think one of his main tasks is education. If it does not, it should – because for a Western organization, doing business in China requires that he spend a lot of time educating and developing local talent to work in sophisticated Western business processes – and it requires that Western managers and workers allow themselves to be educated in the flexibility of the Chinese market

A general impression now is that Western governments – for example, the US and European governments – focus on short-term issues: basically ‘fight against fires and of lurching from crisis to crisis with little or no clearly discernible and coherent long-term strategy for how to do, much less resolve, the various crises. Examples include the unrest in the Middle East and North Africa, the tide of refugees arriving in Europe, and the threat of global climate change.

Beware of Chinese companies dynamics

A common cause of losses in China is that foreign companies are so focused on market growth rates that they neglect the basics of competitive analysis. In the beer industry, for example, more than 20 foreign brewers recorded in the mid-1990s, each plan to capture an average of 15 percent of their market segment. In a market lacking clear differentiation, they also found themselves competing with nearly 600 local brewers, many of them subsidized by local governments. Some of these issues should disappear over time, but almost twenty years later, the fundamental situation has changed little. Many industries in China resemble the wine industry, overcapacity, high levels of fragmentation, subsidized local competition, and foreigners are willing to absorb the losses of their “strategic” investments. Learn Chinese is a very good way to understand the way Chinese Things and react explain the founder of Taylor Made School a Chinese training center based in Beijing and Shanghai.

 

Time has different value in China

Many companies want to get on the ground quickly. In one case, the Director General told his head of strategy for operations in China will within six months. Time pressure like this can create problems later. It tends to result in sloppy planning and analysis. It shifts attention to finding the right partner to find any partner, regardless of adjustment partner. It also weakens your hand in the negotiations. Your Chinese counterpart will be how to use your time constraints against you, and you walk away with a worse deal.

The Chinese government, on the other hand, left the impression that he has a vision very long term, for example, by creating the infrastructure of the Asian Investment Bank (AIIb), take action to calm Volatile stock markets, which begin to fight against pollution, health and food security, and so on. While the asymmetry between Chinese and Western governments – short-term and long-western Chinese term - is obvious, directions of activity seem to be the opposite.

In a series of interviews I conducted, Western leaders indicated that while their companies are looking to make long term investment decisions in China, their experience of their Chinese counterparts are executives and employees looking to make a ” making quick death” source Forbes

Chinese executives also identified the following strengths of the Western business: management, technology, clarity and stability of its processes, a history of technical innovation, standardization systems, R & D, global reach, and strong brands. They also highlighted the following weaknesses: lack of flexibility, high costs, slow decision making, slow responsiveness, rigidity, low business efficiency (as opposed to, it would seem, effective production process) shows a lack of flexible ways and innovative operating

However, Chinese leaders have also identified the following strengths of the Chinese company: flexibility, market knowledge, large market, low costs, aggression, large (and flexible) market Labour (practical and tactical) the business innovation (though not necessarily product innovation), fast, increasingly, a human touch, efficiency, and a general attitude of being willing to learn . The weaknesses of Chinese companies, as Chinese managers see them, include mismanagement, poor technology, short-term vision, poor governance, ineffective systems, a lack of professionalism, poor R&D, a lack of standardization , low brand recognition, and poor quality.

 

Interpersonal relationship called guanxi !

A common safeguard against opportunism is to build trust with the people who matter to your business. Unlike the West, the creation of personal friendship is a prerequisite to do business. Friendship building takes time, which is another reason to avoid rushing into things. Besides numerous invitations to sporting and other events, a key element of trust is long dinners during which all but business is discussed. In these, alcohol plays an important role. Learn to drink intelligently. Experienced negotiators have alcohol in their glasses of water or wet towels in most good restaurants make available.

 

Chinese negotiatons are long !

Chinese negotiators sometimes grow beyond what their Western counterparts consider appropriate limits. For example, representatives of a large Western company negotiated the distribution rights for one of their products. Their Chinese counterparts have closed their initial height by threatening to use their political connections to prevent the distribution of their products if they do not get the rights. In another case, China has drunk their Western customers to prevent them from being effective in negotiating the next morning (which the Chinese side, involved a completely different set of people).

Be alert and prepare appropriate measures against. For example, the negotiating teams must learn to drink without getting drunk, include women (because they are not supposed to get drunk), and know that excessive drinking can be delegated to a member of the team.

 

Understand Chinese society (hierarchical)

The decisions of the Company are generally achieved so top-down, with only the top of the pyramid involved in decision making. Distrust puts limits on the delegation, and at each level surveillance monitoring is high. Middle managers generally have little power to make decisions accordingly, and their main role is to transmit orders from the top and ensuring compliance.

Long term Business

The overall results give a picture of a Western long-term and short-term orientation Chinese to do business in China, with the strengths and weaknesses of Western and Chinese organizations somehow complementary. Even when the two Chinese companies from the West and are considered a force in “innovation”, the nature of this “innovation” is different – Innovation West is considered and technical innovation China is thought to be about adapting flexibly to commercial and conditions.That market is an important consideration which may be underestimated. Everyone believes that their main task is to do business and earn money, but the nature of what they actually do is somewhat different. It seems to me that if the Chinese education system inculcates the qualities basic obedience and discipline in his students and when students enter the work force, practical necessities requires significant ‘on the job training “to adapt the most sophisticated technical processes and management procedures needed in today’s economy. So Western organizations have come to serve as a kind of “graduate school” to develop the knowledge and skills of managers and Chinese workers

 

Be Flexible and Agressive

While most Western organizations familiar to those who responded to the survey were multinationals of some sort (hence the perception of sophisticated large companies oriented technology ) Chinese organizations come in all sizes and shapes. They ranged from large state enterprises, heaviness, to smaller, high-technology start-ups more agile (hence the perception of poor governance and management, but also flexibility, aggressiveness, and low cost-).

 

Western Companies need to invest on their Brand

One has the impression that the image of our Chinese leaders of Western companies is something of an aircraft carrier – a large vessel sophisticated technologically innovative, flexible operating processes and systems and extensive global reach – all led by experienced management with a long-term vision. This is a “strategic” image of Western business. Perhaps unsurprisingly, the weaknesses are inversely proportional to the forces – a large aircraft carrier is difficult to maneuver in tactical situations and not to change rapidly adapt and respond to other types of tasks. So things are moving too slowly – decision making, response time, and the pace of tactical innovation – and are too rigid. So with a technical platform very sophisticated, we are stuck with a rigid structure that seems to take some time to adapt. source

 

 

Operating Overseas Operating Overseas(0)

[ By Hank Bourg and Peter O?Neil, Dezan Shira & Associates ]

The 1988 Trade Act by the United States Congress directed the U.S. Attorney General to provide guidance to potential exporters and small business regarding the Foreign Corrupt Practices Act of 1977, an act all U.S. businesses operating in China need to be familiar with.

The FCPA prohibits the ?corrupt? payment of money or bribes to foreign officials for the purpose of keeping or maintaining business. The FCPA also links in with several other U.S. acts, providing for federal prosecution of violations of state commercial bribery statutes. The FCPA requires U.S. listed companies to meet their accounting provisions, which are designed to operate in parallel with the anti-bribery provisions of the FCPA and require corporations to make and keep books and records that accurately and fairly reflect the transactions of the corporation and to devise and maintain an adequate system of internal accounting controls.

The basic requirements of the FCPA are fairly straightforward. Rather, it is the cultural traditions and the common business practices that lend a layer of complexity to enforcement of the FCPA with respect to business done in the People?s Republic of China. While some business practices may be considered entirely acceptable, or even expected, in the course of doing business in China, these practices can often be a violation of the FCPA and are subject to steep fines and jail time in the United States. Companies subject to the FCPA may find themselves faced with making the decision between losing business and violating the FCPA. Violators face the prospect of criminal sanctions, civil sanctions, and injunctions. Criminal sanctions against corporations and other entities can exceed fines of one million dollars. Sanctions against individuals may reach five years in prison and fines of one hundred thousand dollar.

American companies hoping to retain business in China, as well as American companies with the desire to enter the market, face an imperfect and dubious business environment with respect to the FCPA. However, with meticulous planning, careful oversight, and the proper tools violations of the FCPA can be avoided. The mounting prominence of China?s position in the world markets is undeniable. Certainly the benefits of investment in China far outweigh the risks presented by the FCPA, so long as the proper precautions are taken. With an annual growth in the GDP of 9 percent for the last 26 years and an increasingly attractive environment for foreign directinvestment, foreign companies cannot afford to ignore the opportunities for investment. However, companies subject to the FCPA must be aware of several particular risks that are posed by doing business in China.

A potential violation of the FCPA would include the following elements:

  • An act by an individual, corporation, or other business ?covered? by the FCPA
  • An offer to give something of ?value?
  • To a ?foreign official?
  • With ?corrupt? intent
  • To ?obtain or retain business?

Read more :
China and Europe


To know more, the whole issue is available (after a free subscription) on China Briefing website with others archives
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

Zhejiang, university students openning online shops can be clearly identified as business starting Zhejiang, university students openning online shops can be clearly identified as business starting(0)

Once identified as starting own businesses, in addition to equal treatment in employment the college graduates can enjoy, they can also enjoy the preferential policies for starting businesses.

According to provisions of the Education Office of Zhejiang Province, college graduates who declare their own businesses should subject to the following conditions: must be a registered by college graduates; to engage in e-commerce (Shop) operating in more than three months; average revenue reach local minimum wage standards; in e-commerce (Shop) running course, credit points reach 1000, and positive rates (the number of transactions received percentage) are more than 98%.

Education Department of Zhejiang Province said that the introduction of the employment policy first is to show that the education sector recognizes college graduates openning online shops to achieve employment. More importantly, all over Zhejiang, as well as all colleges and universities have a number of incentives to award businesses. After online shops openning is classified into business starting, the graduates will be able to enjoy this part of funds support.

Preparing for declaration of dividends in China Preparing for declaration of dividends in China(0)

Your decision here will depend upon instructions from your parent company overseas, however there are a number of tax-related factors to bear in mind. This article first introduces the procedure that must be followed when declaring dividends and the extra steps necessary if funds are to be reinvested. It also covers the incentives available to investors either re-investing funds into their existing Chinese entity or another operation in the country.

Repatriation of profits from China is of course preferable if your organisation requires the funds for re-investment abroad, or to return to the shareholders.

The process for declaring dividends and repatriating funds

  1. First of all the amount of funds available must be confirmed. The fourth quarter?s Foreign Enterprise Income Tax filing for 2006 will need to be made in the first two weeks of January 2007 (China having a calendar fiscal year), and after this an annual audit must be carried out. (explained elsewhere in this month?s China Briefing). The annual clearance process reflects the results of the audit on the accounts, and this is submitted to SAT for approval.
  2. Assuming there are no problems with the submitted documents, SAT will issue a tax receipt confirming the final amount of FEIT payable.
  3. With this figure defined, the profits tax payment for 2006 can be completed and the net profit figure derived.
  4. Not all profit can be repatriated or reinvested. A portion of the profit (which must be at least 10% for WFOEs) must be placed in a fund reserve account. This is treated as part of owner?s equity on the balance sheet. This account is capped when the amount of reserves equals 50% of the registered capital of the company. In addition the investor may choose to allocate some of the remainder to a staff bonus/welfare fund or a development fund, although these are not mandatory for Wholly Foreign Owned Enterprises.
  5. The remaining balance is available for redistribution. Firstly, a resolution of the Board of Directors to authorise such redistribution must be signed by each director, and translated into Chinese.
  6. Then an application form supported by the following documents (all in Chinese) must be submitted to SAT :

    • annual audit
    • capital verification report
    • annual clearance report
    • quarterly FEIT filings
    • tax receipts proving FEIT payments have been made in full
    • bank and general details of the Chinese entity and entities receiving funds
  7. SAT will review all these documents to check that everything is legitimate and issue an Evidence of FEIT Payment certificate.
  8. This certificate authorises the bank to disperse funds as detailed on the certificate.

Some of these documents need to be provided by your licensed CPA firm in China (such as the capital verification report) and as the documentation can be awkward to manage for businesses overseas it is usually part of the role of the company’s accountants to assist with the repatriation process and ensure transparency at all stages in the transaction. There have been cases of company employees arranging to have profits distributed elsewhere and then disappearing.

To know more, the whole issue is available (after a free subscription) on China Briefing website with others archives
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

Annual licensing & renewals in China Annual licensing & renewals in China(0)

Luckily, the authorities do try to make it is easy as possible for you ? you can either submit your details via the internet, or by going to an office where officials from a total of seven different agencies come together temporarily for this process.

These seven agencies are (almost) the same as the ones to which you have to submit your audited accounts :

  • the Bureau of Foreign Trade and Economic Co-operation (BOFTEC)
  • the Administration of Industry and Commerce (AIC)
  • the Economic Committee
  • the Financial Bureau
  • the State Administration of Taxation (SAT)
  • the State Administration of Foreign Exchange (SAFE).
  • China Customs

The procedure for the annual co-operative examination for FIEs is as described below

Next :
Preparing for declaration of dividends in China


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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

Representative Office annual audits Representative Office annual audits(0)

The information below is limited to RO who are expenses-based taxpayers (the major category for ROs).

  • cash ? are your bank statement and bank reconciliation correct ?
  • foreign currency issues – is the transaction rate entered correctly ?
  • fixed assets purchasing ? has it been recorded into expenses ? If not, has it been approved by the tax authority ?
  • fixed asset disposal gain/loss ? is it recorded into expenses ?
  • funds from the parent company – are these consistent with the parent company?s records ?
  • interest income/expenses – have they been identified in the expenses report correctly ?
  • expatriate Individual Income Tax ¨C for high level management, such as the Chief Representative, has the IIT calculation and pertinent rate been correctly assessed ?
  • audit fees – have the audit fees been accrued and separately entered ? Are they listed in the expenses report ?
  • rental expenses – have the rental expenses been accrued and separately entered ? Are they listed in the expenses report ?
  • employer contributions to overseas social security plans – If employees are involved in overseas social security plans, has this payment has been included into the expenses report ?
  • expenses paid on behalf of the head office – the local tax bureau may require such expenses to be recorded into the expenses report.
  • BT and FEIT payments – these tax payments should be excluded from expenses report.
  • stamp duty – is the RO subject to stamp duty ?
  • unofficial Invoices (fapiao) – has the RO received unofficial invoices (non VAT) as part of its expenses ? If so this can be subject to tax penalties.
  • business licenses and related administrative matters – the annual renewal of all of your licenses such as registration certificate, tax licenses and so on (see also separate article in this issue)
  • local employees registered with FESCO and valid work permits for expatriate staff – has all this been completed in accordance with the pertinent regulations ?

Next :
Annual licensing & renewals in China


To know more, the whole issue is available (after a free subscription) on China Briefing website with others archives
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

Audit items often queried by Chinese independent auditors Audit items often queried by Chinese independent auditors(0)

Adjustments for foreign related payment income
If the foreign company has paid any overseas insurance for their expat employees, it should be noted that this is not tax deductible unless it is recorded as a salary payment and with IIT paid. Foreign sourced income should be provided for by providing evidence of foreign taxes paid with the relevant foreign documentation. Otherwise, foreign taxes may be accrued by the FIE.

Related party transactions
If your FIE had any transactions with related parties, you must make sure that these were at arm?s length and with adequate documentation to substantiate the charges/income, so that the results were not materially affected by related party transactions that were not in the ordinary course of business. Pay particular attention to transfer pricing issues. Tax officials reserve the right to adjust transfer prices, interest charged by related parties based on market prices or even based on prescribed profit margin.

Withholding obligations
If the FIE made or accrued in its costs or expenses any payments, such as rental (including office and expat housing), royalty charges, interest, services or management fees for services performed in China by foreigners (individuals or organisations), pursuant to related contracts and agreement, the relevant withholding obligation should be provided for on an accrual basis. This means 10% withholding enterprise income tax and 5% business tax apply (the tax rate might be different according to each individual case). All the charges shall be accompanied by substantial evidence, otherwise they are not deductible. All the above debts in foreign currency also need to be registered with the SAFE prior to approval for remittance.

  • Input VAT
    The VAT invoices must be verified by the tax bureau within 90 days of the invoicing date, otherwise they cannot be deducted. Furthermore, if you have any unusual loss of inventory, then the VAT input related to the inventory previously credited has to be reversed in the period when the loss is recognised.

    Export VAT
    For FIEs, export VAT refunds for the year should be reconciled with the tax bureaus within three months of the end of the year. FIEs should register all export receivables for the previous year with the bureau. Failure to do so may result in the export sales being deemed domestic transactions (subject to output VAT) if the payment for export sales is not received and related documents are not presented within the deadline.

    Stamp Duty
    Although not a material issue with much cost, FIEs should not forget to pay stamp duty on all books, records and applicable contracts. Fines for non-compliance outweigh the dutiable value.

    Next :
    Representative Office annual audits


    To know more, the whole issue is available (after a free subscription) on China Briefing website with others archives
    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

  • Audit requirements in China Audit requirements in China(0)

    China uses a calendar fiscal year to impose statutory audits, so those for 2006 are nearly due and must be filed by April 2007 at the latest. So you have about three months to get everything prepared, organized, audited and presented to the government – the clock is ticking !

    These statements will be used for calculating the FIE?s taxable and distributable profit. Thus, an annual audit by a firm of Certified Public Accountants registered in the PRC is required under Chinese law.

    FOREIGN INVESTED ENTERPRISE ANNUAL AUDIT REQUIREMENTS 2007

    AUDIT REQUIREMENTS FOR WHOLLY FOREIGN OWNED ENTERPRISES, FOREIGN INVESTED COMMERCIAL ENTERPRISES AND JOINT VENTURES IN CHINA

    [ By Edward Ma, Manager, Dezan Shira & Associates Beijing office ]

    Broadly, the audit system for foreign businesses in China operates as described below, apart from some minor regional differences in audit practice for WFOEs and Joint Ventures that we will identify.

    National Audit Principles
    In China, the following audit requirements exist :

    • submission of the Audited Financial Report
    • the Foreign Exchange Audit Report
    • the Annual Report

    These need to be prepared and submitted to seven different government departments, namely the Bureau of Foreign Trade and Economic Co-operation (BOFTEC), the Financial Bureau, Customs & Excise, the State Administration of Taxation, the local tax bureau, the Administration of Industry and Commerce (AIC), and the State Administration of Foreign Exchange (SAFE).

    FIEs may also need to submit to both the national tax bureau and local tax bureau the Annual Taxation Consolidation Reporting Package, authorised by a CPA firm by the end of April 2007. In this reporting package, a CPA firm shall verify all the taxes including VAT, Business Tax, Consumption Tax, Foreign Enterprise Income Tax (FEIT), and other taxes on the basis of the audit result.

    The FEIT is obviously the most important issue to be disclosed in this report. The related taxable elements, and in particular items involved in FEIT such as income, cost and expenses, are specified in detail, while the auditing firm shall make the FEIT reconciliation between financial profit and taxable profit in accordance with PRC FEIT regulations.

    If the audited taxes are different from the taxes paid by the FIE, the FIE shall discuss the variation with the tax bureau. For example, should the audited tax figure be lower than the figure paid, the FIE will need to apply for a tax rebate or tax reduction for the fiscal year in question. Accordingly; should the audited tax figure be higher than the paid FEIT, once the FIE submits the report, it would have to pay the balance due to the tax bureau. Your auditors should be competent to handle such rebate issues.

    Additionally, there are some regional reporting variations.

    FIEs in Shenzhen
    Shenzhen FIEs are exempted from the requirement of providing an additional Annual Tax Final Declaration Report authorised by a local CPA firm to tax bureaus, although authorities in other Pearl River Delta cities do require it.

    And similar to the situation in Shanghai, FIEs in Shenzhen need to complete the annual audit and obtain two auditor reports, a general one and one addressing foreign currency issues. Only after the local CPA firm has performed the audit for your FIE can you submit the documents to the seven government authorities. All submissions should be completed before the end of May 2007.

    Furthermore, as part of year end closing formalities, FIEs also need to complete the final EIT declaration and final VAT ?exemption, reduction, refund? declaration in order to satisfy the tax bureau?s requirements.

    Next :
    Audit items often queried by Chinese independent auditors


    To know more, the whole issue is available (after a free subscription) on China Briefing website with others archives
    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

    So what then of Central China ? So what then of Central China ?(0)

    Thus far, there are no regionally specific investment incentives available to foreign investors in Central China that are not already generally available on a national basis. Although it may be possible to negotiate preferential treatments for larger investments, Central China as yet does not offer any specific tax breaks for investors to assist with the absorption of the higher costs of transportation in the region. The authorities are however considering what additional incentives might be offered in the future.

    BASIC ANALYSIS

    Obviously there is a lot of difference between types of international investor, and this piece is non-specific. For retail operations such as Wal-Mart and so on, the region, with its massive population, is going to be (and already is) a fertile playing ground. International commodities manufacturers such as Mittal Steel, ensuring its dominance over global steel supply, have made a strategic investment in the region of one of China’s largest steel manufacturers. In time, businesses supplying such industries may begin to enter the central China market. Yet for export-based businesses, central China, with its burden of increased transportation costs, still seems like a bridge too far until competition, a breaking of existing monopolies, and an increase in transportation infrastructure can start to bring those costs down. This would appear to be a longer goal target. Of the cities and regions to note, two strike us as being worth further investigation :

    Hefei (Anhui Province), and its proximity to the regional powerhouse of Shanghai may be worth looking into as a manufacturing area if those logistics costs can be brought under control, and Wuhan, with its river infrastructure. But for now, with no discernable benefits available for investing in the region, China’s desire to move investors out of the coastal cities and inland will have to wait a little while longer and move beyond a pure marketing campaign into something more financially viable.
    To know more, the whole issue is available (after a free subscription) on China Briefing website with others archives
    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

    How This Impacts In Operational Costs For An Average Small Foreign Investor How This Impacts In Operational Costs For An Average Small Foreign Investor(0)

    The remaining 30% is often somewhat industry-specific and we leave this portion open for your specific analysis. Operational overheads such as utilities also vary, however not to a huge extent between first and second tier cities, accordingly we have disregarded them from this survey. However, concentrating on the two most significant manufacturing overheads ? albeit as a mean average, does allow us to fix at least a line in the sand to try and weigh up the pros and cons of investing in Central China. Averages are just that ? and it must be pointed out that in reality you can expect about a 30% swing in costs either way depending upon location, specific investment circumstances and the power of negotiation.

    To get at what this could mean for an investor, we?ve assumed an average small scale foreign invested enterprise as an example, and for the sake of calculating a reasonable export amount, suggested an auto component manufacturer as this industry is relatively commonplace and is China wide. We have assumed a factory unit size of 2,500 sq meters and 100 staff to base our cost analysis on. A factory like that with such a product could typically export about 10 containers a week. Taking the figures we have thus far, and converting them to USD for ease, (rate of 8 RMB to 1 USD) we can reach the following assumptions :

    Next :
    So what then of Central China ?


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