Doing Business in China; Opportunities in a Major Emerging MarketOctober 03, 2011
China, a land in the midst of dynamic internal changes, offers unparalleled opportunities to the well-prepared company or individual seeking to expand overseas.
The Chinese government is working to bring its massive population into a modern market-driven economy, and, in the process, opportunities abound for businesses ranging from multinational corporations to budding entrepreneurs. The Chinese government believes that opening their economy to overseas investors is a viable pathway to modernization, and it will help the well-prepared businesses and individuals avail themselves of unprecedented opportunities.
The key point is being well prepared, and the savvy business will prepare for a China venture by working with a highly skilled team, including tax experts, accountants and business attorneys. A primary requirement before embarking on a business venture in China is that the team should include members who are fluent in Mandarin Chinese.
In addition to assembling a team of multilingual financial experts, it is also necessary to understand the Chinese system of taxes and fees. The Chinese corporate income tax – roughly 25 percent compared to the 35 percent rate in the US – is an attractive factor when doing business in China, but is only one of many tax categories that will be encountered.
Your team will be required to understand the tax structure for Non-Resident Companies (NRC's) including Value Added Taxes, Turnover Taxes, Taxation of Related Party Transactions and exempt organizations, to name just a few. China views every business venture as a partnership, socially and legally, thus it is essential to go into negotiations assisted by experts who can provide a comprehensive review of the Chinese tax structure and successful negotiation strategies, as well as understanding Chinese social issues.
One key issue to be understood before embarking on a business venture in China is that while the types and rates of various taxes are set by the central government, local tax authorities will be involved with hands-on matters and company officials should be aware that they often will deal directly with local officials.
Experienced China business veterans note that when entering negotiations in China, a sponsor, usually from within the government, is a requirement. An insider on your team will save dollars and time and help avoid potential pitfalls. BlumShapiro for instance, is a member of Baker Tilly International, a worldwide business network which has China-based member firms that can provide invaluable assistance as our clients successfully navigate the complicated business regulations and tax issues.
Newcomers to doing business with China should also be familiar with the culture, and how social rules impact the business practices they will encounter. For instance it is common for the host country's representatives to press for concessions from potential business partners.
It should be understood, however, that promises made in negotiations, regardless of whether during an introductory luncheon meeting or a final round of contract issues, are expected to be honored. The unwary newcomer could innocently make a promise based on the U.S. tax structure that could prove to be costly under the Chinese tax system so in any negotiations it is essential to be assisted by team members who understand the full implications of every conversation.
It also helps to understand Chinese demographics when reaching out to the potentially lucrative Chinese markets. China has a population of 1.3 billion people but 60 percent of that 1.3 billion, or 780 million people, are classified as rural farmers who are not likely to be part of marketing ventures.
Another 25 percent of the Chinese population is classified as "workers," non-rural people who run the gamut from minimum wage jobs to skilled laborers who earn a decent wage by Chinese standards. The Chinese working class may be a source of revenue depending on the product or service offered.
The Chinese middle class amounts to only 8 percent of the population, with another 4 percent classified as businessmen and senior managers and 3 percent work for the government. But this 15 percent has complete control and most of the money in China, and totals nearly 200 million people.
Firms that are properly prepared to successfully navigate the path to opening serious negotiations with Chinese business representatives could find that an exciting new market has opened for them.
The successful team of accountants, attorneys, linguists and international business experts will labor long and hard, but diligence and attention to detail can position your firm to tap into markets that are all but impossible to access in most of the rest of the world.