Chill Out Tax Man. The China WFOE Is In The Hopper.
Now I know that one of the overriding themes of this blog since its inception is that China is stepping up its enforcement of laws against foreigners, but I am getting a strong vibe that things just ratcheted up another notch or two.
Two times in the last few weeks, two clients in two different industries and two different cities, but both of whom we are in the process of registering Wholly Foreign Owned Entities (WFOE) reported how Chinese tax authorities had come by to complain about their not paying their taxes. In both cases, our clients informed the tax authorities that they were just in the process of starting out and explained how they were waiting to hear back on their WFOE applications. In both cases, the tax authorities told them to hurry it up, which is great except the company registration people seem to be taking longer than ever these days.
Never before had a client of ours been approached by the Chinese tax authorities during the pre-WFOE stage. I see this as part of the tax crackdown against foreigners I discussed in the post, "China's Top 5 Business Law Trends For 2010:"
3. China will increase its tax collection efforts. This has been going on at a rapidly accelerating pace over the last six months or so. If your China operations are not making a healthy profit, do not be surprised if the government imputes healthy profits to it. In particular, the government will look very closely at your transfer pricing and in many cases it will not like what it sees.
We also just got two denied China visa calls and we usually only get two or three of these a year. Both came from people insisting they had been getting China visas for years without any problem, and that nothing should have changed for them.
What is going on here? Is this just a payback for America's recent foreign policy? If so, is this being coordinated from Beijing, or is this just some locals expressing their own unhappiness regarding a few F-16s? Were the visa denials just a Shanghai Expo house cleaning? Or is all of this a sign of China's intention to increase the pressure on foreign businesses even further?
What are you seeing/hearing out there?
Comments (14)
Read through and enter the discussion by using the form at the endStan Abrams - March 2, 2010 12:54 AM
Same vibe on my end. I've also seen a lot of pushback/gov't involvement in the tech transfer area. When tech/royalties are going offshore, there is a lot more scrutiny than there used to be from MOC. I'd call this a definite step backwards, since the simple tech transfer process established by the "new" 2001 law was implemented to cut down on this sort of thing.
I don't think any of this is a reaction to recent US-China relations issues. There has been a noticeable shift going back well over a year that, I think, has more to do with the mature status of the Chinese economy and the government's reaction to the Great Recession. Additionally, local tax guys might be pushing harder because some local government budgets are in precarious positions and could completely blow up if the property market goes south.
allroads - March 2, 2010 1:01 AM
Interesting observation on the WFOE. What has been the timeline lately? I was told recently that everything was normal for Shanghai. Perhaps other cities are different?
were the visas tourist/ business/ working?
I would expect to see some up/down on tourist visas before the EXPO. Security is going to be just like Olympics, but they have to maintain for 6 months, and everything that was reported in the run up to Beijing I would expect as a minimum for Shanghai.
R
Twofish - March 2, 2010 9:05 AM
Also, I don't think it's specifically China. Everyone is cracking down on tax collection.
Matthew - March 2, 2010 5:35 PM
Dan,
One of my colleagues and I recently (2 days ago) had an article published in the International Tax Review (ITR) (http://www.internationaltaxreview.com/includes/magazine/PRINT.asp?SID=724703&ISS=25580&PUBID=35) on the topic of the increased tax collection efforts by the authorities in China and outline some of the practical steps in dealing with investigations.
Tim - March 2, 2010 6:18 PM
I haven't seen significant delays occurring in Shanghai or Beijing, although apparently Beijing last year decided that they would not allow companies to switch districts. Not a regulatory change but rather an unstated rule - fear of losing tax revenues.
Tax bureaus at the district level will occasionally have campaigns to improve tax collection efforts. This often takes the rather sophisticated approach of going from floor to floor in an office building and knocking on doors. FIE's are always attractive in this case as they tend to comply to tax regulations. We've seen this a few years ago with one of our clients in Shanghai. They were changing districts but their former district dragged their feet to release them. The new district's tax bureau sent a couple of guys to my client's new office on several occasions to threaten them. Nothing came of it as my client was in compliance; it was simply the reluctance of their former district tax bureau to relinquish this revenue stream.
We have also seen this with RO cancellations. We were told in Beijing last year that we could not cancel a particular RO simply because it would hurt the district tax bureau's numbers. We were then promised that we would be allowed to complete the process after CNY.
I doubt this is a specific trend to clamp down on FIE's in terms of setting up; Stan's technology transfer issue is a different story. Instead I suspect what you are encountering is one of the following: district tax bureau attempting to fulfill a quota, intra-bureau wrangling, bureaucrat motivational deficiency, or incompetence.
Eye in Beijing - March 3, 2010 5:25 AM
There seems to be a general push back against foreign companies. We've seen this across the board. China is now "confident" (read: smug) in their world outlook. Following the financial crisis the idea seems to be "we tried it your way for a while, but now we have at least as much legitimacy as you."
We see this with standards and indigenous innovation, where China is actually forcing crappy products on the domestic market. For example, if you want an iPhone or Nexus One with WiFi, you need to buy it on the gray market. Why? Because any device that has WiFi must also be equipped with the crappy Chinese standard Wapi, which doesn't work. Most companies won't bother to come out with a separate design just for China. For products that do include Wapi, the owner of the technology gets all of the royalties, even though it's useless. Of course,no one buys iPhones through official channels as a result of this.
We see this across the board. It's just a trend of blatant discrimination against foreign companies with national pride in mind. I'm sure it's the same idea with taxes and visas. It's like the explanation in Goodfellas once the restaurant owner gets in bed with the mob: business is bad? F-you. Pay me. The kitchen burned down? F-you. Pay me. China now seems to believe it's such a privilege to have access to Chinese consumers that anything goes.
Chris - March 3, 2010 9:18 PM
While there is certainly a bit of nationalist pushback in some recent moves on Govt procurement and Chinese technological development, overall the toughest moves are being made against foreign companies that do not comply with Chinese taxation, HR, commercial law.
Too many cowboys came in with the 'anything goes' mentality. Practices that would not be acceptable in the USA, Canada, Europe etc, became the norm for a whole range of foreign SMEs and even larger enterprises.
In assessing whether we are experiencing nationalist discrimination on taxes, visas, HR etc, foreign managers need to ask themselves:
a) would the practice being challenged by the Chinese authorities be acceptable in the US, Europe etc, both within the company and under the laws of those countries; and;
b) are Chinese enterprises being subject to the same level of scrutiny on these issues.
On the tax issue, the pressure on SOEs and larger domestic companies to comply is actually much heavier than on foreign enterprises (which are generally more compliant). The State Tax Office has been all over them for the past 24 months. Larger private domestic enterprises are now feeling the heat.
On visas, every country is tough on work visas. China remains relatively open. Establish a WFOE and get your staff employed and paying taxes and you will discover China remains fairly open and straightforward. Getting employment permits for foreigners in the USA, Europe, UK etc remains extremely difficult.
Overall, senior expat managers need to consider China very, very similar to their home jurisdictions on compliance issues.
Pepijn Meyer - March 4, 2010 12:17 AM
Do you see a different approach between USA nationals compared to Europeans?
Best,
Pepijn
Dan - March 4, 2010 5:36 AM
Stan,
I don't see it as push-back arising from foreign policy disputes either. I see it as China becoming more confident and feeling less in need of foreign investment, which means that these sorts of thing is going to be ongoing.
Dan - March 4, 2010 5:39 AM
allroads,
On the WFOES, we have not so much seen any change in timelines but we are definitely seeing an increase in the requirements for documentation, which itself can slow things down. These people both were coming in on tourist visas, which they should not have been doing, and I'm thinking it is in that arena where the crackdown lies.
Dan - March 4, 2010 5:39 AM
twofish,
I agree, but we just focus on China....
Dan - March 4, 2010 5:39 AM
Matthew,
Thanks.
Dan - March 4, 2010 5:40 AM
Tim,
Absolutely. Everything these days seems to have a tax collection focus.
Dan - March 4, 2010 5:42 AM
Eye in Beijing,
I love your Goodfellas analogy both because it is a great movie and it rings very true.
I have heard/read much about what you are describing in the technology (and government related work) sector, but so far, my firm's clients have experienced little to none of that, or at least they haven't talked with us about it.