Practical Issues in Entering the China Market and Sourcing From China September 29, 2010 Approved for 3.6 hours of Missouri CLE 8 - 8:30 Registration and Continental Breakfast Tab Speaker Biographies 1 8:30 - 9:15 Is a Long Distance Relationship Right for You? 2 Sourcing from and Exporting to China Linda Tiller, Partner, Husch Blackwell LLP Ms. Tiller will cover selected legal issues and provide practical advice related to sourcing from China, such as U.S. import laws, sourcing methods, contracting issues, quality control, and China- specific export controls. 9:15 - 10 Legal Issues Relating to Entering the China Market 3 Fang Shen, Associate, Husch Blackwell LLP Ms. Shen will discuss entering the China market through contractual arrangements, covering issues such as distributor arrangements, manufacturing and licensing agreements, compliance with local laws, foreign exchanges, payments, Incoterms, and the Foreign Corrupt Practices Act. 10 - 10:15 Break 10:15 - 11 Foreign Direct Investment in China 4 Lawrence Shu, Partner, Hylands Law Firm, Shanghai, China Mr. Shu will discuss the process of a foreign company establishing a business entity in China, covering issues such as common entity choices, joint ventures, registration procedure, key issues for a U.S. business to understand (concepts of registered capital, overall investment amount, etc.), and industry guidance. 11 - 11:45 What You Have to Know for Doing Business 5 in China Lidong Pan, Partner, Wang Jing & Co., Guangzhou, China Mr. Pan will cover areas such as labor contract law, IP protection, importation regulations affecting foreign companies, the new tax laws and how they work with the special economic zones, old tax holidays and other key issues. Visa Challenges for Chinese Business Visitors handout 6 About Husch Blackwell LLP 7
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Practical Issues in Entering the China Market and Sourcing From China
September 29, 2010 Approved for 3.6 hours of Missouri CLE
8 - 8:30 Registration and Continental Breakfast Tab
Speaker Biographies 1 8:30 - 9:15 Is a Long Distance Relationship Right for You? 2
Sourcing from and Exporting to China Linda Tiller, Partner, Husch Blackwell LLP
Ms. Tiller will cover selected legal issues and provide practical advice related to sourcing from China, such as U.S. import laws, sourcing methods, contracting issues, quality control, and China-specific export controls.
9:15 - 10 Legal Issues Relating to Entering the China Market 3
Fang Shen, Associate, Husch Blackwell LLP
Ms. Shen will discuss entering the China market through contractual arrangements, covering issues such as distributor arrangements, manufacturing and licensing agreements, compliance with local laws, foreign exchanges, payments, Incoterms, and the Foreign Corrupt Practices Act.
10 - 10:15 Break 10:15 - 11 Foreign Direct Investment in China 4
Lawrence Shu, Partner, Hylands Law Firm, Shanghai, China
Mr. Shu will discuss the process of a foreign company establishing a business entity in China, covering issues such as common entity choices, joint ventures, registration procedure, key issues for a U.S. business to understand (concepts of registered capital, overall investment amount, etc.), and industry guidance.
11 - 11:45 What You Have to Know for Doing Business 5
in China Lidong Pan, Partner, Wang Jing & Co., Guangzhou, China
Mr. Pan will cover areas such as labor contract law, IP protection, importation regulations affecting foreign companies, the new tax laws and how they work with the special economic zones, old tax holidays and other key issues.
Visa Challenges for Chinese Business Visitors handout 6
About Husch Blackwell LLP 7
PAN Lidong,
Partner, Attorney at Law in China and New York
Areas of practice: corporate law, cross-boarder investment, employment law, intellectual
property (trademark and copyright), insurance law, commercial litigation and arbitration,
disputes of cargo transportation, international trade and Customs law issues
– Importer of Record is responsible for proper tariff classification
– Importer must exercise “Reasonable Care” to properly classify imported products
Common Import Pitfalls
• Country of Origin– Every foreign good imported into the U.S. for consumption must be marked with the country of origin so that the ultimate purchaser knows where the product originated.
– For textiles, COO determined by tariff shift rules (similar to those in U.S. free trade agreements).
– For non-textiles, COO is the country in which the product was last “substantially transformed” into a new and different item.
– Imported goods that are not properly marked are subject to seizure or redelivery to Customs and Border Protection (CBP), plus the costs of marking under CBP supervision, plus a marking penalty of 10% of the entered value of the goods.
4
Common Import Pitfalls
• “Assists”– Definition: Any of the following if supplied directly or indirectly, and free of charge or at reduced cost, by the buyer of imported merchandise for use in connection with the production or the sale for export to the United States of the foreign merchandise:• (i) Materials, components, parts, and similar items incorporated in the imported merchandise.
• (ii) Tools, dies, molds, and similar items used in the production of the imported merchandise.
• (iii) Merchandise consumed in the production of the imported merchandise.• (iv) Engineering, development, artwork, design work, and plans and sketches that are undertaken elsewhere than in the United States and are necessary for the production of the imported merchandise.
- Value of the “Assist” is added to the entered value of the imported merchandise and duties are assessed on it.
- Suggestion – If feasible, have the Chinese manufacturer purchase the components, materials, etc. and simply add it to the selling price.
Common Import Pitfalls
• Antidumping/Countervailing Duties
– Numerous Chinese-origin products are subject to AD/CVD orders (79 AD/12 CVD).
– AD/CVD orders impose additional duties on imported products to “level the playing field.”
– Additional duties could range from .1% to 300+% of the entered value of the goods.
– Rates can be manufacturer/exporter specific so know who you are buying from.
– CHECK THE AD/CVD ORDER LIST!• International Trade Administration - http://trade.gov/ia/
5
Import – Special Certifications
• Consumer Product Safety Commission– China exports more than $250 Billion in consumer products to the U.S. each year
– Consumer Product Safety Improvement Act of 2008 established requirements for testing and compliance certifications for any “consumer” product and for any product directed at children
– Violations could result in seizure and destruction or export of the products
– April 2010 - CBP and CPSC signed MOU which will give CPSC the capability to conduct import safety risk assessments and perform targeting work using CBP’s Automated Commercial System.
Import – Special Certifications
• Lacey Act– Makes it unlawful to import, export, transport, sell, receive, acquire, or purchase in interstate or foreign commerce any plant, with some limited exceptions, taken or traded in violation of the laws of the United States, a U.S. State or a foreign country.
– USDA identified a list of products and the associated Harmonized Tariff Schedule (HTS) numbers which requires filing a Plant Product Declaration Form (PPQ 505) with the import.
6
Counterfeit Goods/Components
• Enforcement of intellectual property rights is a priority trade issue of CBP. (http://www.cbp.gov)
• Counterfeit goods (or goods with counterfeit components) are subject to seizure and forfeiture at the U.S. border.
• Protect your marks and your imported goods:– If you have a recorded trademark/copyright, register it with CBP.
– If you are importing a product that includes a component trademarked/copyrighted by some other party, be sure that the component is genuine.
Sourcing from ChinaGetting Started
• Quality Control is key!– Supplier choice is critical!
• Considerations in selecting a factory– Location• Access to raw materials?• Costs to get finished goods to port?
– Expertise• Do they specialize in your type of product?• Do they have technical resources?
– Size• Too big? Too small?
• Recommendation: VISIT THE FACTORY!
7
Sourcing Structures
• Contract directly with the factory
• Use a sourcing agent– Full-service independent sourcing agent• Confirm whether it is a Buyer’s Agent or a Seller’s Agent
– Set up a PRC representative office to handle
• Use a trading company– Trading companies usually specialize in a particular type of product, but work for the factories so you may not know or have any control over which factory is producing
Manufacturing Contract
• Written Agreements should:– be clear and concise
– include all agreed upon terms
• Remember: – Entering into a contract in China is just the beginning (some say it is just the beginning of the negotiations).
– Constant oversight and mutual cooperation is required from the time the Agreement is signed until the product is delivered.
– If you simply issue a purchase order and expect perfect product and delivery without being engaged, you will likely be extremely disappointed.
8
Manufacturing ContractKey Terms
• Quality Control, Testing, Monitoring– Be specific– Require written reports– Joint Inspection– Independent inspector– Rules of Inspection
• Setoff Rights• Subcontracting– Generally not a good idea– If it will be required to complete the product, specify the terms
Manufacturing ContractKey Terms
• Dispute Resolution -- Arbitration VS Litigation– Arbitration
• In China– Over 200 arbitration institutions in China– Chinese International Economic and Trade Arbitration Commission
– Hong Kong International Arbitration Center– International Chamber of Commerce
• Outside China– China is a signatory to the New York Convention so enforces foreign arbitral awards
- Litigation• In China
– In the past, this was the last resort, but in recent years the Chinese courts have gained popularity
• Outside China– Difficult to get enforced in China
9
Manufacturing ContractKey Terms
• Dispute Resolution - Arbitration VS Litigation
- Evaluate the type of disputes that may arise
• E.g. - Quality issue and manufacturer has no assets outside of China; remedy = money damages
• E.g. – Manufacturer is using your intellectual property to manufacture and sell product to India in violation of Agreement; remedy = injunction.
• E.g. – Manufacturer refuses to return your molds after termination – You don’t need $$ - you need the molds returned; remedy = court order for return of the molds.
Manufacturing ContractKey Terms
• Specify Governing Language
– If contract will be in printed in more than one language, specify which language governs.
– Governing language may depend on whether disputes will be resolved by arbitration or in a Chinese court.
– Recommendation: Governing language should be Chinese if you want to enforce in a Chinese court.
10
Manufacturing ContractKey Terms
• Labor Matters
– Include provision prohibiting forced, convict, or child labor.
– Include a right to inspect the factory to actually confirm that labor matters comply with the contract.
Sourcing from ChinaTips
• How to encourage long-term reliability from Suppliers– Work closely at the beginning to establish acceptable performance.
– Keep monitoring quality (get written signed records and don’t lower your standards).
– Dump the worst factories.
– Give regular business to those that perform.
– Understand that the best factories receive a reasonable premium on prices.
– Don’t switch suppliers for a few pennies, but keep them in competition with at least one other factory to avoid unreasonable quotations.
11
Sourcing from ChinaTips
• Practical Recommendations
– Order 2nd quarter products in 4th quarter of the previous year (Chinese New Year is in Jan/Feb and everyone goes on vacation)
– Build in plenty of time for completion (e.g. don’t expect delivery of an order for 350,000 in the same time as you would expect delivery of 70,000)
– Establish a process for quality control and inspection [hire an in-country agent if necessary]
Export – Lists to Check
• Denied Persons ListA list of individuals/entities that have been denied export privileges. Any dealings with a party on this list that would violate the terms of its denial order is prohibited.
• Unverified ListA list of parties where Bureau of Industry and Security (BIS) has been unable to verify the end-user in prior transactions. Being on this list is a “Red Flag” that should be resolved before proceeding with the transaction.
• Entity ListA list of parties whose presence in a transaction can trigger a license requirement under the Export Administration Regulations (EAR). The list specifies the license requirements that apply to each listed party. These license requirements are in addition to any license requirements imposed on the transaction by other provisions of the EAR.
12
Export – Lists to Check
• Specially Designated Nationals ListA list compiled by the Treasury Department, Office of Foreign Assets Control (OFAC). OFAC’s regulations may prohibit a transaction if a party on this list is involved. In addition, the Export Administration Regulations require a license for exports or reexports to any party in any entry on this list that contains any of the suffixes "SDGT", "SDT", "FTO", "IRAQ2" or "NPWMD".
Export – Lists to Check
• Debarred ListA list compiled by the State Department of parties who are barred under the International Traffic in Arms Regulations (ITAR) from participating directly or indirectly in the export of defense articles, including technical data or in the furnishing of defense services for which a license or approval is required by the ITAR. (22 CFR §127.7)
• Nonproliferation SanctionsSeveral lists compiled by the State Department of parties that have been sanctioned under various statutes. The Federal Register notice imposing sanctions on a party states the sanctions that apply to that party. Some of these sanctioned parties are subject to a general policy of denial. (15 CFR §744.19).
13
Export – “The China Rule”
• Export license to China is required for a targeted list of items that are intended for a “military end use” (i.e. incorporated into a military item). (§744.21)
• Involves 20 product categories and associated technologies and software, as described in 31 entries on the Commerce Control List.
• Items subject to the military end-use control include aircraft and aircraft engines, avionics and inertial navigation systems, lasers, depleted uranium, underwater cameras and propulsion systems, certain composite materials, and some telecommunications equipment for space communications or air defense.
Export – “The China Rule”
• Validated End-User (VEU) program
–Certain Chinese companies that qualify (i.e.“trusted customers”) with a track record of responsible civilian use of U.S.-controlled technology will be able to receive certain controlled items without individual export licenses.
Facts• MoInc is a Missouri company with headquarters
in Kansas City. MoInc makes and sells animal health care products. MoInc desires to expand its market in China.
• MoInc’s VP-International attended several trade shows and identified BeijingInc, a company that currently makes and distributes similar products in China. BeijingInc has offices in Beijing and several other major cities in northern and western China, but not southern China.
• After a few initial visits both are very interested in having BeijingInc serve as MoInc’s distributor in China and to market and sell MoInc’s products
manufactures a range of measuring and precision devices that are commonly used in industrial manufacturing, farming, and construction
• It started selling its products in China three years ago. Since then KansasCo has seen the overall demand for its products increase in China, but at the same time local competition has also grown.
Facts• To produce more products quickly to supply the
China market and bring down the cost, KansasCo started discussion with a Chinese company called ShanghaiCo. ShanghaiCo currently manufactures similar products under its own brand names.
• KansasCo would like to have ShanghaiCo manufacture the products under KansasCo's design and brand name. The products will then be shipped to KansasCo's existing distributor in China for sale to customers.
• Mandatory Product Certification Requirement– New regulations effective September 2010
– Requiring certification by the State Administration of Quality Supervision, Inspection, and Quarantine for products that potentially pose hazards to human, animal, plant or environment health or safety
– Catalogue of specific products is currently in the works; past examples from previous catalogue included electric cables and wires, circuit switches, surge protectors, etc.
• Certain products may be subject to licensing requirement by industry regulatory authority: e.g., elevator, medical equipment
• Manufacturer Registration Requirement: e.g., Food Safety Law
• “Incoterms” stands for “International Commercial Terms” – they are the international standard delivery terms published by the ICC. They are widely used in international transactions
• They are currently being revised and the most recent version will come into force January 1, 2011
• Each term defines at which point transaction responsibilities and costs related to the delivery, transportation, insurance, export and import documentation, are divided between the seller and the buyer
– Buyer contracts for the freight from seller’s door to buyer’s door, buyer’s risk and responsibility from the seller’s door all the way to the buyer’s door
– Insurance not mentioned, but common sense dictates that parties should work this into the contract or Buyer should arrange
• Best if, (1) each party’s responsibilities match its realistic capabilities and (2) control and liabilities go together if (1) each party's responsibilities match its realistic capabilities and (2) control and liabilities go together
• Make sure the INCOTERM works with payment method
FCPA Overview• Prohibits bribery of foreign officials, foreign
political parties or candidates to obtain or retain business
• Covers any U.S. person and any “domestic concern” organized under the laws of the United States or its agents
• Who is an official? Any officer or employee of a government or of a government-owned entity, any foreign political party or official, any candidate for foreign political office, any official of a public international organization, and any other person while “knowing” that the payment or promise to pay will be passed on to one of the above.
Don’t Ignore the Facts!• “Willful blindness,” “deliberate ignorance” and
taking a “head-in-the-sand” attitude constitutes knowledge under the statute
• A company is not immune if the payment is made by a third party, such as an agent or consultant
• Liability may flow to a company if it: (1) authorizes an agent or third party to make improper payments to foreign officials or (2) makes payments to an agent or third party with actual or constructive knowledge that all or a portion of money will be paid directly or indirectly to foreign officials
� Catalogue of Industries for Guiding Foreign Investment (“Guidance Catalogue”)
� Four categories of industry sectors: “encouraged”, “restricted”, “prohibited”and “permitted”
� Each category provides a difference level of treatment
� Updated in regular intervals: the most recent edition by NDRC and MOFCOM in Oct of 2007
Hylands Law Firm
3
� 2007 Catalogue/2005 Catalogue
• upgrading the industrial structure
• reducing the consumption of industrial resources
• speeding up the developments in certain high tech-industry sectors
� Opening up of the service sector
• Encouraged: logistics, service outsourcing
• No longer restricted: foreign trading
� Cooling down excess investments (e.g. real estate)
General FDI Policy – FDI Guidance Catalogue (II)
Hylands Law Firm
General FDI Policy – FDI Provisions
• Provisions on Directing Foreign Investment
• By State Council in 2002
• Applicability
– Establishment of FIEs
– Foreign related M&A
• Catalogue of Industries in Central and Western China Favorable to Foreign Investment” (“Western Catalogue”)
– Part of “Go-West Policy”
Hylands Law Firm
4
General FDI Policy – Exceptions to FDI Categorization
• General principles subject to several exceptions
• Exceptions based on high-priority political concerns
• Examples of Exceptions:
– "Permitted" or "restricted" projects in Western Catalogue;
– "Permitted" projects that export all of their products;
– “Restricted” projects that export at least 70% of products.
Hylands Law Firm
General FDI Policy – Special Restrictions under FDI Provisions
• If only EJVs or CJVs are allowed, a WFOE may not be established;
• If the Chinese side is required to hold a majority share, one or more Chinese shareholders together must hold more than 51% share;
• If the Chinese side is required to hold a relative majority share, the combined shares of all Chinese investors must be greater than the share of each foreign investor.
• E.g. sole Chinese investor (40%) + two foreign investors each (30%)
Hylands Law Firm
5
General FDI Policy – Summary
• FDI Provisions and Guidance Catalogue: a leading role in guiding FDI
• Categorization of investment: basis of solid investment plan
• Practical advise on categorization issue
– One of the first question from client
– Not easy to answer – 3 reasons
– Sufficient communication with client & early consultation with gv’t needed
– Room of negotiation
• Economic policy more favorable
• Further opening up widely expected
Hylands Law Firm
General FDI Concepts – FDI Vehicles
• Basically four kinds of FDI vehicles:
– RO (“Representative Office”);
– CJV (“Contractual Joint Venture” or “Cooperative Joint Venture”);
– EJV (“Equity Joint Venture”) and
– WFOE (“Wholly Foreign-owned Enterprise”).
• CJV, EJV and WFOE collectively called Foreign Investment Enterprises (FIEs)
Hylands Law Firm
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General FDI Concepts –Capitalization of FIEs (I)
• Concept of registered capital
– Total amount of capital contributions subscribed to by investors
– Investors’ equity in a FIE
• Concept of total investment
– Registered capital + external borrowings
• Minimum capital requirement
– To satisfy needs of future operation
– No general requirement on minimum amount for FIE
– Special requirement for specific industries
– Local difference
– General principle: being sufficient for preparation & initial operation
Hylands Law Firm
General FDI Concepts –Capitalization of FIEs (II)
• Registered capital/total investment ratio
At least 33.3% or US$ 12 million(whichever is higher)
> US$ 30 million
At least 40% or US$ 5 million(whichever is higher)
> US$ 10 million and ≤US$ 30 million
At least 50% or US$ 2.1 million(whichever is higher)
– Basis for other procedures (land, FIE establishment, equipment import, tax benefits)
– Other gov’t dep. not to proceed till verification is obtained
• Department in charge
– SoE: department in charge
– In a JV project, consent from such department is fundamental
Hylands Law Firm
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General FDI Concepts – Business Scope
• Limited scope of approved operation
• Generally impossible to obtain a general scope of business
• Typically restricted to a specific category of manufacturing or service
• Broader scope of business on a case-by-case basis– prohibiting business activities that are prohibited by PRC laws, regulations and
state policies regarding foreign investment industries;
– prohibiting business activities that require special approval prior to obtaining the special approval; and
– permitting any and all business activities that are not subject to special approval as provided by PRC laws and regulations and are not classified as "restricted" according to PRC foreign investment industry regulations.
• Expansion of business scope Hylands Law Firm
Representative Office – Nature and Function
• Nature of Rep Office
– Most basic form of foreign business presence
– Permanent base + liaison
– Not a independent legal entity, but a liaison office
– Establishment process: relatively simple
– No capital investment requirement
• Scope of Activities
– Quite restricted and must be specifically approved
– Prohibited from engaging in “direct business operations”
• No precise definition
• Determined on a case-by-case basis
• No direct business activities with a view to making profits
Hylands Law Firm
11
Representative Office – Scope of Activities
• Permitted activities
– Basic types of activities w/i business scope
– Coordinate visits and exchanges of personnel
– Conduct negotiations on behalf of parent company
– Conduct activities in relation to its own office adm
• Consequences of exceeding limitations on activities
– Penalties
• Fines up to RMB 20k
• Suspension of business activities
– In practice, somewhat discretionary & on a case-by-case basis
• Remedy situation w/o sanction
• Appropriate penalties based on the amount invested or income generated
� Labor Law of the People’s Republic of China (which come into
force as of January 1,1995)
� Labor Contract Law of the People’s Republic of China, (which
is promulgated and come into force as of January 1, 2008)
� Law of the People’s Republic of China on Labor Dispute Mediation and Arbitration, (which is promulgated and be effective
as of May 1, 2008 )
� Regulation on the Implementation of the Employment Contract Law of the People’s Republic of China, (which is
promulgated and be effective as of September 3, 2008)
I. Labor-Labor Laws in China
� Labor Contract Law provides more protections to employee, such as open-ended labor contracts, double financial compensation for illegal termination of labor contracts;
� After the promulgation of Labor Contract Law and Law of the People’s Republic of China on Labor Dispute Mediation and Arbitration, Labor cases in Shenzhen has increased 198% than one year before. As the enterprises fail to keep records and adjust it’s internal regulations and management to employees, 60%-70% enterprises of the enterprises involving labor cases lose the cases.
3
1.1 Labor-Enter into Labor Contract
� Employers have to enter into written labor contracts with employees.
Three types of labor contracts:
� Fixed-term labor contracts
� Open-ended labor contracts
� Labor contracts that set the completion of
specific tasks as the term to end contracts
1.2 Labor- Open-ended Labor Contract
Unless the employee proposes to conclude a fixed-term labor contract a open-ended labor contract shall be concluded in the following circumstance:
1) The employee has already worked for the employer for 10 full years consecutively;
2) The labor contract is to be renewed after two fixed-term labor contracts have been concluded consecutively;
Failing to sign a written labor contract
after the lapse of one full year of work
open-ended labor contracts.
4
1.3 Labor-Liability for failing enter into a
contract pursuant to Labor Contract Law
Labor Contract Law Article 82
If an employer fails to conclude a written labor contract with an employee after the lapse of more than one month but less than one year as of the day when it started using him, it shall pay to the worker his monthly wages at double amount.
If an employer fails, in violation of this Law, to conclude with an employee a open-ended labor contract, it shall pay to the employee his monthly wage at double amount, starting from the date on which a open-ended labor contract should have been concluded.
1.4 Labor-how to terminate a labor contract
legally
Labor Contract Law Article 39
Where an employee is under any of the following circumstances, his employer may dissolve the labor contract:
1. the employee does not meet the recruitment conditions during the probation period;
2. The employee seriously violates employer’s rules;
3. The employee causes any severe damage to the employer because he seriously neglects his duties or seeks private benefits;
4. The employee simultaneously enters an employment relationship with other employers and thus seriously affects his completion of the tasks of the employer, or the employee refuses to make the ratification after his employer points out the problem;
5. The labor contract is invalidated due to the circumstance as mentioned in Item (1), paragraph 1, Article 26 of this Law; or
6. The employee is under investigation for criminal liabilities according to law.
5
1.5 Labor-other matters shall be paid more
attention
� Add a non-competition clause into labor agreement, if necessary
� Make sure your employee manual comply with labor laws and regulations
Case on trademark:Wholesale dealers sold counterfeit industrial batteries
Company A reported Infringement to Administrative Authorities
Authorities took Administrative Action (confiscation & fines)
Dealers appealed against
Administrative Actions in Court
claiming illegal procedures
Company A assisted with
defense, appeal withdrawn
Company A initiated civil lawsuits
√ lawsuits—manufacturer
×lawsuit -dealer
2.4 IP- strategy
Civil Lawsuit
or
Criminal Prosecution
Prevention
Pre-action Investigation
Administrative Adjudication
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III Importing Goods to China
(Wine as case study)
� Business Licenses and Permits
� Application for a Registered Chinese Wine Label
� Quality Inspection - CIQ
� Customs Procedures/Forms
� Taxes
� Customs Duties/Website
� Import VAT
� Consumption Tax
� Tax Rate Formulas for Imported Goods
� Tax Rate - Case Study
� Contract Registration
3.1 Business Licensesand Permits (Wine as case study)
� Must be a legally registered PRC enterprise;
� Approval of Business Scope: BOFTEC provides approval for
importation (and domestic sales), and the business scope must
include trading.
� Permit for Wine Sales and Correct Business Scope : AIC grants
permit and the business scope must include the wine sales.
� Import and Export Operations: The enterprise may import the
wine on its own (with the above approvals, permits, and correct
business scope) or consign a separate trading company as its
agent to import the wine.
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3.2 Application for Registered
Chinese Wine Label (Wine as case study)
An application must be filed with the local inspection & quarantine authority (“CIQ”) to obtain a registered Chinese label. Application documents:
� Business License;� Inspection & Quarantine Report on the quality of the wine;� Photocopy of Permit for Production provided by the wine manufacturer and a
Chinese translation (issued in the country of origin);
� Photocopy of the Health and Sanitation Permit provided by the wine manufacturer and a Chinese translation (issued in the country of origin);
� Photocopy of the Wine Production Process provided by the manufacturer and a Chinese translation;
� Design sample of the wine label in Chinese.
After the abovementioned documents are ready, the CIQ will report to the State CIQ for examination and approval. Upon approval, a Certificate of Approval for a registered Chinese label will be granted. One label may only correspond to one type of wine.
3.3 Quality Inspection - CIQ
Quality Inspection and Customs Declaration of imported goods areconducted simultaneously. The goods will be released by the Customsupon issuance of the clearance certificate from the CIQ. Goods must then also pass the CIQ’s sampling inspection which is done for each shipment received. The CIQ duties include the following:
� Examining the documents relating to the goods, including Sanitation Certificate, Certificate of Origin, Certificate of Quality, etc. issued by the exporting country;
� Whether the package is in compliance with the accepted standards
� Whether the goods have obtained a registered Chinese label (for wine);
� Sampling inspection: To discern whether the goods are in compliance with the sanitation standards of the PRC for imported food, three bottles are selected from each label, within each shipment, for inspection. The process takes about one week to complete.
14
3.4 Customs Procedures
Procedure - Declaration——Inspection——ReleaseDeclaration: Declaration must be made to the Customs by the receiver within14 days of the arrival of the means of transport. Necessary documents include: contracts, invoices, packing list, freight list (cargo manifest), bills of lading, a power of attorney for Customs declaration (if imported by agents), license to import and export, a write-off bill for collection of proceeds in export, and perhaps others.Inspection: Customs may examine whether the goods are in conformity with the documents and impose penalties or delay release if they are not satisfied with the results of their Inspection.
Release: After the consigner or its agent pays in full any tax or duties, the goods will be released by Customs upon obtaining the clearance certificate issued by the CIQ.One common source of delays at Customs is in the determination of the dutiable value of the imported goodsFactors considered by Customs in determining the price include: packaging, label, brand name/trademark. Generally speaking, the grade of the wine is determined by a commercial specification, the brand name, the place of origin, the raw materials used, and the processing method involved in its production.
3.5 Customs Declaration Form
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3.6 Taxes
Scope of taxable goods: goods being allowed to be imported
into or exported from PRC and entry articles
� Customs Duties
� Import VAT (value added tax)
� Consumption Tax (special goods)
3.7 Customs Duties
Rates:
� Different goods are subject to different tax rates
� The State Council has a Customs duty commission which is responsible for the adjustment and interpretation of taxable items, Customs codes, and Customs duty rates which are published in the Regulations of the People’s Republic of China on Import and Export Duties and the Table of Rates of Import Duties of Entry Articles.
Taxpayer:
� Consignee of imported goods
� Consignor of exported goods
� Owner of imported articles
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3.8 Customs Website
(Tax Rates Listed)
3.9 Import VAT
Taxable items:
� Sale of Goods
� Processing Services
� Repair and Replacement Services
� Importation of Goods
Taxpayer:
Entities and individuals engaged in any of the abovementioned
operations within the territory of the PRC are considered
taxpayers of VAT.
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3.9 Import VAT
Rate:
� 17%: Sale or importation of goods (most goods), including wine
� 13%: Food grains, tap water, edible vegetable oil, pesticides and other basic appliances necessary for the production and living of residents
� 0%: Export of goods (unless otherwise provided by the State Council)
Calculation:
� the VAT amount as indicated in the Import VAT Duty Paid Certificate (������������) issued by the Customs is the input tax amount which is allowed to be offset against or be deducted from the output tax amounts
� the payable tax amount = the output tax amount – the input tax amount
3.10 Consumption Tax (Wine as case study)
Scope: Consumption tax only applies to the importation of the following
commodities
� Cigarettes, wine and alcohol (including white wine, rice wine, beer,
other wines, and alcohol), cosmetics, precious jewelry and gems,
cars, golf carts and golf equipment, top-grade watches, yachts,
wooden throwaway chopsticks, hardwood flooring
Rates: Different commodities are subject to different rates, ranging from 1%
to 45%.
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3.11 Tax Rate Formulas for
Imported Goods
� Customs Duty: import duty = dutiable value X duty rate
(Dutiable value = total amount payable and actually paid by the buyer to the seller + the freight, the associated expenses, and the insurance premiumsincurred prior to the arrival and unloading of the goods at the destination within PRC).
Customs is entitled to examine the authenticity and exactness of the declared value and is entitled to consult with the related parties on the declared value and adjust the declared value if it deems that the value declared by the related parties is not correct.
� Consumption tax: composite taxable value = (dutiable value + Customs duty) / (1 – consumption tax rate);
payable amount of consumption tax = composite taxable value Xconsumption tax rate;
� VAT = (dutiable value + Customs duty + consumption tax) X VAT rate;
Import enterprises must register contracts involving advance payments on the sales of exported goods and deferred payments regarding imported goods on the official website designated by the State Administration of Foreign Exchange (SAFE).
� The term “deferred payment” refers to a payment made through foreign exchange on a date stipulated in a COD (cash on delivery) import contract which is later than the date of the importation of the goods, as stipulated in the contract, or which is made on a date more than 90 days later than the date of the actual importation
� Deadlines for contract registration
1. Within 15 working days of execution of the contract; or
2. Within 15 working days, of the end of a 90 day period from the date when Customs approves the import goods declaration form.
IV Enterprise Income Tax Law
� Reasons for the Enterprise Income Tax Law (EIT)
� Tax Rates
� Taxable Income Amount and Deductions
� Changes in Preferential Tax Treatment
� Technology Transfer and R & D
� Advance Pricing Agreements and Investigations
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4.1 EIT-Reasons for the EIT Law:
� Unify the income tax processes of both domestic enterprises and foreign invested enterprises
� Unify and standardize the procedures and criteria used for pre-tax deductions
� Implement a preferential tax policy: priority is being given to specific industries for preferential tax treatment and the prior practice of preferential treatment based on the region an enterprise is located is now secondary
4.2 EIT-Tax Rate
� General tax rate 25%- PRC registered enterprises
� Small/Low-profit enterprises 20% (enterprises must not have more than RMB 300,000 in annual taxes, no more than 100 employees, and assets exceeding RMB 30m)
- PRC registered enterprises� Specific New and Hi-tech enterprises 15%
(enterprises must meet standards regarding investment, employment of skilled workers, and levels of income to qualify as a New or Hi-tech enterprise)
- PRC registered enterprises� Withholding income tax: 10%
- Foreign registered enterprises
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4.3 EIT-Taxable Income Amount and
Deductions
� Taxable amount of income = total amount of income each tax year = tax-free income = tax-exempt income = all deduction items = any remedies for the losses of the previous year(s)
� Tax-free income: proceeds not originating from business activities (Article 7 of the EIT )
Example: VAT rebates
� Tax-exempt income: preferential tax treatment provided for in specific situations (Article 26 of the EIT, Article 83 of the Regulation on the Implementation of the EIT)
Example: treasury debts, qualified dividends, profit distribution, and other returns on equity investments between domestic enterprises.
� Business entertainment expenses may also now be deducted up to a maximum of 0.5% (Article 43 of the EIT)
4.4 EIT-Changes in Preferential Tax
Treatment
Article 53 stipulates that specific
measures for preferential tax treatment
and the right to reduce or exempt tax
shall be subject to the approval of the
State Council. Local authorities have no right to reduce or exempt tax.
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4.4 EIT-Changes in Preferential Tax
Treatment
Examples of Preferential Tax Treatment which have been cancelled:
1. Preferential tax rates of 15% and 24% in special economic zones, costal economic and technical development zones, and in the initial development of riverside cities, etc.
2. “2+3” or the system whereby the first two years of taxes were exempted and the following three years received a 50% exemption
3. Tax rebates for foreign invested enterprises from purchases of domestically manufactured equipment
4. Tax rebates from reinvestment into a foreign invested enterprise
5. 50% reduction of tax for foreign invested enterprises whose products are mainly for export
6. General principle: preferential tax treatment which has been stipulated in the new tax law will continue and any that were not included are cancelled.
4.4 EIT-Changes in Preferential Tax
Treatment
New Preferential Tax Treatment
New preferential tax treatment mainly focuses on agriculture, forestry, fishery and animal husbandry industries, also investment in key infrastructure, investment in environmental protection and energy conservation, technology transfer, and investment in not-for-profit organizations (the first three years are exempted and the following three years receive a 50% exemption)
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4.4 EIT-Changes in Preferential Tax
Treatment
Preferential Policy Transition Period
From January 1, 2008, the tax rate of enterprises which enjoy a preferential treatment will gradually move to the statutory tax rate over a period of 5 years as of the implementation of the new tax law. Enterprises which enjoy a tax rate of 15% will be levied 18% in 2008, 20% in 2009, 22% in 2010, 24% in 2011, and 25% in 2012 (+3+2+2+2+2+1); enterprises which are levied 24% of the enterprise’s income will be levied 25% beginning in 2008.
From January 1, 2008, enterprises which enjoy a preferential treatment of regular income tax deductions such as “being exempt during the first two years and receiving a 50% exemption the following three years” , “being exempt the first five years and receiving a 50% exemption the following five years”, etc, will enjoy the preferential treatment until the preferential term expires according to the original tax law, the administrative regulations, and the preferential regulations and term in the relevant document; for enterprises which fail to enjoy a preferential policy because they have not yet begun to make a profit, the preferential term will commence from the year 2008.
4.4 EIT-Changes in Preferential Tax
Treatment
Preferential Treatment in Special Economic Zones and the PudongNew Area
� For New and Hi-tech enterprises registered in the special economic zone and Shanghai Pudong new area after January 1, 2008, their income from the special economic zone and Pudongnew area shall be exempted from tax for the first two years and shall receive a 50% exemption the following 3 years, using the statutory tax rate of 25% as of the tax year the enterprises obtained business and operational income.
In Guangdong Province Special Economic Zones include:
Shenzhen, Zhuhai, and Shantou
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4.5 EIT- Technology Transfer and R&D
Expenses
� Technology Transfer: the portion of income from technology transfer in a tax year which does not exceed RMB 5million is exempted from tax; the portion which exceeds RMB 5million will receive a 50% tax exemption. The exemption may be delayed until a late time (Article 90 of the Regulation on Implementation of the EIT)
� An additional amount may be deducted from R&D expenses and the intangible assets formed as a consequence: additional 50% deduction (Article 95 of the Regulation on the Implementation ofEIT Law)
� Example: Company A earned RMB 6 million from the transfer of technology in 2008. In order to avoid paying the maximum tax liability Company A could divide it’s investment into segments less than 5 million RMB and pay over a period of a couple of years.
4.6 EIT-Advance Pricing and Investigations
� The tax authority shall be entitled to make tax readjustments within 10 years of the tax year when the related transaction was conducted. (PRC law states that accounting books, accounting documents, statements and certificates of tax payment must be kept for 10 years)
� An enterprise may file with the tax authority the pricing principles and computation approaches for the transactions between it and its affiliates, the tax authority and the enterprise shall enter into an advance pricing arrangement upon negotiations and confirmation.
� When the tax authority investigates the transactions of an enterprise with its affiliates and when it find the materials provided by the enterprise are false or incomplete, it may decide the rate of tax of transfer pricing based on the results of it’s investigation.Transfer pricing refers to the manipulation of product pricing between two connected enterprises in order to maximize their own profit or avoid tax and completely ignores market demands.
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eg1: Comparing investment through HK and
abroad, in regards to changes in the EIT
Investor Company A (Sweden)
Subsidiary B
Interest, royalties 10%
Investor Company A
(HK)
Subsidiary B
Interest, royalties 7%
investment Profit, tax rate10%
Within the territoryof the PRC
investment Profit, tax rate 5=
Within the territoryof the PRC
eg2: Aspects not yet clear - Income tax in
regards to Equity Interest Transfer
Company A in HK Company B in HK
Company C within the territory of the PRC (target company)
� Questions still not clear:
1. the application of law (if in China then tax should be paid)
2. How to control the transaction and therefore implement tax rules
investmentwithin the territory
of the PRC
equity interest
transfer
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Thank You
Lidong PAN� New Address: 11/F., South Tower,
Phase II, G.T. Land, 8 Zhu Jiang West Road, Zhujiang New Town, Tian He, Guangzhou 510623, P. R. China