China's Tax System. When "Equal" Is A Very Bad Thing.

In the good old days, China gave foreign companies all sorts of tax breaks. In fact, China's taxation system so favored foreign companies, many Chinese companies would form a company overseas and then enter China that way. This tactic came to be known as round-tripping and it became quite common.

Those days are truly over.

China recently put one more, pretty much final nail in the separate but unequal column earlier this month when it "unified" a few more rather obscure taxes. A friend of mine recently sent me an email from a China-focused accounting firm that nicely describes the most recent China tax changes further harmonizing the tax structures as between foreign and domestic enterprises. The email was from Kaizen Certified Public Accountants Limited/Yen and Associates Limited, and it stated the changes so clearly, I am going to just quote it directly:

Commencing from 1 December 2010, foreign enterprises, foreign funded enterprises and foreign individuals will begin to pay Urban Maintenance and Construction Tax and Educational Surcharge.

Urban Maintenance and Construction Tax (城市维护建设税) and Educational Surcharge (教育费附加) are two types of surcharges, levied on taxpayers who pay Value Added Tax ("VAT"), Consumption Tax (CT) and Business Tax (BT). Specifically, each surcharge is calculated as a percentage of the actual amount of the VAT, CT and BT paid by the taxpayers. The rate for Educational Surcharge is 3%. Depending on the location, the rates for City Maintenance and Construction Tax differ:

• In city areas, the rate is 7%,
• In county and township areas, the rate is 5%,
• In other areas, the rate is 1%.

Since their introduction in 1985 and 1986 respectively, the two surcharges have been imposed on domestic enterprises and Chinese individuals only. Foreign enterprises, foreign invested enterprises and foreign individuals have been specifically exempted from these two surcharges.

The extension of Urban Maintenance and Construction Tax and Educational Surcharge to foreign enterprises and foreign funded enterprises, following the unification of Vehicle and Vessel Usage Tax in 2007, Enterprise Income Tax in 2008, Farmland Occupation Tax and Urban Real Estate Tax in 2009, is the last of such moves to unify the different tax systems applicable to domestic and foreign funded enterprises. This very last move signifies that the unification of the two tax systems has been completed and the beginning of a new era of “unified tax system and fair taxation” and now that there is one and only one tax system applicable to all enterprises doing business in China or with Chinese enterprises.

At the end of 2009, I did a post, entitled, "China's Top 5 Business Law Trends For 2010." In that post, I predicted 2010 would see China stepping up its tax collection efforts:

China will increase its tax collection efforts. This has been going on at a rapidly accelerating pace over the last six months or so. If your China operations are not making a healthy profit, do not be surprised if the government imputes healthy profits to it. In particular, the government will look very closely at your transfer pricing and in many cases it will not like what it sees.?

There is no doubt the same will hold true for 2011 and beyond. ?

My friend had this to say about the above changes: ?

My 2-cents on the tax increase are that I don't really mind but wish there had been more advance notice. The amount is small and for a company with decent margins it shouldn't be too harmful. But how do I know what other changes are just around the bend? In any case, the move to bring taxes for foreign and domestic enterprises in line is no surprise (especially to CLB readers!) and this is exactly the kind of thing we've learned to roll with. Maybe we can ask knowledgeable CLB readers to guess what other changes might be on the way...

So what tax changes do you see for China? For foreign businesses operating in China? ?

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Sexism In China. A Good Thing For Foreign Business?

Had an interesting lunchtime discussion the other day with two very dynamic international entrepreneurs on global prejudices. Both told me of how they "take advantage" of it. These two take advantage of it by hiring women, the disabled, and ethnic minorities in countries where other businesses are either reluctant or refuse to hire these people. And let's face it, these prejudices exist, at least to some degree, in every country.

One guy told me of how his small factory in Russia had hired one physically disabled person and of how that person ended up recommending a whole slew of his disabled friends and of how in fairly short order, 22 of his 40 employees were physically disabled. This guy then bragged of how he was able to cherry pick the cream of the crop from the disabled population of this mid-sized Russian city. He paid his disabled employees the same wages as his non-disabled employees (which he said was about 10% more than the market rate) and that he was constantly looking for more. He said that he became guilty of reverse prejudice, favoring the physically disabled over those without disabilities. He said that his disabled employees missed work "way less often" than his employees without disabilities, they were far more productive when at work, and they never left. On top of this, they had much better attitudes. As he put it, by being one of the only employers in town who actively sought out the physically disabled, I was able to "arbitrage" some pretty incredible employees. ?He even said that by the time he sold this factory, a number of other companies in town had come to realize the benefits of hiring based on real performance, not on perceptions.?

The other guy talked of how he so much favors hiring women in China because they are almost always "20 percent better then men." "Look at the foreign SMEs in China," he said, "I think about 75% of them that are run by local Chinese are run by women. There's a reason for that. Chinese women know that American companies are less likely to engage in sexism than Chinese companies and so they choose to work for us. As long as Chinese companies discriminate against women, I am going to be scooping them up." He then referred me to an Economist article that backed up what he was saying about how foreign companies in China prefer women due to "sexism in China."

The Economist piece on "sexism in China" and it actually is about Korea, but what it says about Korea almost certainly holds true of China as well. The article is entitled, "Profiting from sexism:?If South Korean firms won’t make use of female talent, foreigners will" and it does back up my clients' thesis on how foreign companies are wise to take advantage of other country's prejudices. The article starts out noting how sexism in Korea creates "obvious opportunity" for those who eschew it:

Working women in South Korea earn 63% of what men do. Not all of this is the result of discrimination, but some must be. South Korean women face social pressure to quit when they have children, making it hard to stay on the career fast track. Many large companies have no women at all in senior jobs.

This creates an obvious opportunity. If female talent is undervalued, it should be plentiful and relatively cheap. Firms that hire more women should reap a competitive advantage. And indeed, there is evidence that one type of employer is doing just that.

Korea (and I believe China is the same) is the ideal place for gender arbitrage by foreign companies because the bulk of the sexism comes in the workplace, not the education system:

Jordan Siegel of Harvard Business School reports that foreign multinationals are recruiting large numbers of educated Korean women. In South Korea, lifting the proportion of a firm’s managers who are female by ten percentage points raises its return on assets by one percentage point, Mr Siegel estimates.

South Korea is the ideal environment for gender arbitrage. The workplace may be sexist, but the education system is extremely meritocratic. Lots of brainy female graduates enter the job market each year. In time their careers are eclipsed by those of men of no greater ability. This makes them poachable. Goldman Sachs, an American investment bank, has more women than men in its office in Seoul.

Only 60% of female South Korean graduates aged between 25 and 64 are in work—making educated South Korean women the most underemployed in OECD countries. That may change, however. Marriage and fertility rates have plunged. There were 10.6 marriages per 1,000 people in 1980, but only 6.2 last year. South Korean women have an average of only 1.15 children, one of the lowest rates anywhere. That has troubling implications for the country, but should help women in the workplace. Firms will have to use all the talent they can find. If they don’t, their rivals will.

I completely buy it.?

I previously wrote on sexism in China in a post entitled, Sexism China Style. Not A Good Thing.?

When I first read this post over at the Josh in China blog (why are there so many Joshs in China, anyway?), I smiled. But then I frowned. Okay, I didn't really frown, but I'm going for literary effect here.?

The post is entitled, "Interesting Cultural Differences" and it astutely (albeit reflexively) notes how the women at Chinese toll booths are uniformly "extremely good looking girls." When Josh discussed this observation of his with a cab driver, the cabbie responded by saying, "Of course! These are the people welcoming you into the city. They have to be beautiful!" Josh then tells us that the pay for these jobs is "three or four times that of a typical retail job." Probably better job security and benefits too.?

Now at first this seems harmless, but it really isn't. Now before anyone calls me a prude or anything, trust me I am not. But I also have two daughters and I would never want them either to be hired or not hired for any job based on their looks. Now I also know full well that nearly all of us have our own prejudices when it comes to looks and there is no way those can be fully excised when hiring, but blatant sexism is a bad thing and that is exactly what we have here. With any sexism on the up side (truly no pun intended) in terms of hiring means there has to be a concomitant sexism on the downside. For every attractive woman hired for this job, there is one less attractive woman who missed out on it.?

If I had to rate China on a sexism scale among the countries I know best, it actually does fairly well. It is not as good as the United States, but it is considerably better than Korea and better than Japan as well. I would say it is about the same as Russia. My sense is that pretty women in China are favored more in employment than in the United States, but that women who do their jobs well (no matter what their looks) are taken seriously. I am basing nearly all this analysis on observations in law firms and on conversations with female lawyers so it is about as far from scientific as one can get.

So what about sexism in China? How does it compare to other countries? Is it confined only to certain industries? Is it getting better? ?I have to say that I have seen virtually none of it in the Chinese law firms with which I have worked, but I hear it is rampant in other industries and, of course, my interactions with Chinese law firms has not been enough for me to really know. ?So really, what is going on with sexism in China?

Please speak up. ?

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China Law Blog On Linkedin. It's A Good Thing.

We started a China Law Blog Group on Linkedin with the plan of making it a spam-free source for China networking, information and discussion. That group has been active for nearly a year now and I am proud to say we have succeeded. ?

Let's look at the numbers.

We have 2195 members, which is way more than any other China law related group on Linkedin.?

We have had approximately 160 discussions, generated by more than 100 members.?

We have of late been averaging about one new job posting a day. ?

Most importantly, we have had some absolutely terrific discussions both based on the numbers (a number of the discussions have received around 100 comments) and, more importantly, on the quality of the comments. Our discussions have ranged from practical (such as, how do I open a China bank account or what are the best practices for a China Joint Venture) to deep think (such as, what impact does U.S. politicians' demonizing China have on how America views China?).?

But I am most proud of how (at least as far as I know) no spam item has yet lasted on the site for anything approaching 24 hours.?

If you want to learn more about China law or business, if you want to discuss China law or business, or if you want to network with others doing China law or business, I suggest you check out our China Law Blog Group on Linkedin and join up. The more people in our group, the better the discussions.

So what are you waiting for??Click here and join us.

?

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China Law Blog On Linkedin. It's A Good Thing.

We started a China Law Blog Group on Linkedin with the plan of making it a spam-free source for China networking, information and discussion. That group has been active for nearly a year now and I am proud to say we have succeeded. ?

Let's look at the numbers.

We have 2162 members, which is way more than any other China law related group on Linkedin.?

We have had approximately 160 discussions, generated by more than 100 members.?

We have of late been averaging about one new job posting a day. ?

Most importantly, we have had some absolutely terrific discussions both based on the numbers (a number of the discussions have received around 100 comments) and, more importantly, on the quality of the comments. Our discussions have ranged from practical (such as, how do I open a China bank account or what are the best practices for a China Joint Venture) to deep think (such as, what impact does U.S. politicians' demonizing China have on how America views China?).?

But I am most proud of how (at least as far as I know) no spam item has yet lasted on the site for anything approaching 24 hours.?

If you want to learn more about China law or business, if you want to discuss China law or business, or if you want to network with others doing China law or business, I suggest you check out our China Law Blog Group on Linkedin and join up. The more people in our group, the better the discussions.

So what are you waiting for??Click here and join us.

?

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