International Tax Day
New Orleans, October 24, 2012
Doing Business in Asia
Whilst every effort has been made to ensure that the information, views and data contained herein are accurate and given in good faith, we accept no
responsibility for and exclude all of our liability to the maximum extent permitted by applicable law for any loss and/or damage whatsoever or howsoever
caused from use of the information contained in this report. Fiducia shall only be liable in respect of anything done or omitted in a grossly negligent manner.
This report has been produced by Fiducia exclusively for clients, for their internal circulation. Fiducia retains all rights, titles and interests, including copyright
and other proprietary rights, in this report and all material provided or made available as part of this report.
This report does not constitute legal, valuation, tax, or investment advice. Those interested in specific guidance for legal, strategic, and/or financial or
accounting matters, should seek competent professional advice from their own advisors.
E&OE
Fiducia Management Consultants
We have a 30-year track record of serving international clients in China
► Established in 1982 in Hong Kong
► Professional service provider focused on China and Hong Kong
► 90 Chinese and foreign specialists
► 3 China offices located in Hong Kong, Shanghai and Shenzhen
► High level of local expertise and multicultural experience
► Proven ability to apply international standards with local
understanding
► Close co-ordination with the client leading to long-term
relationships
► Strong support from a large network of partners, AGN member
since ‘03
Page 2
Comparison of locations: Hong Kong vs. China
One country – Two Systems – Differences prevail!
?
=
Page 3
Hong Kong and its reach within Asia
Flights from Hong Kong to
Shanghai
Shenyang
ca. 100 daily connections
first 8:00 am
last 9:20 pm
Flight time ca. 2 ½ h
Beijing
Seoul
Qingdao
Tokyo
Chongqing
Shanghai
Wuhan
Any Conclusions?
Fuzhou
Taipei
Guangzhou
Hong Kong
Hanoi
Mumbai
Business with China? Choose
HK or SHA
Manila
Kuala
Lumpur
Ho-ChiMinh-City
Singapore
Business in SEA? Choose
Singapore
Return daytrip from HK to SHA
is possible but not from
Singapore
Jakarta
The circle represents
approx.
3 h of flight or 1800 km
Page 4
Comparison of key locations to set up an office
The Ease of Doing Business 2012
HONG
KONG
SHANGHAI
BANGKOK
HO CHI MINH
CITY
3
35
29
44
No minimum
($1)
US$140,000
(depending
on business
scope)
US$6,500
(foreign owned
Thai limited
company)
No minimum
(except for e.g.
insurance,
banking, real
estate)
Total tax rate as a %
of profit
23%
63.5%
37.5%
40.1%
Amount of yearly tax
payments
4
7
23
32
Preparation and filing
(hours required)
80
398
264
941
Proximity: airport to
city centre (km)
36
40
30
8
Corruption Perception
Index
12
75
80
112
FACTORS
No. of days to
incorporate company
Minimum capital
requirements
Page 5
Risks / Tides of Change
Corruption remains a major challenge in Asia…
Transparency International Corruption
Index
Risks
► Paying bribes / taking kick-backs
► Collusion by staff members
► Manipulating financial reports
► Blackmail by existing / former staff
Scale
from 0 – 10
0 : highly corrupt
10: very clean
No
Country
Index
12
Hong Kong
8.4
14
Germany
8
24
United Kingdom
7.8
24
USA
7.1
…
….
…
75
China
3.6
► China situation: Law vs. Enforcement
► FCPA / UK Bribery Act (July 1, 2011)
► Reputational damage
I
N
T
E
R
N
A
L
E
X
T
E
R
N
A
L
6
Recent Examples
...and foreign companies are no exemption, highlighting the importance of good corporate
governance.
“SAP Chinese personnel shock or
impact of $2 billion investment plan”
Quote: IC Supply, March 29, 2012
► 5 executives (4 in China) were dismissed
including senior VP, the founder of SAP China
Research Instritute Mr. Rui Xianglin who
served SAP for 20 years
► The 5 persons are suspected of violating
company “internal regulation”, referring to
changes to business processes, the
disclosure of trade secrets, commercial
bribery, bribery and gray trading and other
acts of unfair competition
► Outside began to worry about the $2 billion
investment plan will be affected, although
declined by SAP spokesman
► Total damage?
7
Legal Situation and Consequences
President Hu Jintao: ‘Fighting corruption is a matter of life and death for the Communist party’.
Commercial Bribery
► Stricter laws in China since May 2011
► Article 164: Prison term minimum 3
years,
up to10 years if the amount is “huge”
► Laws apply to all PRC citizens (also
outside of China) and foreigners
physically in the PRC
Hong Kong – A Different Situation
► Independent Commission Against Corruption
(ICAC) founded in 1974
► Payer and receiver of bribery face severe jail
terms
► Government officials and semi-public bodies
obliged to declare origin of private assets
► Examples: Sun Hung Kai, Schenker
Official Bribery
► Article 389: Illegal for a person to give
money or property to a public official
► Officials who receive gifts above
RMB200 must turn them over to their
superiors
8
Change in China is a constant – the distances remain the same
Peking – Chengdu 1,520 km
Peking – Shanghai 1,070 km
Peking – Hongkong 1,960 km
Shanghai – Hongkong 1,225 km
Shanghai – Chengdu 1,660
km
Hamburg – München 612 km
Page 9
Birds of same feather... – Industry Cluster in China
The coastal regions with the three major centers of:
Bohai Rim Region
► Aeronautics/Astronautics (Tianjin)
► Chemicals (Tianjin)
► Electronics and Telecom (Beijing)
► Fasteners (Handan)
► Medical (Beijing)
► Rubber (Hengshui)
► Steel (Cangzhou)
Yangtze Delta Region
► Automotive (Shanghai, Hefei)
► Chemicals (Shanghai, Suzhou)
► Home Appliances (Hefei, Ningbo)
► IT (Suzhou)
► Steel (Hangzhou, Nanjing)
► Textiles (Wuxi, Suzhou)
► Wire and Cable (Wuxi)
Pearl Delta Region
► Automotive (Guangzhou, Xiamen)
► Hi-tech Electronics (Shenzhen)
► Kitchenware (Yunfu)
► Lighting (Zhongshan)
► Machinery (Zhongshan)
► Textiles (Guangzhou, Zhongshan)
► Toys (Shantou)
Page 10
Birds of same feather... – Industry Cluster in China
Central China and the „Wild Westen”
Shandong Province
Mid-West Region
► Aerospace (Chengdu)
► Ceramics (Zhuzhou)
► IT (Chengdu)
► Machinery (Changsha)
► Motorcycle (Chongqing)
► Pharmaceuticals(Chongqing)
► Steel (Wuhan)
Page 11
China consists of eight distinct markets
Customer expectation differs from region to region – the main demand is along China’s Eastern belt
NE
Eastern vs. Western China 2011
(virtually unchanged in last 3 years)
BB
NW
Centra
l
YR
D
W
SW
PR
D
Note: Eastern/Western region defined by China State
Council for “Western Development” policy
Sources: China Govt. NBS, Fiducia analysis
Page 12
Birds of same feather... – Industry Cluster in South East Asia
More labor intensive and manual industries have relocated from China to the SEA neighboring
countries
Myanmar
(Burma)
Laos
Thailand
Cambodia
Philippines
Malaysia
Singapore
Indonesia
Success Strategies in China – Way Out or Go West
Companies have difficulties to find new sourcing alternatives to China due to established economies
of scale, industry clusters and high productivity. Selling in China is also tough since China is large
and diversified.
Made in
India
Made in
Vietnam
Made in
Malaysia
Made in
Indonesia
9,640,821 km2
CAGR (06-11)
15%
15%
200km
Productivity Wage
Move
V.S.
Stay
Page 14
Where is the best and most suitable location for my sourcing operation
More labor intensive and manual industries have relocated from China to the SEA neighboring
countries
► Labour:
wage levels – age – quality
► Complexity of production:
labour force vs. automation
► Logistics and infrastructure:
transportation costs – sea/rail/air
links
► Proximity to end market:
short vs. long product life cycles
► Sustainability along
the supply chain
environmental footprint – social
compliance – CSR
► Cross-border cash management:
corporate
requirements –
currency issues
bank transaction fees –
tax – reporting
credit rating –
How to manage your purchasing business effectively?
Getting all relevant parties on the Order To Cash Platform
Supply Chain Management Platform
► Accessibility from anywhere,
anytime
► Managing operations over
distances using the right tool
► Shift to handling information
more efficiently through
technology
► Whole transparency and
visibility of the supply chain
► Cut costs through better
planning and decisions based
on accurate reporting data from
the system
Page 16
Key Growth Industry Sectors - Automotive
Guangdong ‘s automotive output ranks the third of all provinces in China in 2011 and continue with
the aggressive expansion plans targeting to reach capacity of 4,500 k units in 2015.
New Plant (2011 – 2015)
Foshan
Capacity Expansion (2011-2015)
Guangzhou
’11
Capacity
Development
(k units) 1,670
1 3 4 6
’15
4,500
5
2
Shenzhen
Investment Snapshot
1. 220k, 2012
2. 200k, 2012
3. 100k, 2012
200k, 2013
4. 270k, 2012
50k (EV),
2015
5. 600k, 2013
6. 300k, 2014
Case Study
Project:
Audi and VW
@ Foshan
Investment amount
 Phase I: RMB18.2b
Audi 300k units, VW 300k units,
2013
 Phase II: RMB11b, 300k units
Investment rational
 Strong demand in South China for
mid-to-high end automotive
 Sufficient automotive parts supply
 Pushed by central government to
diversify the location
Sources: Company website, Guangdong govt., Fiducia Analysis
Page
17
Key Growth Industry Sectors - Chemical
Guangdong ‘s petrochemical industry output value achieved rapid growth, ranking the third of all
provinces of China during 11FYP and targets to reach RMB1.3t with annual growth of 13% in 12FYP.
New Plant (2011 – 2015)
Capacity Expansion (2011-2015)
Ethylene Capacity
Development (m MT)
Jieyang
Huizhou
4
3
Maoming
Zhanjiang
2.2
’15
4
1
Investment Snapshot
2
’11
1. 22m MT oil refining,
2m MT ethylene, 2012
2. 10m MT refining, 2012
3. 300k MT refining,
2013
4. 20m MT refining ,
2014
Case Study
Project:
Lubricant Additives
@ Zhuhai Gaolan DZ
Investment amount
 Phase I: USD100m, 200k MT,
2012
 Phase II: USD100m, 92k MT,
2013
Investment rational
 High speed train and railway
connect to the national networks
 16 deep water berths within 10
km of the zone
 Close to the major base oil
import port for CNOOC
Page 18
 Guangdong
Proximity to
Shell
lubricant
plant
Sources: Company website,
govt.,
Fiducia
Analysis
Key Growth Industry Sectors - Biopharma
Guangdong ‘s Biopharma industry catches annual growth rate of 25% during 11FYP tops all
industries within the province. However most industry players are SMEs with production in trial
stage.
New Plant (2011 – 2015)
Capacity Expansion (2011-2015)
Output Value (RMB b )
Guangzhou
2
Zhuhai
1
3
Shenzhen
’11
90
’15
180
Case Study
Investment Snapshot
1. RMB400m insulin,
2011
2. RMB700m, vaccine
25m units , 2012
Project:
Influenza Vaccine
@ Shenzhen DZ
Investment amount
 Total: USD94m, China’s largest influenza
vaccine project
 Phase I: 25m units, 2008
 Phase II: 25m units, 2012
Investment rational
 Strong local demand and close to Hong
Kong for export
 Shenzhen govt spends RMB500m in
developing biology industry every year
during 12FYP period and provide
subsidies to companies
 Sufficient biology talent back from
overseas
Sources: Company website, Guangdong govt., Fiducia Analysis
Page 19
3. RMB116m API, 2012
RMB2b mAb,
vaccine,
2015
Total ~500 players, 2011
Foreign Companies are planning new presences…
Guangdong still tops other regions as new investment destination. Investment in west regions are
mainly low cost sites added to existing sites, not a complete substitution.
“If you want to set up new presences,
which province(s) will you choose?”
“Based on which top 3 criteria will / did you
choose the above province(s)?”
21
18
14
1. Guangdong
Geography
13
4. Beijing: 14%
4. Sichuan:
14%
12
12
Labour
Availability
Infrastructure
Geography
15
13
Infrastructure
Geography
14
12
Infrastructure
Geography
2. Chongqing
3. Jiangsu:
15%
Infrastructure Regional Policy
10
3. Jiangsu
2. Chongqing: 19%
Regional
Policy
10
4. Beijing
1. Guangdong: 21%
Top 5 provinces for new presences
Regional
Policy
13
12
9
Labour
Availability
Infrastructure
Geography
Sichuan
n = 154
(multiple answers possible)
Page 20
Suitable (and affordable?) office locations throughout China
Office rent in China can be on or above international levels
Grade A offices top locations of CBD in Q1 2012 (rent per m²/ month)
Stadt
(1 EUR= 8 RMB)
Higher End
Lower End
Average
RMB
EUR
RMB
EUR
RMB
EUR
Beijing
712
89
375
47
525
66
Shanghai
541
68
308
39
414
52
Chengdu
174
22
139
17
161
20
Guangzhou
282
35
159
20
220
28
Shenzhen
295
37
239
30
288
36
Cushman & Wakefield Marketbeat Q1 2012
Page 21
Comparison of set up options within China
Rep Office vs. WFOE – Corporate Structure
Page 22
Comparison of set up options within China
Rep Office vs. WFOE – Tax & HR
Page 23
Comparison of set up options within China
Set-up times in weeks for different entities (estimated from past experience)
Trading WFOE
Document preparation
Name registration
Manufacturing WFOE
Environmental Evaluation
Foreign investment approval
Business Licence
Tax and other registrations
Service WFOE
Bank Account opening
Capital injection and verification
Import / Export Licence & Customs
Rep Office
0
5
10
15
20
25
30
35
Page 24
Comparison of set up options within China
Accounting Requirements of Rep Office and Wholly Foreign Owned Enterprise
Page 25
Finance Issues
Taxation – Corporate Income Tax (CIT)
RO
WFOE
 The CIT is based on the deemed income, which is
 The taxable income is the amount remaining from
calculated from the Rep Office’s expenses.
 Deemed income = operating expenses / (1deemed profit rate-business tax rate)
 Deemed profit rate is at least 15% and business
its gross income in a tax year after deducting the
corresponding costs, expenses and losses.
 The Tax Bureau can make adjustments due to
non-deductible expenses or transfer prices that
are deemed inappropriate
tax rate is usually 5%.
 The actual profit rate shall be reviewed and
approved by the local tax bureau.
According to the Chinese Enterprise Income Tax Law implemented on January 1, 2008, the rate of corporate
income tax is 25% for most industries. Some particular tax holidays and preferential treatments may be
granted for approved new high-tech enterprises, which are subject to a reduced rate of 15%.
 It is settled on an annual basis but is paid quarterly with adjustments either refunded or carried forward to
the next year.
 The final calculation will be based on the year-end audit.
Page 26
Finance Issues
WFOE Profit Repatriation
Foreign companies in China generally can repatriate the profits they earned to their mother
companies overseas. The procedure can be done every year after the annual audit has been
conducted and the corporate income tax has been filed.
Restrictions:
At least 10% of the profit should be retained in the company as its statutory surplus reserve.
When the total amount of the reserve reaches 50% of the company’s registered capital, the
company can stop the provision of the reserve.
Annual profits must also first "make up" losses from previous years and the registered capital
has to be fully paid in before any distribution can be made to shareholders.
China levies a withholding tax on any dividends remitted out of the country. Profits earned
before 2008 are tax free.
Page 27
Finance Issues
Withholding Tax Rates
The general rate for withholding tax for payments of dividends, interest, and royalties from
China to abroad is 10%. For recipients from certain countries the rate is reduced under the
respective DTA (e.g. Hong Kong, Singapore, Dubai, Belgium).
Hong Kong
General
(e.g. USA, Germany)
Dividend
5%* / 10%
10%
Interest
7%
10%
Royalty
7%
10%
*To enjoy the reduced 5% withholding tax rate on dividend, the “beneficial owner” of China WFOE must satisfy the
conditions listed on the following page.
Page 28
Finance Issues
Withholding Tax Rates
The reduced rate of 5% for dividends under the China-Hong Kong DBA is only granted to
holding companies of a Chinese entity that fulfil the following requirements
a) Be a Hong Kong company;
b) Directly holding at least 25% of the entity that pays dividend;
c) The shareholding percentage complies with the above limit during the past 12
months prior to dividend payment;
d) The company must have been incorporated for over 12 months;
e) The company should have its own business operation.
Page 29
Comparison of company structures
Benefits of using a Hong Kong holding company
► Hong Kong company can be used for billings to other SEA countries
► Hong Kong coporate tax rate only 16.5%
► Company set-up in China less complicated with Hong Kong parent company
► Easy and quick realization also of more complicated ownership structures possible in Hong
Kong
► In the case of changes in the shareholding structure, shares of Hong Kong entity can be
transferred
► Dividends are tax free in Hong Kong
► Withholding tax for dividends paid from China to Hong Kong favorable compared to many
other countries (conditions apply)
► Hong Kong´s legal system is based on British law, favorable in case of disputes
Page 30
Comparison of locations – Sales in Asia
Warehouse in Asia for Asia-Pacific
Mother company has (global)
centralized warehouse in USA
USA
Production / Central
warehouse
Hong Kong
Regional warehouse
(Alternative: FTZ in China)
• Increasing Asia business
• Problem: Time and
geographical distances
Regional warehouse for time
sensitive goods (e.g. spare
parts)
• Excellent logistics environment
• Not duties or sales taxes
Customers in Asia-Pacific
Order by
• Own subsidiary
• Service partners
• Final customer
Page 31
Tax, legal and corporate background of Hong Kong
Hong Kong’s strategic advantages
Low Tax Regime
► Profits tax is 16.5%
► Offshore transaction tax
free
► Salaries tax is 15%
► No sales tax or VAT
► No taxes on dividends
► No Capital Gains Tax
Legal Environment
Trade Friendly
Export Credit Insurance
Banking and Financial Services
Outsourcing possibilities
Page 32
Tax comparison of favorite corporate structures in Asia
Comparison of tax rates in Hong Kong, Singapur and China
China
11%
Singapur
25%
14%
7%
17%
Hong Kong 20%
28%
5%
5%
15%
20%
16.5
%
31%
14.5%
Corporate Income Tax
Personal Income Tax
Social Security (Employee)
Social Security (Employer)
VAT
Source: InvestHK
Page 33
Countries with a DTA with Hong Kong
Confirmed and ratified Double Taxation Agreements with 24 Countries (as at: 30.April
2012):
Belgium
Brunei
China
France
UK
Indonesia
Ireland
Japan
Liechtenstein
Luxembourg
Holland
New Zealand
Austria
Spain
Thailand
Czech Republik
Hungary
Vietnam
Not yet ratified:
Under discussion:
Jersey
Kuwait
Malaysia
Malta
Portugal
Schwitzerland
Bangladesh
Finland
Guernsey
India
Italy
Canada
South Korea
Macau
Malaysia
Mexico
Saudi-Arabia
UAE
Source: InvestHK
Page 34
Summary of Doing Business in Asia
Important key learnings
► Consider the unique differences
of setting up entities in the
region when making investment
plans
► Hong Kong set up is fast, China
takes longer but an entity in
China is required for local
trading activities
► Tax landscape in Hong Kong in
China is substantially different
and requires good planning to
profit from both places’
advantages
► Hong Kong is very suitable as a
holding company or when
sourcing from China
Page 35
Our offices
What is your next move?
Hong Kong
Tel: (+852) 2523 2171
Fax: (+852) 2810 4494
Email: info@fiduciachina.com
Shanghai
Tel: (+86) 21 6327 9118
Fax: (+86) 21 6327 9228
Email: info@fiducia-china.com
Shenzhen
Tel: (+86) 755 8329 2303
Fax: (+86) 755 8329 0821
Email: info@fiducia-china.com
www.fiducia-china.com
Page 36