The National Business Review / October 23, 2015
Special
Report
23
Doing business
with China
Kiwi companies will need to watch China closely. Changes to China’s IP laws, currency, local government coordination, internet policy,
stock market, central reporting, manufacturing and other areas will each disrupt foreign existing business in the country in different ways.
Knowing when to shift your investment, or perhaps even when to pull it from the country, is now more crucial than ever.
Looking east: risks and
rewards for businesses
Nevil Gibson
says cover is now mandatory for
companies in a variety of industries
that produce heavy metal
pollutants.
“There was a long period when
nothing was done and now they’re
making some big reforms from an
environment perspective in a very
short period,” he says.
“Directors and officers need to
keep an eye on where insurance is
compulsory and make sure they
comply with those laws.”
Mr Vale says the China market is
unique because of the large degree
of state or public ownership.
“Just because they are stateowned companies doesn’t necessarily mean they have a strong
risk management background or
focus. This should not be taken for
granted whether state or privately
owned.”
He advises insured parties to be
careful about the structure of their
arrangements and if necessary have
a clause in agreements to reveal a
minimum level of insurance.
“This is the easiest way to get
some form of visibility of any cover
in place.
As one of 10 designated global
“too big to fail” insurance companies, AIG will remain a significance
presence in China.
But the industry was shocked
last week when IAG, the unrelated
Australia-based insurer, scrapped
plans for further investment in
China.
Chief executive officer Mike
Wilkins says the company will
instead seek growth in other
Asian markets. “After completing
significant work on assessing the
opportunities available, IAG has
determined not to pursue further
investment in China,” he said in a
statement. “While we believe in the
fundamentals of China, our future
focus will be on pursuing growth
opportunities in our other Asian
markets and our core businesses in
Australia and New Zealand.”
In 2001, IAG bought a 20% interest in Tianjin-based Bohai Property
Insurance for about $A100 million.
New lessons are learned every day
on doing business with China, the
world’s second-largest economy.
Just this week, the pioneer of
Western fast food in China decided
to upend its operation and turn it
over to local operators. Yum Brands,
which owns the KFC, Pizza Hut
and Taco Bell restaurant franchises,
first entered the Chinese market in
1987.
It quickly established itself and
became a success story, with 4900
Insurance rules
KFCs in 1000 Chinese cities as well
Although few New Zealand comas 1400 Pizza Hut stores and nearly
panies will be involved in heavy
300 delivery outlets. Yum also owns YUM FRANCHISES: The pioneer of Western fast food in China is selling to locals
industries, they may be dealing
a Chinese chain of hot-pot stores
with other companies that are.
called Little Sheep.
lowered confidence in Beijing’s eco- helping the country restructure the
In governance, issues arise over
economy from an export focus of
But these nearly 7000 operations nomic management.
payment of defence costs for local
consumer goods to a high-value
have turned sour for Yum over the
directors and officers not covered
The government botched a
one based on higher domestic con- by global policies, the interests of
past three years, turning from being rescue of the stock markets, which
the stars of its global portfolio to a
joint-venture partners and laws
fell 29% during the quarter before
sumption.
liability.
covering employment obligations.
partially recovering this month, and
Companies doing business in
Hence the decision to split off
In food safety areas, insurance is
announced a surprise devaluation
China need to be mindful of the
the China business and turn it into
less developed.
of the currency – a move that global changing requirements of risk
a separate, publicly traded fran“The ability to respond to such a
investors saw as a sign that China’s
management.
claim in China requires a local poleconomy was struggling.
Multinational insurer AIG says
chisee.
two areas where protection is
icy,” Mr Vale says. “Having a local
either mandatory or highly recompolicy with local language will help
Widespread issues
in reputational issues and in comMarch to market economics mended are in governance and the
Unfortunately, the problems that
environment.
beset Yum are not unknown to a
Overall, China’s economy remains
municating with the public, areas
Ben Vale, manager of AIG’s Asia
raft of other multinational comhobbled by hefty debt, overbuilding
that are critical to those in food and
Pacific multinational risk practice,
in housing and excess manufacturbeverage.”
panies operating in China, from
[email protected]
McDonald’s to Mercedes Benz.
ing capacity.
These include food-safety scares,
The manufacturing sector
which have hit New Zealand
has seen slumping profits and 43
Renminbi’s direction a balancing act
exporters, as well as accusations of
straight months of deflation.
price gouging, dodgy product qualBut these are also part of the
process toward China’s fuller
ity, bribery and refusing to handle
weaker than expected. Factories have seen 43 consecutive
China’s currency objective has moved away from being
embrace of market economics,
consumer complaints.
months of falling prices and fixed-asset investment
purely competitive to help keep its exports competitive
reform of its financial system and
In the wider picture, compadecelerated in September.
to one that attempts to prevent a destructive level of
more sustainable growth.
nies have also been affected by
But retail sales and services have held up, while new
depreciation, a Deloitte analysis shows.
Its state-owned companies are
economic volatility, heightened
lending data in September point to a pickup in demand.
Its latest CFO Insights says China is also spending
being put on a more commercial
competition, poor choice of busiForecasting the future direction of the currency is hard
foreign reserves to maintain a floor under the renminbi (or
basis and the renminbi, or yuan, is
ness partners and misreading the
yuan) to curb domestic price inflation in essential imported and provides the central bank with a difficult balancing
act, CFO Insights says.
commodities and offset reduced overseas interest in
being moved to a more convertible
market.
This is because trading of the offshore version of the
stocks and bonds.
currency to meet the conditions
China has also tightened the
renminbi (CNH) is restricted and can differ in value from
The Insight authors say the currency is at a tipping
of being accepted into the special
laws and obligations for foreign
the onshore version (CNY).
point.
drawing rights basket run by the
companies as part of a general
An added complication is that too much support for
“Among the most obvious factors is that a depreciated
International Monetary Fund (see
purge against corruption among
the
renminbi may in itself weaken global sentiment for
currency
will
probably
do
more
to
suppress
import
levels
box story).
government officials.
than to stimulate export levels – which has a direct impact the currency and the government-supported institutions
In reacting to this week’s
Observers of the Chinese scene
involved.
on consumer demand and growth,” they say.
announcement of third quarter
constantly warn of these dangers,
Other sources say further cuts to interest rates cannot
A weaker currency will probably affect pricing of popular
growth for 2015, Premier Li Keqiang
while outsiders also chart the
be
ruled out. Past efforts, including five interest-rate cuts
imported
items
such
as
infant
formula
and
fashion
items.
impact of China’s slowing economy was quoted as saying, “even though
and
several rounds of reductions to the reserve level since
Recent
figures
show
both
exports
and
imports
declined
it was 6.9%, it is still a growth rate of
on the global scene.
November,
have failed to reboot growth.
during
the
third
quarter,
and
industrial
production
was
The September quarter featured around 7%.”
several policy missteps that dented
growth, rattled global markets and
He said employment had
improved and innovation was
24
October 23, 2015 / The National Business Review
SPECIAL REPORT: DOING BUSINESS WITH CHINA
From trade mark trolls to IP respecters –
what China’s IP laws mean for New Zealand
Hamish McNicol
New Zealand exports to China in
the past year have been worth more
than $8.3 billion.
But in a country which in 2012
had more than one million patents
filed, compared with only about
6000 here, intellectual property
issues represent a “big barrier” for
Kiwi businesses.
A leading patent attorney, however, says despite China still being
in “catch-up mode” on IP issues,
there are ways around the hurdles.
AJ Park partner Anton Blijlevens
says China’s IP laws and enforcement have become similar to the
rest of the world.
There are still two main issues
for New Zealand companies looking
to enter the market, however, one of
which he says is easy to avoid.
Much like most of Europe and
South America, China has a “first to
file” law for trade mark protection,
Mr Blijlevens says, which means
whoever files for a brand first generally has the rights to it.
This has created a market for
“opportunists,” who have realised
there is a growing market for foreign
products in China, leading to them
filing trade mark registrations for
those brands.
“In New Zealand, the first to use
a brand will have trade mark rights.
“When the original brand owner
subsequently starts selling product
in China, they are faced with trade
mark infringement proceedings
along with an offer to sell the trade
mark at an exorbitant price.”
Mr Blijlevens says this is known
as “trade mark squatting” and is
similar to what happened with
domain name registrations in the
late 1990s.
The practice has caught many
New Zealand companies out, he
says, meaning they either have to
rebrand specifically for the Chinese
market or spend a lot of money in
court.
But companies can avoid this by
filing applications as early as possible, even if exporting to China is
not yet on the radar. “It’s cheap and
can save a lot of grief later,” Mr Blijlevens says.
How to catch a con
A second issue for New Zealand
companies wanting to sell into
China is the enforcement of IP law.
James & Wells IP specialist
Johnathan Chen says the Chinese
government is setting up agencies
and specialist courts to help deal
with IP infringement.
The country’s subtle “lower-tier”
patent system means China has a
lower threshold for “inventiveness”
for the subject matter of a patent,
although overall it is relatively in
line with the rest of the world.
“It is cheaper, faster and has
teeth for enforcement.
“These do not significantly
impact New Zealand businesses
unless they are in the niche market
of those subject matters that are not
patentable subject matter.”
country still in catch-up mode and
ironing out business hurdles as they
grow.”
Mr Chen calls the squatters
trade mark “trolls,” who ask for
“exorbitant” prices from overseas
companies looking to buy their
Time and money
marks back.
Trade mark “squatters” are proving
In one situation, Mr Chen says
a major barrier for some New Zeathe Chinese distributor for a New
land businesses, Mr Blijlevens says.
Zealand brand turned into “trolls,”
It is also expensive to try to
filing custom notices notifying Chiwin back trade marks, which have
already been registered in other
nese Customs they were the rightful
parts of the world, and any chalowners of a certain brand.
“The legitimate New Zealand
lenges are usually unsuccessful,
products were detained on the
which costs more time and money.
docks until we negotiated a deal for
But while this is currently
the New Zealand client,” he says.
impacting businesses, it is also
Businesses also like to “save a
improving, he says.
buck,” he says, going for the cheapMany have rebranded especially
for the Chinese market, too.
est options available.
China’s IP examination process
is strict, bureaucratic and time consuming, however, taking about one
and a half years for a trade mark
and up to four for a patent, meaning it is extremely important to get it
right the first time.
“We have to try to recoup situations all the time for companies that
deal with cheap filing agents who
offer a cheap price to file the mark,
and do not offer any of the strategy
for getting it right first go, and comTROLLS: James & Wells IP specialist
Johnathan Chen says trying to “save a buck” pletely drop the ball with how the
on Chinese IP applications can ultimately
marks are filed and the like.
come back to cost businesses more
“What ends up happening is it
costs the New Zealand companies
more to fix the mess, and in some
“For some New Zealand product extremely bad cases the situation
being exported to China, it’s not
cannot be reversed.”
so much about the specific brand
He says this is a significant barbut instead the ‘Brand NZ,’ clean
rier for Kiwi businesses because
and green story that sits behind the
most legitimate distributors will not
product that is the value driver in
touch products that do not have all
the Chinese market. the legal rights attached to them.
“Astute owners of export brands
“However, most Kiwi companies
and technology are taking a long
cannot afford to pay the exorbitant
term view of any IP issues in China,
price.”
knowing that in many respects it’s a
[email protected]
that it is just as important for them
to own the Chinese equivalent
brand, not their Chinese distributors, as this makes switching down
the track extremely difficult.”
HURDLES: AJ Park
partner Anton Blijlevens
says astute Kiwi
business are taking a
“long-term view” of IP
issues in China
Mr Blijlevens says there are more
ways to uphold IP rights in New
Zealand than in China but identifying and catching the offenders in
the first place can be tough.
“Production tooling used to
make counterfeit product is relatively cheap. It’s not uncommon for
counterfeiters to abandon tools,
run for the hills, so to speak, and
be up and running again with new
production tools in a different location.”
Related to this, is the fact IP filings are increasing in China.
Mr Chen says China now files
“well over” one million trade mark
applications each year, with the
Chinese now respecters of IP, rather
than pirates.
A New Zealand company may
be selling a product in New Zealand
but this could infringe someone
else’s IP rights in China when
exported there.
This highlights the importance
of a “Chinese equivalent” brand, he
says, which Chinese consumers will
recognise.
“Chinese consumers speak and
read Chinese, so a Chinese equivalent brand is important.
“Businesses often don’t realise
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leads and success follows.
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sights on overseas markets like China, your ambitions are what give
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and internationally.
For more details on how we can help you achieve your ambitions
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26
October 23, 2015 / The National Business Review
SPECIAL REPORT: DOING BUSINESS WITH CHINA
Where New Zealand fits in
China’s economic renaissance
Jason Walls
The Chinese economy is slowing – no
economist would disagree with that.
Although the implications of the world’s
second biggest economy moving down a
gear are vast, China’s shift in focus from
an exports driven economy to one based
on consumption has been flagged many
times.
In 1994 Nobel Prize winning economist
Paul Krugman published an article titled
the Myth of Asia’s Miracle, which forecasted
a slowdown in the Chinese economy.
Although the essay was criticised at the
time, Mr Krugman’s thesis proved prophetic.
China’s economic growth was 7% in
2014 – an enviable level of GDP growth for
most countries – but for China It was down
from double-digit figures.
The International Monetary Fund (IMF)
forecasted in 2012 that China’s economic
growth would continue at 8% until 2017.
But it quickly became clear the IMF’s
forecast had overshot.
Earlier this week, Chinese third quarter
GDP figures revealed the economy had
edged down from 7% to 6.9% growth when
annualised.
Although this figure beat many analysts’
expectations, various figures show over
the next few years the economy will ease
further.
Goldman Sachs slashed its Chinese
growth forecasts in August, citing pessimism over its economic health.
Goldman marked down its 2016, 2017
and 2018 projections to 6.4%, 6.1 % and 5.8
% respectively. These figures were down
from previous estimates of 6.7%, 6.5 % and
6.2%.
Figures from the OECD paint a similar
picture, forecasting China’s GDP growth
well into the 2050s (see graph) .
Although these figures reflect slowing
growth, the world is witnessing a “measured slowdown” in China, rather than a
dramatic collapse.
“[China’s measured slowdown]
reflects the structural change in the
economy,” ASB
head of AgriCapital
Kevin Cooney says.
The Chinese
economy is havA MEASURED
SLOWDOWN: ASB head
ing to make a
of AgriCapital Kevin
transition from an
Cooney says the world is
investment-led
witnessing a structural
GDP growth, to
change, rather than a
more of a consum‘measured slowdown’
er led GDP growth
model, he says.
“I think that transition will also take
some time. It does not happen overnight.”
But China’s new economic focus represents an opportunity for New Zealanders
looking to do business with the People’s
Republic.
University of Auckland Asian studies
professor Paul Clark suggests that there is a
desire to generate more economic growth
from within China.
“Given there are 1.4 billion people in the
country, it’s perfectly possible to do that.”
China’s exploding middle class
There are signs China’s new economic
focus is good news for New Zealand but
other countries have not been so fortunate.
Australia’s economy has taken a beating as China’s economy has been cooling.
When many other developed countries
plunged into recession following the 2008
global financial crisis, one of the reasons for
Australia staying afloat was China’s investment into infrastructure.
With the explosion of new building,
demand for hard commodities – such as
metal – was high and countries, like Australia, which were able to fill this demand,
reaped the benefits.
New Zealand was less fortunate, as
demand for soft commodities – such as
dairy and beef – fell.
DOING BUSINESS
IN CHINA?
Exporters with the right
intellectual property advice
are more likely to succeed.
Talk to AJ Park today.
Coffee’s on us.
From P26
OECD long-term forecast
GDP Volume (At 2005 purchasing power parity, $US) Growth – change
12.5%
10.0%
7.5%
Forecast
5.0%
2.5%
0
2010
2016
2022
2028
2034
2040
2046
2052
2058
Source: OECD Economic Outlook No 95 – Long-term Baseline Projections, 2014
But it would seem the tables have
turned. The Australian government calls
China’s slowdown “the new normal” but
with China demanding fewer hard commodities, Australia’s terms of
trade has
widened.
PAUL
BLOXHAM: Says
the Chinese
tourism market
represents
huge
opportunity
for New
Zealand
businesses
The National Business Review / October 23, 2015
“The fundamentals are China’s middle
class continues to grow,” Mr Cooney says.
According to research by McKinsey
& Company, by 2022 more than 75% of
China’s urban consumers will be earning
between $US9000 and $US34,000 a year –
technically defined as the middle class in
China.
McKinsey also suggests by the same
year, 54% of urban households will be
classed as “upper middle-class,” with
incomes between roughly $US20,000 and
$US34,000.
Mr Cooney says this represents a “whole
rump of consumer spending power.
“The opportunity for New Zealand is to
work out what those consumers are going
to be most interested in spending their
money on.”
He says at the moment, 40% of a Chinese person’s income is spent on food.
“Increasingly, consumers will demand
Continued on facing page
higher quality food that’s safe and has high
nutritional integrity,” he says.
“They will demand more proteins. They
are already demanding product which
is absolutely safe and which they can be
assured it’s safe and has high nutritional
integrity.”
He says New Zealand is well placed to
capture more value from that trend.
China Construction Bank (CCB) executive general manager of corporate banking
Lloyd Cartwright says the growth story for
China’s middle class has “only just begun.
“The growth of the middle class is only
really the tip of the iceberg at this point,”
he says.
“In the move to a more consumer led
economy, focusing on the social aspects of
growth is very important for China.”
Mr Cartwright agrees New Zealand is
well positioned when it comes to doing
business with China.
“New Zealand is a surplus producer
of products which have large demand [in
China],” he says.
He says it’s important for New Zealand
businesses to add value to their products
when looking at doing business with China.
But it’s not just the traditional means
of trade that Mr Cartwright is optimistic
about.
He says China is becoming increasingly
reliant on e-commerce and e-marketing –
whereby business is conducted online.
Figures from New Zealand Tourism
reveal a 21% increase in Chinese visitor
arrivals for February year-on-year.
The Ambition 2025: Insights, Trends and
Opportunities in Asia report from Auckland
Airport outlines in 2013, the Asia inbound
market contributed more than $1.6 billion
to the New Zealand economy.
It also states that, by 2025, this market
has the potential to contribute more than
$4.6 billion to New Zealand’s economy
annually.
“China and other emerging Asian
markets are truly the greatest source of
opportunity.
“Their economies are industrialising,
urbanising and rapidly growing the number of middle-class households in their
countries,” the report says.
HSBC chief economist Paul Bloxham
says the Chinese tourism market represents
huge opportunity for New Zealand businesses.
“Chinese arrivals are up 180% over the
past five years, or up from 100,000 arrivals
five years ago to over 300,000 Chinese,” he
says.
There is more good news on the horizon, as Mr Bloxham forecasts Chinese
tourism numbers will double over the next
decade.
“Just 4% of the Chinese population have
a passport, so we think there is a lot more
scope for increased travel by the Chinese,”
he says.
China’s shift from an investment-led
Earlier this week, Chinese third
quarter GDP figures revealed the
economy had edged down from 7%
to 6.9% growth when annualised. Although
this figure beat many analysts’ expectations,
various figures show that, over the next few
years, the economy will ease further.
In 2013, China surpassed the US as the
world’s largest digital retail market. A report
by Bain & Company suggests that, in any
single day during November 2013, more
people logged on to China’s most popular
e-commerce site than the entire population
of Brazil.
A study by eMarketer revealed similar
results when looking at China’s e-commerce over the next few years.
“eMarketer estimates retail ecommerce
sales, excluding travel and events tickets,
will rise 42.1% in 2015 to US$672.01 billion,
easily making China the world’s largest
ecommerce market.
“In fact, China will account for more
than 40% of the world’s retail e-commerce
sales this year,” the study found.
Mr Cartwright says New Zealand businesses are building strong e-channels in
China and say he has observed some “brick
and mortar” businesses are closing due to
online demand.
“Some foreign supermarkets are closing
and going straight to e-channels, which
is a potential advantage for New Zealand
because some time we cannot meet the
size of requirements for an importer from
China.”
He says e-channels provide a good portal for New Zealand firms to do business in
China.
A taste for travel
Anton Blijlevens
+64 9 356 7665
[email protected]
SPECIAL REPORT: DOING BUSINESS WITH CHINA 27
As well as the increase in consumption, the
Chinese are getting a taste for travel.
In 2013, China’s outbound travel exceeded 80 million trips and this number is projected to increase to 100 million this year.
It would seem that many Chinese travellers are looking at New Zealand with interest.
export story, to more of a services consumer led story means they will consume more
things people in developed economies
consume, “tourism is one of those things,”
he says.
“Chinese tourists are playing a bigger
role in global tourism flows. As middle class
Chinese incomes rise, more and more people are travelling and that includes destinations like New Zealand.”
How relationship equity could
determine your company’s
fate in China
Joshua Riddiford
China and its growing market piques the
interest of many ambitious outside investors but the country’s cultural practices and
modes of doing business remain poorly
understood.
NZ China Council executive director
Patrick English says despite China becoming more business friendly in recent years,
guanxi – a Chinese concept that loosely
translates as “relationships outside of the
family” – remains an important aspect to
doing business in the middle kingdom.
Relationships in China should be seen
as an account where you have to put into it
to be able to draw on “relationship equity,”
Mr English says.
“Guanxi is as much about responsibility as it is about opportunity. There is a lot
of obligation and you must make sure that
you stay in positive credit.”
Guanxi could be a double-edged sword
for New Zealanders doing business in
China because connections may mean
advantages like easier establishment of distribution and supplier networks but those
connections could count against the business if the relationship with a local partner
turned sour, Mr English says.
“If somebody’s got vested interests in an
area that enables the business to happen,
those vested interests are also able to load
the deck if something goes wrong. It’s an
equal measure of risk and opportunity.
You want to make sure that you have a
degree of neutrality wherever you operate,
so there aren’t as many vested interests.”
AJ Park patent attorney partner Anton
Blijlevens agrees relationships are important to business success in China. He says
New Zealand businesses should be prepared to devote a lot of time to cultivating
relationships with Chinese partners.
“Chinese businesspeople want to know
you before they want to do business with
you. This takes an investment in time
that many are not used to. We are used to
business negotiations and a contract concluding much sooner than it takes to get a
deal across the line with Chinese businesspeople.” Continued P28
Risk is everywhere.
And so are we.
Looking to the future
Mr Cartwright says the China story has not
yet run its course.
“We will see continual opening up of
the Chinese economy and of the capital
account,” he says.
He says one of the ways China is looking to promote itself on the world stage is
through its pioneering of the Asian Infrastructure Investment Bank (AIIB).
The AIIB is a new, multilateral development bank that will provide finance and
infrastructure for projects in Asia.
It has investment capital of $100 billion,
with contributions from many countries,
including India, Russia and Australia, and
will address some of Asia’s infrastructure
needs. Finance Minister Bill English tells the
National Business Review the bank will
provide capital for infrastructure and development across economies where New Zealand has a long-term interest.
Treasury secretary Gabriel Makhlouf
says the AIIB is important for New Zealand.
The capital invested in the AIIB will help
support investment into improving infrastructure in the Asia-Pacific region, benefiting New Zealand in the long run.
[email protected]
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28
SPECIAL REPORT: DOING BUSINESS WITH CHINA
October 23, 2015 / The National Business Review
How relationship equity could
determine your company’s fate
in China
From P27
At a national level, the relationship
between New Zealand and China has been
quite strong following the NZ China free
trade agreement, so New Zealand was able
to draw down on its equity, Mr English says.
The Labour Party’s release of material
using Chinese names as a proxy for Chinese homeownership, did not raise much
concern but the recent Lochinver decision
by cabinet ministers overruling the Overseas Investment Office was not seen as a
good way to maintain the relationship by
Chinese leaders, he says.
“It’s viewed with a reasonable level of
realism but I think the recent decision on
Lochniver has had a much greater impact.
It’s not so much that the decision went
against Pengxin but the process that it went
through over such a long period of time
and then how it was handled in the end. It
didn’t acknowledge the importance of the
relationship with China.”
Guanxi, like much of doing business in
China, represents opportunity and risk for
New Zealand companies and in a country
that is changing fast, there is no quick fix.
“People need to do their homework.”
Many businesspeople are excited by the
PATRICK ENGLISH: ‘Guanxi is as much about
responsibility as it is about opportunity’
opportunities China offers but fail to put in
the necessary planning to be successful, Mr
English says.
“I’ve seen people who have signed
contracts in Chinese that they haven’t had
translations for. They have just had their
Chinese counterpart saying ‘this is what it
says’.”
Businesses also underestimate the time
and money they needed to get things done.
“It is an incredibly expensive place to
do business now. You have got to be well
resourced. You are competing against international and local business,” Mr English
says.
While all these factors are important, he
says there are no hard and fast rules about
doing business in China.
Differences also exist within the Chinese business environment, Mr Blijlevens
says.
“Beijing is more traditional. Shanghai is
fast and much more commercial.”
Mr English says Chinese culture emphasises another factor that shouldn’t be
underestimated by New Zealanders.
“There’s a certain element of luck where
planning meets opportunity.”
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SHANGHAI: Faster and much
more commercial than traditional
Beijing
SUPPLIED CONTENT
Doing business with China: The evolving tax landscape
Builds a better future
Doing business in a foreign country is never easy and dealing with international
tax developments and the ever changing tax landscape has its challenges at
the best of times. Combine these normal pressures with the on-going tax
developments in China and the current global tax debate on base erosion and
profit shifting (BEPS) and you really need to be ahead of the game.
In recent times there has been a simplification of the rules applying to wholly
foreign owned enterprises (WFOE) in China. Organisations using representative
offices are recommended to review and monitor the scope of their China activities
to ensure that the representative office is operating within its allowed scope and
to ensure that a separate taxable presence does not arise for the New Zealand
group. The recent changes mean it is now much easier to use a WFOE and this
may result in increased certainty and a reduced tax base in China as well.
China is currently transitioning from its business tax system to VAT (GST)
and the new rules are being phased in across different industries at different
times so it is important to monitor these developments. This obviously results
in necessary systems changes and additional compliance costs especially given
the China regime is quite different from the GST regimes that operate in New
Zealand and Australia. Difficulties with the VAT exemption for services charges
to non-residents can also result in VAT leakage. These implications need to be
carefully managed.
Recent developments have simplified the processes for making payments out of
China to related entities however there is still a significant level of complexity
in navigating the withholding tax requirements and ensuring a tax deduction
is available in China for the costs. Care needs to be taken in relation to related
party cross border payments out of China.
•
Providing comprehensive banking services with a
focus on customer care
•
Simplifying the process of trade relations between
New Zealand and China
•
A global network of over 14,000 branches and
over 25 countries
China Construction Bank (New Zealand) Limited
nz.ccb.com
Finally, China is entrenched in the current BEPS debate and a number of the
OECD proposals will likely result in an increased tax burden for multi-national
groups doing business in China. These changes include transfer pricing
developments in relation to pricing methods and the treatment of intangibles, as
well as other matters such as “country-by-country reporting” and the tightened
rules for permanent establishments.
The Deloitte China Services group in New Zealand and China assists a large
number of New Zealand organisations with navigating these issues and is
extremely well placed to assist you as required. Please contact Jenny Liu at
[email protected] or your regular Deloitte advisor.