This issue will examine the role of Free Trade Agreements and the various regional blocs that China is either a member of or considering becoming so, as well as how these can be of significance to your China business. We'll also examine the role of Double Tax treaties, provide a list of active agreements, and explain how to obtain the tax minimization benefits on offer.
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to be applied for - they do not automatically appear.
Local tax bureaus in China need to be made aware
of treaty status, and provided with supporting
documentation; otherwise, the opportunity will
be lost.
In this issue of China Briefing,
we examine the role of Free
Trade Agreements and the
various regional blocs that
China is either a member of
or considering becoming
so, as well as how these can
be of significance to your
China business. We also
examine the role of Double
Tax Treaties, provide a list
of active agreements, and
explain how to obtain the tax
minimization benefits on offer.
We wish you all a profitable 2015 and Chinese New
Year of the Sheep!
This Month’s Cover Artby Huang You Wei ( 黄有维 ) Chinese Painting, 92x54cm Wan Fung Art Gallery (云峰画苑)[email protected] | +86 0760 8833 3861www.wanfung.com.cn/eng
For queries regarding the content of this magazine, please contact:[email protected]
ReferenceChina Briefing and related titles are produced by Asia Briefing Ltd., a wholly owned subsidiary of Dezan Shira Group.
Content is provided by Dezan Shira & Associates. No liability may be accepted for any of the contents of this publication. Readers are strongly advised to seek professional advice when actively looking to implement suggestions made within this publication.
decades, it has also spread its wings to encompass
numerous international agreements and treaties
to improve its attractiveness for foreign investors,
cement the development of potential export
markets outside of China, and position itself as a
production and trade giant in the world economy.
This has not occurred by accident: it has been a
long term process that is still ongoing, and one that
includes a significant development that will impact
upon China at the end of this year, that of Vietnam
coming into AEC compliance.
However, many foreign investors remain blissfully
unaware that they can take advantage of these
initiatives, and thereby actively reduce their tax
burdens when trading with or operating in China. This
may be because many countries, especially the United
States, do not place enough emphasis on promoting
the bilateral tax advantages that may be obtained by
their more internationally-minded businesses.
It is also true that, as many foreign investors tend to use
lawyers to incorporate, they miss out on the detailed
taxation issues of structuring a business in China, even
to the extent of completely omitting any examination
of the tax situation in China, bar the very basics. This
is a critical mistake. All businesses investing in China
should fully understand what the tax implications and
available incentives are – beyond merely knowing the
corporate income tax rate, VAT and their individual
income tax burden.
In this article we examine the two major areas that
impact upon China and foreign investors’ chances of
success or failure in this huge market.
China’s Free Trade Agreements China has entered into a number of Free Trade
Agreements (FTAs) on a bilateral and multilateral
basis. These have had significant impact on the Asian
geographical region, and proved highly influential
in encouraging the direction of trade flows and the
development of supply chains. China is rather more
sophisticated in understanding its own development
and demographics than many observers give it
credit for.
The Chinese government is well aware it is faced
with an aging population and increasingly expensive
workforce, and to cater for this has been very active
in developing agreements that, on the face of it,
encourage certain industries (particularly, labor-
intensive ones) to relocate outside of China.
Faced with a population that is becoming wealthier,
there are thousands of products that China simply
doesn’t wish to manufacture any more. Moving the
manufacturing base away from low-end goods and
into more added value and innovative products has
long been a specific aim of the Central Government.
China’s use of FTAs fits exactly into this policy.
Knowing how these agreements work and the
geographical restructuring they support is crucial
to understanding and developing your future China
business strategy.
5
Issue 151 • January 2015 • China Briefing
ASEAN The China-ASEAN Free Trade Agreement is by far
the single most important FTA that China has yet
reached, and currently the only multilateral one. It
is already having a significant impact upon regional
and global supply chains, and represents a total trade
volume of some US$443.6 billion (2013), with growth
running in excess of 10 percent per annum.
China’s FTA with ASEAN went live in 2010, yet the
implications of this are only now starting to become
apparent. What this agreement does is to eliminate
import-export tariffs and other barriers on some 90
percent of all products traded between China and
the ASEAN member states.
ASEAN is a ten member Asian trade bloc, including
the “Asian Tigers” of Singapore, Indonesia, Malaysia,
the Philippines and Thailand, all of whom have
already implemented tariff reductions (and received
reciprocation from China) on the majority of
products traded between themselves. By the end of
this year, the same will also apply to the other ASEAN
members of Cambodia, Laos, Myanmar and Vietnam.
These developments are of extreme economic
importance. While the full impact of the China-
ASEAN FTA has yet to be felt by foreign investors, it is
already starting to change the way the global supply
chain operates – and this is having huge implications
for global manufacturers, especially those operating
in China. China, as it is now commonly known, is
becoming a far more expensive country in which
to manufacture goods. Minimum wage levels have
grown by approximately 13 percent over the past
5 years, and are predicted to rise similarly in 2015.
What isn’t often recognized is that the total cost of
employing Chinese workers is increasing as well
– China imposes mandatory welfare payments on
employers for hiring permanent staff, and these
payments – amounting to a maximum of around 35
percent of an employee’s salary cost within certain
caps – make up a significant portion of the total
expense. Therefore, if wages go up – so does the
mandatory welfare.
When assessing ASEAN’s potential, however, it
is important to differentiate between the bloc’s
capabilities. Singapore is essentially a services hub,
and although it does possess some manufacturing
capabilities, is typically not a destination for lower-cost
production; rather, its role is in regional management.
Meanwhile, Brunei is almost exclusively an oil and
gas play, while the smaller ASEAN economies of
Cambodia, Laos and Myanmar are still infrastructure
poor and unlikely to be able to handle sustainable-
quality production at this time.
For this reason, the more developed ASEAN
economies of Indonesia, Malaysia, Philippines,
Thailand and Vietnam are all starting to have a large
effect on the regional financial competitiveness of
skilled workers when compared as follows:
More than twenty years ago, much of the global
chain moved to China to take advantage of its
well-organized infrastructure, cheap labor and
ultra-low tax rates in Special Economic Zones (SEZs).
However, with the Enterprise Income Tax Law of 2007,
these tax incentives were severely curtailed, and
foreign investors were newly struck by a 10 percent
withholding tax on repatriated dividends. China
now compares with its regional rivals as shown in
the table to the left.
Labor Costs in China Versus ASEAN
CityAverage Worker Salary
(US$, per calendar month)Mandatory Welfare
(percentage of salary)Guangzhou 760 35%
Bangkok 460 5%
Ho Chi Minh City 150 22%
Jakarta 240 4.8%
Kuala Lumpur 800 12%
Manila 500 25%
Note: Guangzhou welfare can vary depending upon the housing fund contribution amount.
Shown is the average value. All other country welfare figures can vary depending on a number of
circumstances. Shown are the typical contribution rates.
Corporate Taxation in China Versus ASEAN
CountryCorporate Income
Tax RateDividend Tax
ImposedChina 25% 10%
Indonesia 25% 20%
Malaysia 25% 0%
Philippines 30% 15%
Thailand 20% 10%
Vietnam 22% 0%
Note: Vietnam plans to further reduce its CIT rate to 20% from 2016. Dividend taxes can further be reduced by 50% if an applicable Double Tax Treaty is invoked. For more information, see the article “Taking Advantage of China’s Double Tax Treaties” elsewhere in this magazine.
6
China Briefing • Issue 151 • January 2015
In all cases, China’s heavier tax burdens coupled with
its higher labor costs are now making manufacturing
in the country less competitive than in the major
ASEAN economies. Yet a mass departure of foreign
investors from China has not occurred, although
there has undoubtedly been some leakage. The
reason for this is the upside to the increasing labor
costs of China – the development of a considerable
middle class consumer market.
Today, China has a middle class consumer market of
about 250 million people – yet in what will become
one of the fastest-growing wealth trajectories ever
seen, that number is set to increase to 600 million
by 2020 – just five years from now. This means that
many factories in China are forgoing relocation – or
at least those that possess and are continuing to
build their China supply chains to reach out to the
new Chinese consumers.
But what is happening is that the additional
manufacturing capacity that is gradually being
required to service China is being repositioned
elsewhere – a direct consequence of the China-
ASEAN FTA. Nearly all import duties from the ASEAN
nations mentioned above have been eliminated, and
Vietnam will follow suit in December, 2015.
This now means a double-pronged strategy is
being developed by many companies intent on
servicing the Chinese market. The intention is
to develop a strategic hub in China, which may
include some manufacturing, and which definitely
needs to sit tight on the supply chain management,
while combining this with production of either
component parts or complete products sourced
from other factories in ASEAN.
Here, there seems to be a general rule of thumb, at
least amongst Dezan Shira & Associates’ own clients
– if non-China production can reach 70 percent of
the level that can be achieved by a China factory, it
usually makes good sense to house your production
in the non-China facility. Plus that production gap is
only going to close as regional infrastructure improves.
We have already seen Foxconn announce that they
are to up sticks from China and gradually relocate
to Indonesia. With a workforce of over one million,
the China price of manufacturing components for
Apple is becoming too high for the end-product
to remain globally competitive. Indonesia, as part
of the China-ASEAN FTA, provides a solution. Other
companies are sure to follow.
The implications are clear: as the Chinese economy
moves from an export manufacturing base to a
consumer driven model, production facilities offering
lower labor and tax overheads elsewhere in Asia
will emerge to take up the challenge. China’s Free
Trade Agreement with ASEAN dictates that the main
beneficiaries of this will, over the next decade, be
Indonesia, Malaysia, the Philippines, Thailand and
Vietnam. The China-ASEAN FTA is also being expanded,
with negotiations underway to include a greater
portion of the service industry within the agreement.
Foreign manufacturers based in China must
consider the benefits of relocating their production
capacity to these destinations in ASEAN for use in
servicing the China market.
Other China Free Trade Agreements China’s other FTAs have been enacted on a bilateral
basis. We summarize them as follows:
Mainland and Hong Kong Closer Economic and Partnership ArrangementAlthough Hong Kong is part of China, there are
differences between the two concerning tariffs
and duties, as well as through Hong Kong’s status
as a Free Port. To address these, China structured
the “Closer Economic & Partnership Arrangement”
(CEPA) with Hong Kong, implemented in 2003. A
similar agreement also exists with Macau.
These CEPA agreements provide a number of
incentives for businesses from each Special
Administrative Region to invest in mainland China,
irrespective of beneficial ownership. These include
permitting fast-track investment into industry
sectors in China still restricted to foreign investors,
as well as large service industry concessions.
Typically, a qualifying period is required, as are
minimal tax contribution requirements in either
Related Reading
For information on China’s Free Trade and Double Tax
Agreements with ASEAN, please visit www.aseanbriefing.com.
Medical and dental Patent agencies Photographic services
Placement and supply of personnel Printing and publishing Professional qualification examinations
Public utility Real estate/construction Mining (restricted to oil and gas)
Scientific and technical consulting Sports Storage and warehousing
Securities and futures Telecommunications Tourism
Trademark agents Translation and interpretationTransport
(including road/freight/passenger and maritime)
>> Continued on page 10
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also key to China, not least because it recognizes
that keeping the peace in what can be a volatile
region is essential. Urumqi is already Central Asia’s
wealthiest city, and that is partly to do with keeping
the Uyghurs from pushing for too much autonomy.
Xi’s proposed Silk Road economic belt would
concentrate on free trade, connectivity and
currency circulation (denominated in RMB). This
was only made possible because border problems
between Russia and its former Central Asian allies
have now largely been solved. For example, the
Commonwealth of Independent States allows
visa-free access for its members. This lines up
perfectly with China’s push to develop its Far West
in Xinjiang.
Beijing is already massively investing in new roads
and bridges across the region via a wealth of
separate projects. Linking these countries together
then is a network of highways, railways, fiber optics
and pipelines – with the added Chinese push for
logistics centers, manufacturing hubs and,
inevitably, new cities and towns. The New Silk Road
is set to become a reality.
BeijingBeijing
UrumqiUrumqiAlmaty
SamarkandSamarkand TashkentTashkent
KabulKabulIslamabadIslamabad
Tehran
IstanbulIstanbul
Moscow
China's Proposed Overland New Silk Road Route
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Who is influencing China and who China is influencing in the new emerging Asia
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