By Dezan Shira & Associates
Editor: Mia Yiqiao Jing
The finalization of value-added tax (VAT) reform on May 1, 2016 was China’s biggest tax overhaul within the last 20 years. Changes include the tax rate on business activities conducted by representative offices (ROs) in China, which has been reduced from five percent to three percent. The reduced tax liability on ROs may cause foreign investors to completely restructure their business practices to capitalize on the benefits of the reform. Currently, there is no written regulation on the applicable tax rates or tax payment methods for ROs. Taxpayers must contact the tax bureau in charge prior to filing taxes. In this article, we provide a brief introduction to China’s taxation rules on ROs, and look at the potential impact of the VAT reform on ROs’ tax structure.
By Alexander Chipman Koty
In March this year, China and Israel officially launched discussions for a long-rumored free trade agreement (FTA), reflecting the budding rapport between the two nations. As China and Israel become progressively more politically isolated due to their assertive geopolitical policies, the two controversial states are growing their economic and political ties closer together. Israel’s traditional economic and political partners in the U.S. and Western Europe are becoming increasingly critical of their longtime Middle Eastern ally, while China’s aggressions in the South China Sea are unnerving Pacific countries wary of the Middle Kingdom’s rise.
In light of these political realities, China and Israel are finding each other to be convenient collaborators as they seek to diversify their economic dependence and profit from each other’s comparative advantages. Israel, with its small population of about eight and a half million and world class high-tech capabilities, and China, with its immense population, manufacturing prowess, and huge capital waiting to be spent, are naturally complementary economies. Despite presenting rapidly expanding bilateral trade and investment opportunities, however, sometimes divergent political interests and persistent concerns over IP protection prevent the countries from fully embracing their burgeoning friendship.
China’s Plastics Industry Hits Slowdown
China’s plastics industry has experienced a bout of slower growth, with investment into plastics machinery dropping by six percent last year, the biggest fall since the global economic recession. Despite this, the plastics industry remains a key driving force of the global industry, and by other methods of measurement, the industry is still growing. 2015 saw a 10 percent rise in demand for plastics, a figure that is 1.5 times more than GDP growth. This demand largely originates from the manufacture of cars, mobile telephones and food packaging, industries that have been requiring increasingly more plastic. China exports three times more plastics than it imports, and exports continues to grow, driven by low production costs. Commodities such as daily use products, plastic sheeting, construction materials and packaging comprises the major categories of those exports.
By Dezan Shira & Associates
Editor: Mia Yiqiao Jing
China’s recently released law to regulate the activities of foreign non-governmental organizations (NGOs) has raised fresh doubts regarding foreign investment into China’s higher education industry. Set to come into effect in January next year, the law contains provisions that will further regulate education institutions with operations in the country and affect the entry strategy of new players looking to enter the market.
Powered by China’s economic development and a rapid increase in university student enrollment, there has been a sharp rise in interest from foreign education providers to invest in China since the turn of the century. The industry is potentially hugely profitable, with China’s increasingly affluent population willing to pay more in tuition fees to enroll at foreign education institutions, which are generally seen as more prestigious. However, Sino-foreign education institutions have long been subject to special scrutiny in China, resulting in 70 percent of Sino-foreign education applications being rejected in 2011. The new law is set to further complicate the industry for foreign education providers, raising questions of how best foreign investment can be channeled.
The Sino-foreign Education Industry
As of March 9, 2015, there were 60 Sino-foreign institutions and 1, 052 projects active in China’s higher education industry, with a total of 30 countries contributing to foreign education resources in the market. According to the Ministry of Education (MOE), the UK is the biggest source of foreign education investment, with 233 joint programs with Chinese universities, while the U.S. takes second place with 169 programs. Approximately 94.5 percent of foreign investors chose to form education projects in Chinese universities, within which computer science, accounting, and global economics are the three most popular undergraduate programs. Provinces with a high GDP per capita, such as Beijing, Shanghai, Zhejiang and Jiangsu province, rank highest for the number of Sino-foreign education programs.
RELATED: Business Advisory Services from Dezan Shira & Associates
Current Regulations on Foreign Investment
There are currently three ways to enter the Chinese higher education industry: an independent institution in cooperation with a Chinese university, a college affiliated to a Chinese university, or a joint education program. Upon establishment, both the foreign and Chinese parties must submit several different kinds of official documents, including identification, criminal records, and sources of funding.
According to the Regulations on Foreign-Chinese Cooperation in Running Schools, the president or principal administrator must be a Chinese national, who will decide and manage the board of trustees, implement financial budgets and activities, and take charge of quality control. The MOE oversees any changes made by the joint institution, and any imported teaching materials must be scrutinized and receive government approval.
The NGO Management Law and Sino-foreign Education Industry
While Sino-foreign education institutions are not the direct target of China’s new NGO Management Law, the law contains provisions that will further restrict their involvement in educational exchange in China.
According to the new management law, the entry of for-profit foreign schools will be strictly prohibited. Due to the vague definition of “non-governmental” and “non-profit” foreign NGOs, there is also a risk that the marketing and funding activities of not-for-profit education providers will also be impacted, as the law requires all financial documents remain available to the State Council.
The law states that in addition to receiving supervision from local authorities, foreign NGOs will also be reviewed by the Public Security Bureau. This will extend to foreign education providers, with activities such as registration, licensing, recruitment, operations, and education programs disclosed to the State Council.
Complying with the NGO Management Law
Because the NGO Management law doesn’t clearly indicate which practices are considered “for profit”, foreign investors should communicate with the MOE to ensure that their planned education programs and events don’t fall foul of regulations. It is also recommended that foreign investors regularly communicate with local governments in order to understand their area-specific development strategies, targets, and how education programs can boost local economic development, which will help alleviate any scrutiny.
Historically, most Sino-foreign universities have been subsidized by local governments. For example, the Ningbo government provided RMB 1.5 billion for the founding of The University of Nottingham Ningbo China, and the Pudong government gave away land for the building of NYU Shanghai. Mutual understanding is therefore key between foreign investors and local governments to reduce expenditure on the initial investment, and this will be especially true when the NGO Management Law comes into effect
Prospect for the Future
In line with China’s 2010-2020 Innovation Society Plan, Sino-foreign education will continue to be seen as a means to boost China’s knowledge economy.
Traditionally, Sino-foreign universities have targeted China’s more affluent coastal cities. However, the Chinese government is now putting more emphasis on providing high-quality education services to children living in rural areas, or to migrant families who have comparably lower household income. In addition, the MOE is giving more support to local governments from middle and Western China in education development, with plans in place for them to make up 44 percent of the total number of Sino-foreign programs. This initiative gives foreign investors more opportunities in a less saturated market.
With China targeting 20 percent of its energy mix to be clean before 2030, the Chinese government is also working to promote expertise in atmospheric science, disaster management, ecology and environmental engineering. Joint education programs targeting these subjects are therefore expected to have a promising future in the country’s higher education industry.
While the NGO Management Law stands to further impede foreign investment into China’s higher education market, the Chinese Sino-foreign education industry is still expected to expand overall. In order to ensure that their investment is worthwhile, foreign education providers will have to look closely at a number of influencing factors, including the location of their institution or program, the subjects that it teaches, and the setup and structure of their partner.
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 email@example.com or visit www.dezshira.com.
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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.
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Establishing & Operating a Business in China 2016, produced in collaboration with the experts at Dezan Shira & Associates, explores the establishment procedures and related considerations of the Representative Office (RO), and two types of Limited Liability Companies: the Wholly Foreign-owned Enterprise (WFOE) and the Sino-foreign Joint Venture (JV). The guide also includes issues specific to Hong Kong and Singapore holding companies, and details how foreign investors can close a foreign-invested enterprise smoothly in China.
Tax, Accounting, and Audit in China 2016
This edition of Tax, Accounting, and Audit in China, updated for 2016, offers a comprehensive overview of the major taxes that 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-based operations.
Editor: Jake Liddle
As summer approaches, a notice detailing temperature standards in Shanghai workplaces and the proper payment of the high temperature allowance has been released. Effective from June 1, 2016, the notice stipulates that between the months of June and September, Shanghai companies with outdoor labor must take effective measures to maintain a workplace temperature of below 33℃. Employers who fail to keep suitable temperatures are legally obliged to pay a monthly high temperature allowance of RMB 200 to employees, which must be included in the sum of the total salary. In addition, while paying the allowance, companies are still required to provide employees with cool beverages.
28 regions of China have implemented measures for the summer high temperature allowance, with only the more temperate provinces of Heilongjiang, Tibet and Qinghai not providing the allowance. Each region’s stipulations are different, with some calculating allowances per day and some per month. However, many laborers complain that they do not receive the allowance, despite the hot weather, which last summer reached temperatures as hot as 40C in some areas. Many companies are too concerned about costs, making them reluctant to pay out allowances, and in some cases exploit loopholes in order to avoid paying.
By Adam Livermore, Dezan Shira & Associates
Editors: Qian Zhou & Alexander Chipman Koty
Not so long ago, it was common for organizations in China to share input data for their monthly payroll with their payroll processing vendors across corporate email. It was also not unusual for those vendors to process their clients’ payroll using Excel sheets. Nowadays, the advent of secure FTP links to allow uploading and downloading of sensitive HR information has eliminated confidentiality concerns relating to data transmission. Payroll processing companies have also developed sophisticated systems to make payroll calculations and produce the reports their clients require, instead of fiddling with formulae in Excel. However, the gathering of input information has remained a significant challenge.
A good example of the complexity is the social insurance and housing fund systems in China. Contributions need to be made on behalf of every employee, but the administration of the systems is managed at city-level. Contribution percentages differ greatly between cities, and even within districts of the same city. The housing fund, in particular, presents a challenge. The entire amount of housing fund contribution from employers is considered tax-free when the salary of an employee is no more than 500 percent of the local average annual salary in some cities. In other cities, the tax-free housing fund contribution base is limited to 300 percent of the local average annual salary.