Comparison: Chinese Foreign-Owned Enterprises Versus Private Limited Companies in India

In China, a wholly foreign-owned enterprise (WFOE) is a limited liability company (LLC) formed solely by one or more foreign investor(s) with no mandatory requirements to have a domestic partner. The flexibility afforded to a WFOE through Chinese policies makes it a popular form of foreign investment in China.

Foreign investors increasingly believe that China’s economic and legal development make it unnecessary to over-rely on guidance from a local partner.

Many factors make the establishment of WFOEs attractive in China, especially for businesses engaged in manufacturing or trade.

These include:

  • 100 percent foreign ownership and control;
  • Security guaranteed to technology and intellectual property rights;
  • Ability to develop own internal structure;
  • Capacity to retain organizational culture even on foreign land;
  • Access to China’s large market; and
  • The ability to repatriate funds to holding company.

Under Indian law, foreign investors are able to establish wholly-owned subsidiary companies (WOS) in the form of private limited companies if they operate in sectors that permit 100 percent foreign direct investment (FDI).

WOS in India work in a similar manner to Chinese WFOEs, with a few key distinctions. The specifications for establishing a wholly-owned subsidiary in India can be found here and for establishing a WFOE in China can be found here.

Regulation of foreign-owned companies in India, China

In India, both 100 percent foreign-owned private limited companies and joint venture companies are governed by the same regulations. The Companies Act, 2013, regulates joint ventures (JVs) and wholly-owned subsidiaries in India.

In China, too, JVs and WFOEs are subject to the same general laws, such as the Company Law, 2013 and the Measures of Record-Filing for Establishment and Change of FIEs. However, there are other specific measures regulating each type of legal entity as well.

For example, a corporate JV in China, whether it is a limited liability company or a joint-stock limited company, is subject to Company Law, 2013. In addition, corporate JVs with foreign investments must also comply with the Sino-Foreign Equity Joint Ventures Law and the Sino-Foreign Co-operative Joint Ventures Law.

Different types of WFOEs have different registration criteria depending on their area of operation and category of industry. Some entities need pre-approval before setting up, trading WFOEs need to register with the customs department, manufacturing WFOEs need to pass an environmental impact report, among others. This is similar to the regulatory landscape in India.

The specifications for establishing joint ventures in India are discussed here.

Securing approvals for FDI in India

Foreign investment in India is regulated under the Foreign Exchange Management Act (FEMA), and is allowed under two different routes – the automatic and the government approval routes. (See the Consolidated FDI Policy published in August 2017 here. This has been amended in January 2018, which can be seen here.)

In both India and China, the scope of the business – the company’s intended activities – dictate the need to establish either a 100 percent foreign ownership or the requirement of additional national investors.

For example, any sector in India that attracts an equity cap or falls under the 49 percent government approval route for FDI needs an Indian investor to be involved within the business.

A business eligible for 100 percent automatic FDI requires no prior approval.

Setting up in India versus China

Setting up a private limited company / wholly-owned subsidiary in India differs substantially from the WFOE set-up in China.

The standard setting up process in India is known as the ‘automatic route’, which involves a comparatively easy establishment process.

Under this route, 100 percent investment is allowed in certain sectors, as per the Master Directions issued by the Reserve Bank of India (RBI).

For these sectors, no specific approval is required prior to setting up the entity, making the establishment process quite simple.

The investors are only required to notify the RBI within 30 days of the receipt of inward remittances and file the required documents with that office within 60 days of the issuance of shares to foreign investors.

For sectors that fall under the approval route, sectoral investment caps are defined, and investment requires government approval.

In this case, there is a separate set of procedures to be followed.

Among other things, the company must obtain approval for investment from respective ministries or administrative departments through the Department of Industrial Policy and Promotion (DIPP).

To improve the ease of doing business in India, the Indian government now allows 100 percent automatic FDI in most sectors.

In China, more industries are being opened up to FDI, such as the automotive and insurance sectors. The country released its latest Negative List in July 2018 reducing the restrictive measures from 63 to 48, and for a Negative List for Free Trade Zones, where restrictions were brought down from 95 to 45.

Major industries that are highly restricted because of FDI caps or other laws or practices in China include finance, telecommunications, education, healthcare, internet businesses, and any industry engaged in the extraction or processing of natural resources.

In India, the FDI regime is more liberal.

In its foreign investment policy released in January 2018, the government allowed 100 percent FDI under the automatic route for single brand retail trading and construction development sectors besides introducing relaxations for investing in power exchanges and the medical devices sector.

As mentioned earlier, most sectors in India allow 100 percent foreign investment without the need for specific government approval.

Industries were FDI restrictions apply include mining, defence, petroleum refining, broadcasting services, print media, and air transport services. However, even in these sectors, investments beyond regulated caps can be made after securing government approval.

Difference in organizational requirements 

Foreign investors interested in setting up a WFOE in China or a WOS in India must follow the government’s organization structure guidelines. However, distinctions exist here as well.

A WFOE set-up requires an executive director or board of directors, at least one supervisor, and a general manager.

The Indian WOS, on the other hand, must have a minimum of two directors and between two and 200 shareholders. A shareholder can be another legal entity, such as a Hindu Undivided Family (HUF), whereas directorship is held only by individuals.

As in the case of China, the amount of paid-up capital required should be a financial exercise to determine the business’ start-up and cash flow needs. For a WOS in India, there is a minimum share capital requirement of INR 100,000 (approximately US$1,500). This has been relaxed under the Companies (Amendment) Act, 2015.

Taxation of WFOE versus WOS

IB-Tax-Liability-–-India’s-Wholly-Owned-Subsidiary-ModelIB-Tax-Liability-–-China’s-Wholly-Foreign-Owned-Enterprise-Model

India does not charge a tax on profit repatriation whereas China levies a 10 percent tax on the value of repatriated funds. Additionally, China’s labour welfare costs are higher.

However, it is also important to note that domestic companies in India are liable to pay dividend distribution tax, levied at 16.995 percent of dividend payout, which is deducted from their reserve or surplus.

Foreign investors whose countries have double tax avoidance agreements (DTAAs) with India will need to calculate their respective tax liability according to the terms of the respective DTAA.

India DTAAs Part 1India DTAAs Part 2

Shanghai Is Piloting A New Startup Visa For Foreign Entrepreneurs

A new “business startup visa” has been piloted across select districts in Shanghai, giving foreign entrepreneurs the ability to live in China as they establish a business.

In May 2018, the Shanghai Public Security Bureau updated the policies for a new “Private Residence Permit (entrepreneurship)”, commonly referred to as the “business startup visa” (创业签证) , which offers foreigners a chance to establish a new and innovative startup business within Shanghai.

This visa is valid for one year, but can be extended for a further one year if the foreign entrepreneur is able to demonstrate the successful incorporation of a company within this time. Alternatively, this visa can be transferred to a work permit once the company is set up.

To date, the visa has only been piloted in certain districts in Shanghai, including Changning and Yangpu.

The business startup visa is unique in that its scope of eligibility is expansive — it includes individuals who have traditionally been excluded from many other visa categories, such as inexperienced graduates and individuals older than 60 years old.

Compared to traditional work permits, the business startup visa also gives investors and key management staff alike flexibility in conducting auxiliary business activities such as market research, business development, staff recruitment, lease searching, initial company setup procedures, etc. before getting the company legally established.

The following people are eligible to apply for the business startup visa:

  1. Foreign students who have the willingness to innovate and start a business in Shanghai and graduated from a higher education institution in China;
  2. Foreigners planning to invest in Shanghai or innovate in business; and
  3. Excellent overseas graduates from top Chinese universities or world-renowned universities who have been graduated for no more than two years but have made outstanding achievements in innovation and entrepreneurship in Shanghai.

Besides these special requirements, most of the required documents are similar to that required of other types of visa applications.

The business startup visa is just the latest policy rolled out by the Shanghai government to stimulate the city’s economic development through innovation and attracting high-level talent.

Recently, Shanghai released a series of 100 new measures, which include a variety of opening-up measures designed to ease market access in many key industry sectors.

Earlier this year, Shanghai also rolled out preferential visa and green card policies and business establishment incentives for top foreign talent.

However, Shanghai is far from the only Chinese city to launch visa incentives for foreign talent. Beijing and Yunnan province, for example, are among the regions that have released policies this year to attract high-end foreign talent.

What Are The Top Five Fastest Growing Cities in China?

In China, lower-tier cities are challenging the dominance of first-tier cities like Beijing and Shanghai for attracting foreign investment.

In recent years, the increasing cost of labor, housing, and land in first-tier cities has led many Fortune 500 companies — especially those in the computer, software, information technology, and e-commerce sectors — to settle in second- and third-tier cities.

Lower-tier cities are continuously announcing business incentives to attract investment and promote pillar industries, while also offering a variety of entrepreneurship and housing subsidies to attract talent.

China’s next generation of workers are aware of these trends. According to the 2018 Research Report on the Employment Market for Graduates, 40 percent of the 90,000 graduates surveyed hope to work in so-called “emerging first-tier cities” such as Chengdu, Hangzhou, and Chongqing, while only 27 percent hope to work in first-tier cities.

To understand how these lower-tier cities are performing compared to established first-tier cities and to identify those with the greatest economic potential, China Briefing examined all cities in mainland China with a gross domestic product (GDP) of more than RMB 500 billion (US$74.1 billion) in 2017 and calculated their GDP growth rates between 2012 and 2017.

In this article, we examine the business environment and latest developments in the top five fastest growing cities in China.

1. Hefei, Anhui

Hefei is the fastest growing city in China, with its GDP rising from RMB 416.4 billion (US$65.9 billion) in 2012 to RMB 721.3 billion (US$106.8 billion) in 2017 – an increase of 73.2 percent.

A survey by the State Administration of Foreign Experts Affairs titled ‘2017 Charming China’, revealed that Hefei was the third most attractive Chinese city in the eyes of foreign talent, placing just behind Shanghai and Beijing.

The city currently has eight core industries: automotive, equipment manufacturing, home appliances, chemicals, new materials, software and electronic information, biomedicine, and food processing.

Last year, Hefei was selected as a pilot city under the Made in China 2025 initiative, and as a result increased its investment in the manufacturing sector. To this end, in June 2018, Hefei announced subsidies of up to RMB 20 million (US$3 million) to eligible newly settled businesses in the circuit and software industries to promote investment in both these sectors.

Further, Hefei has ramped up efforts in targeting Fortune Global 500 companies in the equipment manufacturing, new energy vehicles, and logistics sectors in order to attract more foreign businesses and high-end human resources. The city has also committed to improve incentives targeting overseas professionals.

Earlier, in 2014, Hefei launched a system to promote industry development, introducing five specific measures to advance industrialization, innovation, agriculture, services, and culture.

By 2020, Hefei aims to realize a GDP of more than RMB 1 trillion (US$150.9 billion).

2. Yangzhou, Jiangsu

Ranked as the second fastest growing city, Yangzhou’s GDP rose from RMB 293.3 billion (US$46.4 billion) in 2012 to RMB 506.4 billion (US$75 billion) in 2017, an increase of 72.65 percent.

Traditionally, the dominant industries in Yangzhou have been automobile, machinery, tourism, software, and food processing.

In 2017, the city released plans to strengthen strategic emerging industries such as new energy, new medicine, novel materials, energy conservation, high-end manufacturing, information technology, and biotechnology. The objective is to generate an output value of RMB 700 billion (US$105.6 billion) from these industries by 20

Furthermore, Yangzhou is the bedrock of the software and information service industry in Jiangsu. Accordingly, analysts acknowledge that the city is well-positioned to influence regional industry development and industrial transformation.

In April 2018, the government announced generous incentives to attract high-end professionals, including a monthly rental allowance of up to RMB 3,000 (US$452.10) and a one-time housing subsidy worth up to RMB 2 million (US$ 301,390).

Yangzhou is also the only city in Jiangsu province to be awarded “pioneer” status as a result of its support for small and micro-enterprises.

Yangzhou, acknowledged as a highly livable city, is likely to continue its progression of economic growth and talent retention, as it continues to stimulate its economy through innovation and industry expert input.

3. Shenzhen, Guangdong

Shenzhen is the only first tier city that continues to expand at a country-leading pace. The city has seen GDP growth of 72.1 percent from 2012 to 2017, rising from RMB 1,295 billion (US$205.1 billion) to RMB 2,228.6 billion (US$330.1 billion).

For the first time, Shenzhen has overtaken Guangzhou to become the city with the third-highest GDP in mainland China in 2017, behind only Shanghai and Beijing.

As the fastest growing first-tier city and the most successful special economic zone, Shenzhen owes its success in part to its proximity to Hong Kong.

Shenzhen’s pillar industries are the cultural and creative industries, high and new technology industries, modern logistics, and finance.

In the future, the government will focus on developing emerging industries, including new energy and materials, life and health, robotics, intelligence equipment, and aerospace and aviation.

In recent years, the secondary (manufacturing) sector has received increased attention so as to avoid industrial hollowing-out due to the relocation of manufacturing caused by rising production costs.

Shenzhen is also known for its dynamic and booming startup scene. Unlike Beijing and Shanghai, which have more state-owned enterprises, Shenzhen is home to younger, private companies.

In 2016, Shenzhen had the highest density of startups of all the mainland cities. The government plays an important role in promoting these companies by providing abundant resources and funds for entrepreneurs to invest in the various sectors.

For example, qualified leading e-commerce enterprises setting up headquarters in Shenzhen may be awarded RMB 5 million (US$748,875.0), while qualified individuals or teams who establish startups may be awarded up to RMB 1 million (US$150,690.0). In addition, in June, the city announced housing policies that provide qualified Chinese citizens with substantial subsidies for renting or buying a home.

The drawbacks of doing business in Shenzhen is that the monthly cost of living is relatively high – an average of RMB 7,000 (US$1,056.2) – meaning that land and labor is expensive.

4. Chengdu, Sichuan

Chengdu’s GDP grew from RMB 813.8 billion (US$137.1 billion) in 2012 to RMB 1,388.9 billion (US$205.7 billion) in 2017, amounting to a 70.66 percent increase.

In late 2017, Chengdu announced that by focusing on six aspects of the new economy (digital, intelligence, green, creative, mobile, and shared), it aims to reach a new-economy output value of RMB 500 million (US$75.4 million) by 2022.

Analysts believe that Chengdu is a strong candidate for developing the new economy because of its many comparative advantages, including being a logistics hub for the Belt and Road Initiative, boasting a huge consumer market, having abundant scientific and technological talents, and being a highly livable city. However, some observers argue that Chengdu’s new economy is currently still capital intensive and lacks innovative capabilities.

The government has also rolled out key measures to support new economy-related companies, including the establishment of an RMB 10 billion (US$1.5 billion) new-economy development fund and subsidies of up to RMB 40 million (US$6.0 million) for financial institutions and their headquarters that are newly-established in Chengdu.

In addition, this year, the city introduced a series of measures to further attract foreign investment. If the regional headquarters of newly registered multinational corporations (MNCs) are located in Chengdu for at least a year, they can receive establishment funds of up to RMB 500 million (US$75.4 million).

Chengdu’s continuous efforts to attract investment have proven fruitful. According to Yicai’s 2018 Business Attractiveness of Chinese Cities Ranking, Chengdu is the most attractive emerging first-tier city for businesses in China, ranking at the top in its concentration of commercial resources, the vitality of its people, its urban pivot ability, and urban plasticity.

5. Nantong, Jiangsu

Nantong’s GDP grew from RMB 455.8 billion (US$ 72.2 billion) in 2012 to RMB 773.4 billion (US$ 114.5 billion) in 2017, representing a growth rate of 69.67 percent.

Nantong continues to develop its mainstay industries – such as high-end textiles, electronic information, and marine engineering – while nurturing the development of emerging industries, including intelligent equipment, new materials, new energy, and new-energy vehicles.

Located on the Yangtze River Delta, Nantong has fostered greater cooperation with other cities in the region, especially Shanghai. In 2017, the government published details of a strategic policy aimed at escalating the construction and development of Nantong, which will improve its integration with surrounding areas.

By integrating and collaborating with Shanghai’s capital, technology, and human resources, Nantong aims to become the economic and transportation hub of the north wing of the Yangtze River Delta. The two cities complement each other: Nantong utilizes Shanghai’s resources to accelerate industry innovation and transformation; while Shanghai expands its market share and advances industry development through Nantong.

Nantong offers generous subsidies to attract top-end talent. Nevertheless, the measures taken to attract graduates and youth are proving ineffective. This was reflected in the 2017 China Urban Research Report, released by Baidu Map, which revealed that Nantong’s ranking in terms of attractiveness to the urban population has steadily dropped.

In recognition of this, a city official announced in June that developing Nantong as an innovative city that appeals to young professionals is a priority. Analysts pointed out that it is vital to deliver what matters most to potential residents, particularly a housing and cost-of-living subsidy, a reduction of hukou restrictions, and opportunities for career development.

Capitalize on regional dynamics

Aside from government support, the driving forces behind the five cities’ are strongly related to their location and their efforts to join China’s macroeconomic trends to innovate pillar industries.

In our ranking, three of the five cities are located in the Yangtze River Delta, and one is in the Pearl River Delta. The government has been creating city clusters and super-regions to facilitate urbanization, which may be positively correlated with GDP growth.

Notably absent from the list are cities from northern China, where much of the economy is struggling compared to China’s dynamic eastern and southern regions and booming west.

The rise of lower-tier cities has also brought huge investment opportunities in the daily consumptioneducation, and elder care markets. Consumption growth in second-, third-, and fourth-tier cities is nearly 1.5 times larger than that of first-tier cities, according to the 2017 Consumption Upgrade Big Data Report.

However, some analysts claim that, for the short term, second- and third-tier cities will continue to suffer from talent and capital disadvantages over emerging and first-tier cities, which have more abundant cash flows.

Nevertheless, as the government continues to restrict population growth in first-tier cites, many businesses and talented individuals may still choose to settle in lower-tier cities as they continue to offer lower living costs and a variety of investment incentives.

See article as originally appears here

Beijing Plans Another Minimum Wage Increase, Still Only 3rd Highest in China

On June 29, Beijing’s Human Resources and Social Security Bureau announced that the city will increase its minimum wage, effective September 1, 2018.

Beijing will increase the monthly minimum wage from RMB 2,000 (US$300.57) to RMB 2,120 (US$318.60), and the hourly minimum wage from RMB 22 (US$3.31) to RMB 24 (US$3.61).

The wage hike of RMB 120 (US$18.03) per month is similar to last year’s increase, when the city raised minimum wages by RMB 110 (US$16.53) per month.

Given the cost of living in Beijing and the nature of its economy, most workers in the city are paid according to market rates rather than minimum wages.

Beijing is increasingly becoming a post-industrial economy, with services constituting over 80 percent of its GDP in 2017.

Once the minimum wage adjustment goes into force, Beijing will have the third highest minimum wage in the country.

Currently, Shanghai holds the highest minimum wage rate, at RMB 2,420 (US$363.69) per month, followed by Shenzhen, at RMB 2,200 (US$330.63) per month. Both cities increased their minimum wage in 2018.

Besides having the highest minimum wages, Beijing, Shanghai, and Shenzhen also have the highest average wages in China.

Last year, the Chinese career platform Zhaopin reported that Beijing had an average monthly salary of RMB 9,942 (US$1,494.13) – the highest in China – followed by Shanghai at RMB 9,802 (US$1,473.09) and Shenzhen at RMB 8,892 (RMB 1,336.33).

In addition to Beijing, Shanghai, and Shenzhen, other regions that have increased their minimum wages this year include: Guangdong, Guangxi, Jiangxi, Liaoning, Shandong, Sichuan, Tibet, Yunnan, and Xinjiang.

As originally appears http://www.china-briefing.com/news/2018/07/03/beijings-minimum-wage-to-rise-september-1.html

China Cuts Tariffs for These Five Asian Countries

China has adopted conventional tariff rates on a range of imported goods originating from India, South Korea, Bangladesh, Laos, and Sri Lanka, following a recent announcement from the Customs Tariff Commission of the State Council.

Beginning July 1, 2018, tariffs on a total of 8,549 goods were reduced or cut to zero.

The tariff cuts target goods such as soybeans, precision instruments, chemicals, agricultural products, clothing, and steel & aluminum products.

Some of the significant tariff cuts include:

  • Soybeans: tariff of three percent reduced to zero percent
  • Beef: tariffs ranging from 12-20 percent reduced to zero percent
  • Liquefied petroleum gas (LPG): tariff of three percent reduced to 2.1 percent
  • Textile raw materials: tariff of 10 percent reduced to 6.5 percent
  • Medical x-ray devices: tariff ranging from two to four percent reduced to zero to 2.8 percent

The complete list of tariff reductions can be found here.

The tariff concessions are part of a larger commitment to improve trade relations between China and the other five Asia-Pacific member countries that are part of the Asia Pacific Trade Agreement (APTA).

The agreement, signed in 1975, is the oldest preferential trade agreement in the Asia-Pacific region and encompasses approximately three billion people.

Currently, all member countries, including China, have agreed to reduce tariffs by an average of a third on more than 10,000 items.

Critics, however, argue that the timing and target of these tariff cuts are not a coincidence. The announcement comes a mere two days after China stated it would impose an additional 25 percent tariff on soybeans, chemical products, and medical equipment imported from the US.

Many observers suspect that China’s decision to give effect to tariff reductions – agreed to in negotiations held over a year ago – is less about adhering to APTA commitments, but rather an attempt to diversify import channels in response to the escalating US-China trade fallout.

While it is uncertain whether imports from these five Asian countries will fill the void left by a decreased reliance on US importers, particularly in commodities such as soybeans, the tariff cuts are nevertheless a positive step to opening-up trade opportunities for countries in the Asian-Pacific region.

Many countries holding trade deficits with China have long been lobbying to expand their market access in the country. India, for example, recently pitched for increased exports of soybeans and sugar at the recent India-China strategic dialogue in April.

In addition to these tariff cuts, previously announced tariff cuts on a range of consumer goods also went into force on July 1.

Article as originally appears http://www.china-briefing.com/news/2018/07/02/china-cuts-tariffs-for-five-asian-countries.html

Vietnam: New Regulations for Online Gaming And Social Networks

Vietnam recently issued Decree No. 27/2018/ND-CP (“Decree 27”) which will amend and supplement the previous Decree No. 72/2013/ND-CP (“Decree 72”) that was issued in 2013, with regards to social networks, electronic information, and electronic gaming. The Decree 27 focuses on social network sites, information websites, and online gaming service providers. It removes 11 business registration conditions and 13 administrative procedures.

Changes in licensing

Previous licensing procedures and conditions have now been consolidated into Decree 27, with few changes:

  • The timeline for certain licensing procedures regarding information websites, social networks, and online gaming has been reduced;
  • For online game service providers, a number of business conditions have been amended or removed.

New conditions for information websites and social networks

Local server

Social networks and aggregated information websites should have at least one server in Vietnam, allowing the authorities to investigate and verify its stored information when needed.

Retaining data

For information websites, the content has to be stored for at least 90 days from the date of publishing. Furthermore, the data processing logs need to be stored for at least two years from the date when the content was published.

As for social networks, the data retained should include account information, users log in and log out details, IP addresses of users, and data processing logs of published information.

Authenticating users

Both, information websites and social networks need to have a system that can store its user’s personal information. It should also be able to authenticate users through SMS or email, in case the user wants to use its services or make changes to their personal information.

The user’s stored personal information should include the name, date of birth, phone number, email address, and details of identification documents such as passport, ID card, or citizen identity card. In case the user is under the age of 14 and does not have any identity documents, the legal guardian of the user will be legally responsible and will have the authority to decide if they want to provide their information indicating consent.

Content management

Social network and information websites need to have a system that can advise whenever illegal content is posted. If illegal content is posted, the platforms need to remove them within three hours from when it was discovered or when they receive a takedown request from the authorities.

Any information that is going to be published on an aggregated information website, need to have their sources authenticated and the content verified before and after publishing.

New conditions for online gaming

For electronic gaming service providers, Decree 27 provides much-needed clarity regarding conditions and procedures related to licensing, especially for G1 electronic games, games in which multiple players simultaneously interact with each other and the main server. Games such as multiplayer online role-playing games fall under this category. The major condition introduced is that systems that provide gaming services should be able to store and update user’s personal information. It should also be able to manage the playing time of a user, ensuring that the total playing time of all G1 games by a company, should not be more than 180 minutes per day for a user who is under the age of 18.

Other provisions under Decree 27 focus on registering the provision of G2, G3, and G4 electronic games. G2 games include multiple players, interacting with the servers but not amongst themselves, while in G3 games, the players interact with each other, but not with the server. G4 games are downloaded games and involve no interactions with other players or servers.

It also includes the procedures involved in the issuance of eligibility certificates for providers of electronic games.

Revocation or suspension of license

Government authorities can suspend the license of an information website, social network, or online game service providers, in case:

  • A prohibited act has been committed under Article 5.1.(d), (dd) or (e) of Decree 72;
  • The licensing conditions and requirements are not followed as per Decree 72 and Decree 27.

In the above cases, the entity will have 10 days to rectify the issue. If they fail to do so, the license will be suspended for three months.

Business licenses can also be revoked in case:

  • A prohibited act is committed under Article 5.1.(a), (b) or (c) of Decree 72;
  • The business license has already been suspended twice.

Decree 27 is still unclear if the aforementioned conditions and procedures are applicable to offshore entities. The decree is already in effect from 15 April 2018.

Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Vietnam and the Asian region. As originally appears http://www.vietnam-briefing.com/news/vietnam-new-regulations-online-gaming-social-networks-information-websites.html/

China+1: How Vietnam Will Benefit From The New Face of Manufacturing in Asia

Foreign companies outsourcing operations to reduce costs and improve market share is nothing new. The only things that seem to change are the companies changing the way that operations are relocated, and the countries that manage to attract capital inflows.

Among nations competing for investment over the last decade, Vietnam has rapidly emerged as a highly effective location for future relocation in Southeast Asia.

Capitalising on rising costs and increasingly complex regulatory compliance requirements in neighboring China—the former “factory of the world”, the Vietnamese government’s accession to the WTO, competitive costs and receptive investment environment have made it an ideal location for Chinese-based investors seeking to reduce costs and diversify supply chains.

China is not out of the picture altogether

Foreign investors and domestic Chinese companies largely view China’s production capabilities in a favorable light and place a considerable value on its deep talent pools, top-tier infrastructure network and excellent sourcing options.

Instead of abandoning the Chinese market, investors are choosing to supplement Chinese operations with low-cost inputs sourced from production facilities in markets such as Vietnam. While the structures of these operations differ greatly depending on the country in question, this production model has become widely known as China+1.

Vietnamese Competitiveness and China+1 Production

Vietnam’s close proximity to China, competitively priced labor and a strong network of trade agreements have proven critical to its competitiveness as a China+1 destination. Cities such as Hai Phong are just 865km away from China’s manufacturing hub of Shenzhen. While a considerable journey, this is much closer than alternatives such as Jakarta (3,300km), Bangkok (2,750km) or Kuala Lumpur (3,025km).

By situating manufacturing cost centers close to traditional hubs in mainland China, investors are able to reduce costs with limited interruption or delays to currently existing supply chains.

Foreign investors pursuing China+1 also generally benefit from cost reductions on wages, land pricing, and inputs. Vietnam again stands out in this respect, offering investors a minimum wage 59 percent of that found in China and 70 percent of that in Thailand.

Finally, and perhaps most importantly, Vietnam’s network of trade agreements is among the best that manufacturers will be able to find in a country at this point on the value chain.

Vietnam, unlike China which has historically used its low wages and large size to boost export competitiveness, has a wide network of trade agreements extending to key import markets across the globe.

Among this network are trade agreements with Korea and the European Union, as well as upcoming agreements with the European Union and, should everything go according to plan, members of the Trans Pacific Partnership (TPP). As a member of the Association of Southeast Asian Nations (ASEAN), Vietnam also benefits from the regional bloc’s trade agreements with China, Japan, Australia, New Zealand and India. Together these agreements provide a significant advantage over China that more than make up for the potential downsides.

Choosing What to Outsource

Foreign investors who invest in the Vietnamese market need to have a clear understanding of the capacity and limitations of Vietnamese production. As of 2018, Vietnam’s education and infrastructure are better suited to assembly and relatively low value-add manufacturing than many of the higher value-added processes becoming popular in mainland China.

Foreign investors often choose to enter the Vietnamese market gradually as a result of these limitations. Basic components or assembly are usually the first aspects of the production to be outsourced to Vietnam. As companies become more comfortable with the capabilities of their Vietnamese counterparts, production can be ramped up and more elements of the supply chain can be relocated.

Knowing What to Watch out for

As mentioned above, Vietnam’s real competitive advantage as a China+1 destination lies in its network of trade agreements. However, access to these agreements is not guaranteed. Most agreements have been negotiated recently and include “rules of origin provisions” that place limitations on what goods will qualify for tariff reductions.

Most often, origin requirements relate to the value added to exports in the Vietnamese market. As a rule of thumb, investors should attempt to move as much value as possible to Vietnamese production facilities and ensure that assembly facilities result in significant changes between inputs and their final output.

Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Vietnam and the Asian region. As originally appears http://www.vietnam-briefing.com/news/china1-new-face-manufacturing-vietnam.html/

The Belt and Road Initiative: How European Businesses can Benefit

French President Emmanuel Macron and UK Prime Minister Theresa May both made trips to China in early 2018. During their visits, they expressed interest in the opportunities presented by China’s Belt and Road Initiative (BRI), but also reluctance over the policy’s aims and whether European countries could really benefit from it. Macron, for instance, said that the New Silk Road cannot be “one-way”.

Given the importance that the Chinese government has ascribed to the BRI – and the vast sums committed to it – European businesses are exploring if and how they can participate. However, many European businesses are unsure of what the BRI looks like in practice, and whether the opportunities it presents can only be enjoyed Chinese companies.

While the exact nature of foreign involvement in the BRI remains elusive, a closer look at the policy and on-the-ground developments show that there are a number of ways for European companies to get involved.

Connecting China to Europe

The BRI is a major international development strategy launched by the Chinese government, and is widely considered President Xi Jinping’s signature foreign policyproject.

At its core, the BRI aims to connect Asia, Europe, and Africa by building physical infrastructure and new trade routes with around 70 participating countries.

The BRI has five major objectives for linking China with participating countries:

  • Enhancing policy coordination;
  • Connecting infrastructure;
  • Building unimpeded trade;
  • Exploring new approaches to financial integration; and
  • Promoting people-to-people ties.

For China, the BRI is a new vehicle to enhance its policy of all-around opening and for directing overseas direct investment (ODI). For European countries, the BRI is an opportunity to access new markets and attract more investment.

European countries play a key role in the geographic layout of the BRI. Just like the ancient Silk Road, the BRI and its “21st Century Maritime Silk Road” – the oceanic component of the BRI – build trade routes from China that extend all the way to Europe.

One of the main goals of the BRI is to connect China and the East Asian economic circle with the EU. Under the framework of BRI, China and Europe will build new international economic corridors – such as the “New Eurasia Land Bridge” – to decrease trade costs and promote cross-regional cooperation.

BRI investment targets

To achieve the goals of connectivity and development along the BRI, China has already invested billions of dollars in the form of foreign direct investment (FDI) and development funds.

For example, China invested US$14.43 billion in 53 BRI countries in 2016, mostly in tourism, public services, infrastructure, real estate, technology, and entertainment industries. It has also committed US$40 billion to set up the Silk Road Fund, which is a state-owned fund for investment in countries along the BRI.

Much of China’s BRI investments are devoted to hard infrastructure investments, particularly in transportation infrastructure and power generation. To improve the connectivity between China and BRI countries, railways, highways, and ports need to be developed to handle the increased traffic expected to arise from the BRI.

For instance, the Eurasian Railway Program plans to build 81,000 km of railway lines for moving freight and passengers overland between China and Europe. This is an important project for connecting national boundaries in BRI countries and developing regional integration.

In addition to transportation infrastructure, many BRI countries are in need of investment in basic facilities and infrastructure more broadly. This is particularly the case for some Central Asian countries that have historically struggled to attract investment.

Much of this infrastructure aims to accelerate power generation and resource extraction. BRI countries hold more than 50 percent of the world’s potential oil supply and 70 percent of its gas supply. Already, more than 40 energy projects have begun and a further 20 projects agreed upon.

With improved infrastructure, China is aiming to improve trade with BRI countries. In 2017, China’s trade volume with BRI countries grew by 17.8 percent year-on-year to reach US$1.18 trillion.

Beyond infrastructure and trade, the BRI seeks to develop people-to-people exchanges through the culture and tourism industries, by capitalizing on the history and legacy of the ancient Silk Road.

How European businesses can participate

China has ambitious plans to develop the BRI region. But how can European companies capitalize on these investments?

There are a number of ways European companies can benefit, either directly or indirectly.

Firstly, new supply chain networks. With more railway and port development projects, logistics companies can build new supply chain hubs and routes. For example, in order to connect Lianyungang and Istanbul, multinational logistics company DHL has arranged to handle more freight traffic and now provides peer-to-peer services along the new route.

Next, lower transportation costs. As a result of improved infrastructure, European companies will be able to benefit from lower costs and faster transportation times if they want to sell products to BRI countries.

For example, the Chongqing-Duisburg railway line built in 2016 can reduce transportation time between the two cities by 12-13 days. For international trading companies in Europe, this is highly beneficial to expand their businesses in China.

Finally, as the end point of several major BRI trade routes, European businesses can directly receive significant investments from Chinese entities. In Greece, for instance, the China Ocean Shipping Group purchased 67 percent equity of Piraeus Port Bureau, which created a new route that shortened transportation from China to Europe by seven to 11 days.

Most of China’s investments in Europe are either mergers and acquisitions (M&A) or Greenfield investments. European companies participating in the BRI may attract Chinese investment if they can strengthen their cooperation with Chinese companies.

Risks posed by the BRI

The capital and investment projects emerging from the BRI produce a range of opportunities for European companies. However, they also face significant risks in participating in the BRI.

Many commentators have speculated that the BRI is primarily aimed at finding new markets for China’s industrial overcapacity and extending China’s international influence. Chinese companies, including SOEs, appear to be playing an outsized role in the BRI thus far, and it may be difficult for European companies to compete with them.

Additionally, many countries included in the BRI pose security risks, particularly for hard infrastructure projects. Political instability and extremist and secessionist movements could result in economic losses and physical danger to employees.

A large number of these countries are also risky investment destinations for purely economic reasons. At least 27 BRI countries are rated as junk or below investment grade by international rating firms.

The economic environment can be challenging in other ways as well. For example, several BRI countries have prohibitive duties for cross-border trade, making trade more costly and challenging.

Finally, European companies should be sensitive to the BRI region’s incredibly diverse assortment of cultures, religions, and ethnicities, as well as the political histories between their countries. Such awareness can be the difference between success and failure when expanding into new markets.

The BRI is relatively young, and many aspects of the policy remain unclear – particularly concerning the role Western businesses will play. Independent of policy details, companies also face a variety of risks when doing business with many BRI countries.

European companies involved in trade, logistics, and infrastructure development, however, have several ways to participate in BRI. Whether directly participating in infrastructure development initiatives or benefiting tangentially as a result of new trade routes, the BRI offers opportunities for a range of different businesses. With the Chinese government’s increasing investments and political determination, the BRI is opening new opportunities that cannot be ignored.

China Briefing is published by Asia Briefing, a subsidiary of Dezan Shira & Associates. As originally appears http://www.china-briefing.com/news/2018/04/02/belt-road-initiative-how-european-businesses-can-benefit.html

China Eases Foreign Investment Restrictions in Free Trade Zones

China has relaxed restrictions on foreign investment in the country’s 11 free trade zones(FTZs), per a decision released by the State Council, China’s cabinet, on January 9.

The Decision on Temporarily Adjusting Relevant Administrative Regulations, State Council Documents and Departmental Rules Approved by the State Council within FTZs (the Decision) updates various administrative regulations to extend to China’s new FTZs, and relaxes investment restrictions in 16 industries.

Several of the relaxed rules introduced by the Decision are technically only temporary. The Decision directs the departments in charge of the relevant industries to issue or amend regulations to formalize the changes.

The industries affected by the Decision are shipping, printing, civil aviation, certification and accreditation, entertainment venues, education, travel agencies, direct sales, gas stations, maritime transportation, retail and wholesale, aircraft, urban rail, internet cafés, banking, and performance brokerage.

The complete changes introduced by the Decision are as follows:

Note: Item (1) to Item (9) were previously temporarily adjusted for the Shanghai, Guangdong, Tianjin, and Fujian FTZs, and the new temporary adjustments shall apply to the other FTZs. Item (10) to Item (16) shall apply to all FTZs.

The relaxed rules are welcome for investors in the affected industries looking to test the Chinese market or expand their operations in China’s growing number of FTZs. Last year, China officially opened seven new FTZs, bringing its total to 11, and reduced investment restrictions with a new FTZ Negative List.

However, the Decision appears to merely formalize many of the changes introduced in last year’s FTZ Negative List, as well as the Catalogue for the Guidance of Foreign Investment Industries, by updating accompanying regulations accordingly. For example, the FTZ Negative List already liberalized foreign investment in Internet cafés and aviation, among other industries. The Decision therefore largely updates rules that were made outdated by recent regulatory changes.

Although the Decision does not offer many notable new liberalizations, it gives foreign investors more regulatory clarity about the implementation of the FTZ Negative List, and shows that the FTZs and industry regulators are moving forward with the changes. As the Decision directs relevant industry regulators to formulate accompanying administrative measures, investors can expect new industry-specific rules for foreign investment in China’s FTZs to be issued shortly.

Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Vietnam and the Asian region.

China’s Pollution Crackdown: How Severe is the expected Macro-Economic Impact?

China is undergoing an environmental paradigm shift, transitioning from the world’s top polluter to global leader in the fight against climate change. In recent months, China has dramatically strengthened the enforcement of its environmental regulations as it pursues its goal of promoting ‘ecological civilization’, and has inspected and fined countless businesses in the process.

Many areas in China suffer from severe levels of pollution, and the central government under the leadership of President Xi Jinping has initiated several crackdowns on heavily polluting industries that are non-compliant with current environmental regulations. These measures have affected business as usual in various sectors and have had rippling effects throughout the economy.

Measures taken by the government

The Ministry of Environmental Protection (MOEP) and the environmental bureau have adopted an intolerant stance against businesses flouting environmental laws over the last year, which is expected to cut air pollution levels in northern cities. Although predominantly targeting air pollution, the authorities are also stringently curbing other types of pollution, including water and soil pollution, in addition to scrutinizing waste management systems across the country.

It is important to note that although environmental laws have not been substantially altered recently, the enforcement of pre-existing laws has been tremendously increased. As enforcement of environmental laws has been historically lax in China, this sudden change in government policy has rattled the industry and made polluting businesses cautious.

In 2016, the government began conducting a series of investigations in heavy industries, and as a result, several non-compliant and illegal steel mills, coal mines, aluminum smelters, and other manufacturing units were shut down. To date, it is estimated that more than 80,000 factories have been shut down across the country by the anti-pollution drive. Other establishments caught infringing environmental regulations have been ordered to clean up their operations within a short time frame or risk closure by the inspection squad.

Penalties have been levied on around 40 percent of factories across the country as environmental inspectors have been dispatched to more than 30 regions in recent months. Inspectors have reportedly imposed hefty fines totaling over RMB 870 million (US$132.2 million) to date, and in some cases criminal liability on employers who are facing jail time for violating environmental regulations. Further, additional inspectors have been deployed to act as watchdogs and ensure that local inspectors are fulfilling their duties.

In addition, municipal authorities have filed a large number of environmental pollution cases in the past year. Beijing municipality alone has filed close to 13,000 cases against non-compliant polluters.

Rippling impact on business and economy

The sectors most severely impacted by the anti-pollution drive have been textiles, energy, heavy metals, coal and gas, mining, cement, paper, automobile, and consumer goods. The impact is also expected to shock international supply chains due to disruption in exports from China.

Inflation has spiked as firms cope with increasing costs of compliance with environmental regulations and adapt to clean energy. Increased production costs will ultimately have to be shouldered by the consumer, and the middle class will be particularly vulnerable to inflationary trends in consumer goods and electricity.

Financial and social stability has also been disrupted as more than 60,000 jobs have been lost as a result of factory shutdowns. Employers who are unable to repay debts have left their factories closed and unproductive.

In many manufacturing sectors, small-scale firms are closing down, as they are unable to compete with larger rivals due to financial incapacity to adapt to clean energy. As a result, the firms that manage to survive and adapt to the new environmental regulations and successfully switch to clean energy will significantly benefit in the medium run as they gain the market share previously held by smaller firms.

The shutting down of small and medium scale firms has also resulted in greater consolidation among surviving firms in many industries like iron and steel, resulting in a steep increase in global prices.

The business impact of the anti-pollution drive has been particularly harsh in the north as well as Beijing-Tianjin-Hebei region. It is expected that these measures may reduce GDP growth by up to two percent in the short run due to disruption in manufacturing and supply chains across industries coupled with increased costs of compliance and technological upgrading.

However, experts opine that the anti-pollution drive will have minimal macro-economic impact in the long run and, if successful, will have huge health benefits for the country’s 1.4 billion citizens. Pollution and related health and safety issues are consistently among the top concerns of Chinese people, and addressing these issues would also boost China’s international reputation as an authority in green technology and climate change leadership.

 

Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Vietnam and the Asian region.

 

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

China SOEs Bid On Philippines Clark International Airport Development

Four of the seven bidders on the design and development contract for the Clark Airforce base in the Philippines are Chinese State Owned Enterprises, according to the Philippines Bases Conversion and Development Authority (BCDA).  The China State Construction Engineering Corp Ltd, China Harbour Engineering Co Ltd and Sinohydro Corp Ltd have all submitted tenders.

Clark International Airport is north of Manila and previously served as an American Airforce base until the facility was closed in 1991. The Airport serves the Clark Freeport Zone, an important tax and duty incentivized area that aims to encourage investment in airport-driven urban facilities, targeting high-end IT, aviation and logistics related enterprises, tourism and other sectors. The area is connected to Manila by the Subic-Clark-Tarlac Expressway, which is in turn connected to the North Luzon Expressway, some 43km from Manila.

Chinese SOEs have been prominent in bidding on development contracts aligned with China’s Belt & Road Initiative, and has special encouragement to do so with the Philippines and ASEAN nations as China has both a Free Trade Agreement with ASEAN and a Double Tax Treaty with the Philippines, providing tax savings on the provision of certain products, services and manpower.

“It will be interesting to note, should a Chinese bid win, whether this will include Chinese labor” says Chris Devonshire-Ellis of Dezan Shira & Associates. “It is important that Philippines labor is deployed in development contracts in the Philippines”.

The contract is worth about US$250 million, meaning that opportunities will arise for subcontractors and materials suppliers familiar with airport and related constructions. The plan is to finish the Clark International Airport New Terminal Building by 2020, increasing Clark’s annual capacity from four million to twelve million passengers. This will give airlines an alternative to Ninoy Aquino International Airport (NAIA), which at the moment is the main international gateway to the Philippines, but suffers from congestion problems.

 

Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Vietnam and the Asian region.

 

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

 

India And Hong Kong Finalize Double Tax Avoidance Agreement After Years Of Negotiation

India and the Hong Kong Special Administrative Region (HKSAR) of China recently entered into a double tax avoidance agreement (DTAA). After years of negotiation, the bilateral DTAA was approved on November 10, 2017.

When it comes into force, the India-Hong Kong DTAA will hold important tax implications for international businesses operating in both countries. The agreement will also benefit trading companies that do not have a permanent presence in India but service to an India-based entity.

What is DTAA?

Non-resident Indians (NRIs) and foreign nationals doing business in India make profits in India as well as in other countries of operation. Such businesses often have to pay tax twice on the same source of earned income or profit in India.

As a general principle, international businesses in other countries are taxed on their territorial income, which is the income generated within the territory of that country. India, on the other hand, imposes a corporate income tax on the worldwide income of business enterprises that have a permanent presence in India. As a result, India-based multinational companies deriving income from other countries face double taxation on their earned income.

A DTAA creates a fair and certain tax environment for business activities carried out between two countries. It prevents international businesses from paying tax in the country where the income or profits are generated. Or, in some cases, it allows the country to deduct tax at source, and offers businesses a foreign tax credit to reflect that the tax has already been paid.

The methodology for double taxation avoidance, however, varies from country to country.

India’s DTAA with Hong Kong

India has over 86 DTAAs in force with various countries, which provide tax relief on transactions carried out between India and those countries. Each DTAA specifies the agreed rates of tax and the jurisdiction on the specified types of income involved.

The India-Hong Kong DTAA offers similar provisions. The DTAA will give protection against double taxation to over 1,500 Indian companies and businesses that have a presence in Hong Kong as well as to Hong Kong-based companies providing services in India. It will provide clarity to businesses regarding tax rates and tax jurisdictions, as they will now be taxed in only one of the signatory countries. This will allow investors to be more confident about their investment decisions.

Aside from tax relief, there are several other benefits that the India-Hong Kong DTAA will offer to the concerned businesses. These include:

  • Lower withholding tax (tax deducted at source or TDS) rates, which can be as high as 40 percent in the absence of a DTAA;
  • Lower dividend distribution tax (DDT), which is an additional tax levied on foreign investors besides the corporate income tax; and
  • In certain circumstances, credits for taxes paid on the double-taxed income that can be encashed at a later date.

Other details regarding the DTAA are yet to be announced.

Chris Devonshire-Elllis of Dezan Shira & Associates comments: “Hong Kong has a very well established Indian diaspora that has been there for decades and has much wealth and business influence within the territory. It is a very positive sign that the DTAA has been agreed as businesses in both India and Hong Kong have finally been given better financial incentives work together and increase trade and prosperity in both their respective areas”.

 

Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Vietnam and the Asian region.

 

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.