Regional issues operating in China

Transcription

1 Regional issues operating in China March 2016 Duncan Levesley China Britain Services Group

2 What are we talking about today? Why China? What are the challenges? Cultural considerations Routes to market Commercial strategy Entities Tax Finance and funding About Grant Thornton In China: 23 offices and 3000 people In the UK: 25 offices and 4500 people Globally: 38,000 people in 100 countries China Britain Services Group experienced multidisciplinary team in the UK, Hong Kong and mainland China

3 Why China? Fastest growing major economy for 30 years The world s largest goods exporter and second largest goods importer. Already the world's largest economy by some measures Sovereign Wealth Fund $1.5 trillion of assets Europe has 35 cities with over a million population - How many does China have? More cement was used in China than in the USA in the whole 20 th century World's most outbound tourists, and the highest spending at US$450billion Higher Education More graduates every year than anywhere else 36 million students studying at almost 3000 colleges and universities The largest source of international students More undergraduates now come to the UK from China than from Europe.

4 China's economy crisis? Stock market Back where it was last year and still well above 5 year average 6-7% growth expected this year Down from double digit growth, but due to the increase in absolute size of the economy, but even 5% growth is the equivalent of 14% growth in 2007

5 Plan for the challenges you may face Some of the common challenges that companies face in China:

6 Planning for language and cultural issues Mandarin, Cantonese Traditional, Simplified Using Interpreters Pronunciation Employ a Chinese Speaker? Marketing Materials Localisation Symbolism Translating Contracts Tailor for the local market products and approach Negotiation Face Highlight track record Subtext, the audience Don t rush, return visits Manners: respect, reputation and hierarchy Praise, recognition of importance The right people, toasting, seating Relationships guanxi Contracts

7 Putting plans into action Your strategy and objectives Operations, tax & supply chain Financing

8 Your strategy and objectives - typical models for HE institutions Student recruitment Distance learning Franchising Consulting and course content Dual awards and double degrees Campus Joint research R&D centres

9 Your strategy and objectives - choice of entity 1. Direct sales 2. Rep office 3. Equity JV UK UK UK China Chinese HEI Rep Office China Shares JV China 4. Contractual / cooperative JV 5. WFOE UK Contract JV China China UK WFOE Chinese sub

10 Operations, tax & supply chain - operating without an entity Suitable for Distance learning Franchising and consulting If no permanent establishment Consider Withholding tax Indirect tax Payments SAFE, paperwork UK Chinese HEI Permanent Establishment risk A PE, ie a taxable presence, can be formed through: Fixed place of business offices at partner institution or recurring visits/events can constitute a physical presence Dependant agents agents concluding contracts or without significant other clients may not be considered 'independent' Having staff in country for a certain period of time furnishing services for over 183 days (cumulative) in 12 months However, activities that are preparatory or auxiliary in nature are exempt UK-China double tax treaty means profits are taxable to the extent the income is attributable to the PE. PE = corporate tax and individual income tax issues Once a PE is formed, an entity is often required to employ the staff. Analysis should be untaken based on the particular facts.

11 Operations, tax & supply chain - representative offices Suitable for Market research, liaison, manage relationships Testing the market Need local support to monitor partner / students Cheaper and quicker to set up Considerations Will you need to make sales? Will you make sales from the UK, if so will you have people in China fulfilling them? Taxed despite not carrying on commercial activities deemed profit margin UK Rep Office China

12 Operations, tax & supply chain - joint ventures Equity or contractual JV UK China JV China Suitable for Restricted sectors Where PE threshold breached Campus R&D centres Joint research centres New institutions Considerations Equity: Profits shared according to equity Contractual: Profits shared according to specifications in a contract Capital contributions Inheriting staff liabilities Value of intangible contributions Cash extraction Planning for divorce

13 Operations, tax & supply chain - wholly foreign owned enterprise UK WFOE Suitable for 183 days physical presence R&D centres Non-restricted consultancy services Executive training Circumvent Chinese partner Considerations Regulatory limitations Keep full control of the entity independence But lose local knowhow Control dividends, inter-co transactions Costly to set up and run Time to establish entity Need good employees Minimum registered capital requirements Changing business scope

14 Operations, tax & supply chain - holding companies Key Benefits Withholding tax rates UK Hong Kong or UK WFOE/JV Source taxation debt Capital gains benefits Asia hub Facilitate reinvestment of Chinese earnings into non-china projects Flexibility Substance UK as an alternative

15 Operations, tax & supply chain - implementation and an overview of the tax system Implementation Not always uniform Can vary from place to place - even within cities Can be different for different companies Advice and local help What taxes should you be thinking about? Corporation tax - charged on profits Withholding taxes - charged on cross border payments Indirect taxes - charged on sales includes VAT and customs duties Individual taxes Employees may be subject to overseas taxes as well as UK taxes Miscellaneous local taxes

16 Operations, tax & supply chain - overview of the tax system Corporate income tax Corporate income tax rate of 25% Not for profit = extremely difficult for overseas institutions If JV is NFP check what income is not taxed and whether repatriation will lead to taxes Tax incentives Withholding taxes and double tax treaties- dividends, interest and royalties Transfer pricing

17 Operations, tax & supply chain - overview of the tax system Individual income tax Progressive rates range from 3% to 45%, so can be higher or lower than the UK depending on pay band Staff sent to China may be liable for Chinese individual income tax if: The individual has stayed in China for more than 183 days in any consecutive 12 months. Or, The individual s employment remuneration is paid or borne by a Chinese entity. Or, The individual s employment remuneration is borne by a PE in China. Consider the interaction with UK pay Social security rules and implementation

18 Operations, tax & supply chain - overview of the tax system Indirect taxes VAT Goods 17% Services - 6% R&D and education services - 6% or 0% Business tax 5% or 3% Customs duties Flat rate VAT at 3% for small-scale taxpayer (< RMB5m turnover pa) lose input tax credit

19 Financing - Cash in, choice of capital Red Equity Minimum capital requirements designated by MOFCOM Time limits apply to injection Difficult to extract Amber Debt Restricted up to US$3m: 30% of total investment $3-10m: Higher of 50% or $2.1m $10-30m: Higher of 60% or $5m More than $30m: 67% or $12m Easier to inject and extract Green Supply chain Manage working capital Less restrictions Beware BT and WHT

20 Financing - Cash out, extracting cash through your supply chain Extract cash from NFP entity Manage effective tax rate How? UK China Royalties Technical services IT support Financial & legal Debt NOT 'management services' Scrutiny & evidence Fee Service JV China

21 Financing - Key barriers in repatriation process MofCom approval Tax Bureau approval SAFE approval Contract registration Contract execution Tax filings Obtain tax clearance certificate Settle Forex payment Documentation required for the Forex remittance Application forms Agreements Invoice or debit note Tax clearance certificate Other documents required by the banks

22 Summary Understand the challenges Set your strategy Assess your routes to market Understand Tax Implications Cash in & out Implementation Let me know if you need assistance Duncan Levesley