circles.jpgGood
news for western businesses looking to establish a trading or
distribution operation in China. Its now a lot easier than it used to
be thanks to a new regulation known as Circular 8.

But the bad news is China tops the list
of Asian countries that pose the greatest tax challenge, according to a
survey published by PricewaterhouseCoopers' Hong Kong office.

Circular
8, introduced last year, enables a foreign investor to establish a
wholly-owned company anywhere in China, with full-fledged trading and
distribution rights with just USD4,000 in capital. According to PwC:

Circular
8 makes tapping the domestic market a real possibility for many smaller
to medium-sized companies who wish to exert direct control over their
China business activities.”

As well as benefiting
new entrants, Circular 8 is also causing established foreign investors
to review the effectiveness of existing Chinese operations set up in
more restrictive times. Some of the options include:

  • Upgrading an existing representative office to a fully-fledged distribution vehicle
  • Upgrading
    trading companies in free trade zones to distribution roles or
    transplanting trading companies outside the FTZ and establishing a
    network of branches throughout the mainland
  • Redesigning Chinese holding companies to function as national distribution vehicles
  • Expanding existing manufacturing or service companies to perform trading and distribution

But
while company formation is now much easier, the bad news is that
China's tax environment is likely to become less favourable for FDI.

That
is because the government wants to create a level playing field for
Chinese and foreign investors. According to PwC, tax breaks mean
foreign investors are today paying an average effective tax rate of 10%
to 15% in China, whereas domestic companies are at a disadvantage and
generally taxed at 33%.

China's tax and investment regulations
are constantly changing, and often lack interpretive clarity and
consistency in implementation. China also adopts a fairly aggressive
audit approach, and a hefty penalty and surcharge regime. Worst of all,
China's current legal system does not provide an effective appeal
process.

No surprise, then, to see China comes top of the list of Asian countries that pose the greatest tax challenge.

PwC
says there is no magic formula for getting it right in China. Foreign
companies must do their homework and should consider their options
carefully.

Key aspects such as investment holding structure,
financing arrangements and profit repatriation strategies have to
considered at the beginning of the FDI process, as they have an
enormous impact on the after-tax return on the investment, on the
ability to restructure in the future and, most importantly, on the
ability to repatriate hard-earned cash out of China.

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