March: Operational Due Diligence: Kicking Your China Business’s Tires

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China Briefing is a monthly magazine and daily news service about doing business in China. We cover topics relating to the Chinese economy, the market in China, foreign direct investment and Chinese law and tax. It is written in-house by the foreign investment professionals at Dezan Shira & Associates

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Operational Due Diligence in China
Due diligence is perhaps one of the most important concepts that any investor in China needs to consider. Whether setting up for the first time, or taking a look at internal practices after years of doing business on the mainland, it is important to stay compliant with China's evolving regulations. This means making sure all documentation is current and accurate, all financials are properly reported and employee issue and other assets have been properly accounted for.
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Financial Due Diligence in China
Copies of filed accounts can be difficult to extract from the target business. This is largely due to the fact that many businesses in China operate two sets of books - one internal, which shows their true position, and one official, that shows their "official" position. This is, of course very illegal, but is a common practice as tax avoidance in China is rife due to the relatively high level of income tax (25 percent) companies in China have to pay. Well meaning staff, trying to save some money for the company, can inadvertently cause serious compliance and potential liability problems, either through naivety or deliberate actions.
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HR Due Diligence in China
For a company, adequately comprehending the HR environment, hiring appropriate people and managing them effectively is critical to maintaining a successful operation on the mainland. Unfortunately, mainly due to lack of reliable information in English (and the proliferation of unreliable information) as well as the rapidly changing nature of both the labor market, it is very difficult for foreign investors and managers to understand the overall situation in enough detail.
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Preparing Transfer Pricing Documentation
Beginning in 2008, the State Administration of Taxation in China introduced a mandatory requirement for taxpayers to prepare and retain detailed transfer pricing documentation to support the arm's length nature of their related party transactions.
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