VAT and customs policies

Chinese customs provides preferential treatment to foreign companies as a tool to encourage them to set up operations in certain industrial sectors. For example, some foreign enterprises are entitled to the preferential value-added tax (VAT) treatment to import equipment tax-free and use such equipment within the total investment. Investors need to be aware of these policies to correctly plan their investments and ultimately save costs.

Transfer pricing

With the implantation of the new Corporate Income Tax Law in January 2008, the Chinese tax authorities are paying more and more attention to transfer pricing issues. A red flag will almost certainly be raised if a small manufacturing enterprise (SME) operates in China for more than two years without declaring any profit in the country. We are aware of specific tax audits being conducted and adjustments to final pricing being enforced by local authorities in the worst-case scenarios. Note that some of the local bureaus do expect a minimum of profit ratio according to specific industry or business sectors and while these figures are not publicly announced, they could lead the relevant bureau to perform a targeted audit on those companies not in compliance.

Therefore, SMEs need to declare profits in China and respect a fair business model. Even though tax exemptions and reinvestment breaks are not as widely available now as previously, for SMEs in China for the medium to long-run, a general 25-percent corporate income tax is still much lower than many Western jurisdictions.

Support from information technology

Choosing a suitable IT system is very important for any SME: a smooth and effective management information system has the following advantages:

Office automation management may save time and paper costs;

Internal and external users can use e-mail, internal, telnet, ICQ and these functions can facilitate and speed up the job;

Information can be shared inside of the group and the internal management procedures and the value-added chain may be optimized inside the group, thus the quick transformation of the information may be realized and the management may be assisted to do correct decisions.

As elsewhere in the world, there are different options in China as well: the big international providers are all in China, such as SAP, Oracle, etc. but may be out of reach to most SMEs due to higher purchase and maintenance costs. Implementing foreign IT systems like AS 400, Peachtree, and Movex all entail professional IT managers who are familiar with the needs of Chinese enterprises and these may not be so readily available at short notice. Considering the operational procedural differences in China such as the Bill of Materials, using a Chinese-English interface can facilitate better and more accurate system control by local employees. Because of different cost management and customs procedures in China, the implementation of most foreign systems will not be successful if IT managers neglect the above-mentioned problems.

The cost of local systems such as an enterprise resource planning system like Kingdee or Ufsoft are not extremely expensive, their implementations are quick, and these local companies also provide training to local staff, so could be considered as an initial stepping stone toward more complex systems once the company's operations require them.

Summary

In the past few issues we have covered only a few of the initial issues SMEs will face during their initial investments in China. Do not assume that what applies on an SME's home turf or in other investments made elsewhere necessarily apply in China. SMEs are encouraged to use a lot of common sense and check all information and data twice. Until a clear picture has formed, SMEs need question all that is told to them, and above all, not take for granted advice given by internal staff as in some cases there may be a vested interest, an ignorance of international tax planning, or a lack of practical experience which could possibly affect operations down the line.