By Emerging Strategy
2016 is set to be a challenging year for investors in China. The country’s economic growth slowed to 7.4 percent in 2015, causing it to miss its full-year economic growth target for the first time since 1998. The Chinese government is likely to further lower its 2016 growth target down to around 6.5 percent, as actual 2015 gross domestic product (GDP) growth looks set to come in at about 6.8 percent – still below the target of 7 percent.
China’s lower growth has become a top concern for foreign investors and the road ahead is filled with uncertainty. However, with the right market intelligence and an informed business strategy, the country’s economic downturn might create opportunities for companies that fully understand new market trends and, more importantly, their customer base.
By Dezan Shira & Associates
Editors: Nathan Wakelin-King and Qian Zhou
While China’s FTZs are regulated by many similar policies, important technical distinctions exist between the four zones. For example, corporate income tax (CIT) and individual income tax (IIT) is structured differently across the FTZs, and Shanghai and Tianjin treat cross border RMB cash pooling differently. Moreover, despite a widely liberalized system for foreign direct investment, there are certain restrictions and incentives across the four zones that investors should be aware of.
Reduced Market Access Restrictions on Foreign Investment
The Free Trade Zones use a “Negative List” for foreign investment that stipulates in which industries foreign companies cannot invest. For industries not included in the Negative List, foreign investment is no longer required to go through the “approval” process. Instead, a more efficient “filing” system is applied.
The Negative List was initially introduced in 2013 alongside the creation of the Shanghai FTZ and has since been updated twice, most recently in May 2015. Long and at times extremely specific, the Negative List may ostensibly give the impression that China’s FTZs are overly restrictive on foreign investment. However, while there are a number of areas that remain closed, many more have been opened up to FDI and provide attractive opportunities for investors.
By Allan Xu
Manager, Business Advisory Services
Dezan Shira & Associates, Shanghai
When it comes to hiring and firing in China, foreign managers and investors should not hold preconceived ideas about the strictness of China’s laws. Highly publicized cases of worker exploitation might give the impression that China unambiguously favor employers, but this is not so. In fact, China’s laws for firing employees are considerably more rigid than those in the U.S.
Firing senior managers is an especially complicated process in China that requires a thorough understanding of the country’s laws. Even before a decision to fire someone has been made, proactively preventing risks related to HR is important.
If an employer wishes to terminate a contract of a senior manager, there are a set of specified reasons for them to be able to. These include, but are not limited to:
China to Further Regulate the Publishing Industry
On January 28, the State Administration of Press, Publication, Radio, Film and TV issued the “Measures for the Administration of Press & Publication License,” which shall become effective as of March 1, 2016. The Measures clarified the procedures for designing, printing, issuance, renewal and the cancellation of the publication license. The state and provincial publication department should publicize the issuance or the revoking of the license via their official websites or an authorized newspaper. In the case where a company/individual needs to renew the license, the renewal should be finished within 30 days before the expiration date. Despite relaxations on foreign investment categories over the past years, publishing in China is an industry marked with restrictions and prohibitions for foreign investment. A more detailed introduction of China’s publishing industry can be found in our previous article here.
By Dezan Shira & Associates
Editor: Jake Liddle
China levies stamp duty (印花税) on legal documents as in many other countries. Rules and regulations regarding Stamp Duty are primarily stipulated in the State Council’s Provisional Rules of the People’s Republic of China on Stamp Duty (1988). However, many foreign investors are unfamiliar with China’s stamp duty, which can open them up to penalties due to neglect or late payments.
Although stamp duty is not a major tax for most taxpayers, compliance with China’s regulations should always be a key concern for foreign companies. Non-compliance or underpayment will result in a fine of up to 30 times tax payable. In order to avoid such a penalty, investors should take heed of the key rules as outlined in this article.
Stamp duty is a form of tax applied to certain written documents in China , or on licenses or certification granted by the administrative authority. The following categories of documents are subject to stamp duty:
- Documents issued for purchase and sale transactions, process contracting, property leasing, commodity transportation, storage and custody of goods, loans, property insurance, technology contracts and other documents of a contractual nature;
- Documents of transfer of property title;
- Business books of account;
- Documentation of rights or licenses;
- Other documents determined by the Ministry of Finance to be taxable.
The following documents are exempt from stamp duty:
- Duplicate copies or written copies of documents on which stamp duty has already been paid;
- Documentation in a case where a property owner donates property to the government, a social welfare unit or school;
- Other documents which the Ministry of Finance approves as being exempt from stamp duty.
If tax payable does not amount to more than RMB 0.1, it is also exempt from stamp duty. Where the tax payable exceeds RMB 0.1 and the second number after the decimal is less than five (e.g., the tax payable is RMB 0.13), the taxpayer may round the number to RMB 0.1. Conversely, if the second number after the decimal is greater than or equal to five (e.g., the tax payable is RMB 0.17), the taxpayer needs to round the number up and pay stamp duty based on the new value (e.g., RMB 0.17 rounded to RMB 0.2).
Tax payable is calculated in RMB. Therefore, where a payment indicated in taxable documents is presented as a foreign currency, it should be converted into RMB in accordance with the exchange rate provided by the People’s Bank of China on the signing date of the document. All signing parties associated with a contract are legally obliged to pay stamp duty. Where tax payable exceeds RMB 500, the taxpayer may use payment certificates after receiving authorization from the tax authority, or tax may be paid at a later date, within and not exceeding one month.
Taxpayers must calculate the amount of tax payable in accordance with the nature of the taxable documents, as calculations are either based on the proportional tax rate, or in accordance with the quota amount, as seen below:
Tax Payable = Amount of payment (or fees or revenue) indicated in taxable documents x Applicable rate
Tax Payable = Number of pieces of taxable documents X Amount of tax per unit
Determination of calculation should be informed by the following Stamp Duty tariff table which details the thirteen taxable items, their relevant tax rates, and the responsible taxpayer:
Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email firstname.lastname@example.org or visit www.dezshira.com.
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Tax, Accounting, and Audit in China 2015
This edition of Tax, Accounting, and Audit in China, updated for 2015, offers a comprehensive overview of the major taxes foreign investors are likely to encounter when establishing or operating a business in China, as well as other tax-relevant obligations. This concise, detailed, yet pragmatic guide is ideal for CFOs, compliance officers and heads of accounting who must navigate the complex tax and accounting landscape in China in order to effectively manage and strategically plan their China operations.
An Introduction to Doing Business in China 2015
Doing Business in China 2015 is designed to introduce the fundamentals of investing in China. Compiled by the professionals at Dezan Shira & Associates, this comprehensive guide is ideal not only for businesses looking to enter the Chinese market, but also for companies that already have a presence here and want to keep up-to-date with the most recent and relevant policy changes.
Annual Audit and Compliance in China 2016
In this issue of China Briefing, we provide a comprehensive analysis of the various annual compliance procedures that foreign invested enterprises in China will have to follow, including wholly-foreign owned enterprises, joint ventures, foreign-invested commercial enterprises, and representative offices. We include a step-by-step guide to these procedures, list out the annual compliance timeline, detail the latest changes to China’s standards, and finally explain why China’s audit should be started as early as possible.
By Thomas Zhang, IT Director, Dezan Shira & Associates
Editor: Samuel Wrest
Foreign companies operating in China will inevitably face challenges with internet connectivity. Over the past five years, the country’s government has been especially active in its control of the internet, with all Google products, various social media channels, and numerous other websites falling victim to its extensive censorship program. In addition, the Middle Kingdom has one of the worst average internet speeds in Asia, ranking 84th in Akamai’s 2015 State of the internet Report, and monitors access to all non-domestic websites. The impact that this has on foreign firms should not be underestimated. Here, we discuss some of the key challenges that foreign companies face.
Slow international internet speed
For Chinese citizens who access domestic websites and participate in China’s massive e-commerce market, the country’s internet can appear fantastic. Users can purchase a 100Mb optic fiber DSL internet line in their home, or can get 4G mobile network on their phone. This is in stark contrast to 10 years ago, when Chinese citizens could only use 2G mobile network and MMS was largely unaffordable.
That said, for foreign companies who need to access cloud computing networks or non-domestic websites, China’s internet has hardly changed — the speed is slow, connections are unstable and latency is high. Technically speaking, there is a very small network bandwidth between China and overseas countries, and links have a high packet lost rate. This is largely why Akamai, in their 2015 State of the internet Report, ranked China 84th in the world.
By Rainy Yao and Allan Xu
China is among the five least generous nations for paid annual leave entitled to employees. The amount of statutory annual leave is generally based on an employee’s work experience/tenure. Employers may extend paid annual leave as a benefit to their employees, but they need to specify the additional days in the labor contract. Here, we introduce China’s paid annual leave and rest day system, as well as the rules for carrying over untaken annual leave to the next year.
The below is a sample of Cascade Asia Advisor’s monthly report on light manufacturing across emerging Asia, available for purchase through the Asia Briefing bookstore. The report is a 4-5 page executive-ready assessment and outlook designed to help companies anticipate labor risks and dynamics across key manufacturing countries in Asia. Countries of coverage include Cambodia, China, Indonesia and Vietnam.
Though the official Chinese New Year (CNY) dates run from February 7-15, many workers will have already left for home with more to follow over the next few days. Office and sales staff will likely be off for about two weeks but other than that points of contact with the factories will be active in most cases. They will continue to take new orders however they will not hit the production line until workers return. Brands should be aware that workers do not typically return to work at the same time but do so in waves. The first wave will usually return after the Lantern festival (February 22) while the second wave will return around the first week of March.