Doing business in China

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Angel Garrett
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1 Doing business in China A journey of a thousand miles begins with a single step Barry Macdonald and Doug Purdie, PwC Vancouver

2 Agenda 1. China overview 2. Chinese social and cultural differences 3. Chinese business issues 4. Tax and legal structuring 5. Q&A 2

3 Section 1 China overview Doing business in China November 8,

4 China overview World ranking # 1 # 2 # 3 Population: greater than 1.3 billion Economy: approximately 5.8 trillion (2010); Canada s second largest two-way trading partner Area: 9,600,000 km 2 46 cities in China with over 2 million people United Nations million middleclass population in 2020 Euromonitor int l

5 China overview Other statistics Literacy: 92 % (CIA Factbook) GDP growth: 10.3% (2010); 9.5% (2011); 9% (2012) Legal system: Civil law influenced by Soviet and continental European civil law systems Three biggest cities: Shanghai, Beijing, Chonqing 5

6 China overview 6

7 Section 2 Chinese social and cultural differences Doing business in China November 8,

8 Chinese social and cultural differences Yes means maybe. Maybe means no. No means disaster. Guanxi. Relationships critical. Avoid euphemisms. Speak slowly. 8

9 Chinese social and cultural differences Patience Saving face Social interaction meals, gestures, gifts Other 9

10 Section 3 Chinese business issues Doing business in China November 8,

11 Chinese business issues Finding and managing business partners - Relationships - Choice of partner and joint-venturing Relationship/negotiating with Chinese governments - Importance of government - Volatile but regulated environment - Enforcement of rules and laws 11

12 Chinese business issues Intellectual property rights - Enforcement and infringement Winning Chinese consumers - Investment and operational costs with partners - Low brand loyalty - Pricing constraints - Lack of reliable market information - Desire for foreign brands versus domestic brands 12

13 Section 4 - Tax and legal structuring Doing business in China November 8,

Tax and legal structuring Tax Applicable to Rate Corporate income tax Taxable profits 25% Value-added tax Domestic sales 17% or 3% Export sales 0% Business

14 Tax and legal structuring Tax Applicable to Rate Corporate income tax Taxable profits 25% Value-added tax Domestic sales 17% or 3% Export sales 0% Business tax Service income, royalties, etc. 3%-20% (normally 5%) Customs duty Importation of goods Average 10% Withholding tax Dividends, interest, royalties, etc. 10% 14

15 Tax and legal structuring Indirect investments Direct investments Branch JV WFOE Sell from Canada Representative office Physical presence and capital commitment 15

16 Tax and legal structuring Direct sale Simple vs. not so simple? What if Canadian employees travel to China for business (visit customers, quality control)? What if contracts are signed in China? What if a broker or general commission agent is used? Free training provided in China? 16

17 Tax and legal structuring Representative offices Useful but limited functions 15% markup Liaison contact Not allowed to participate directly in profit-making Crackdown on use of Rep. Offices 17

18 Tax and legal structuring Direct investment JV WFOE *At least 25% foreign ownership 18

19 Section 5 - Q&A Doing business in China November 8,

20 Q&A What is your biggest concern of investing in China? a. Social and culture differences b. Political environment c. Intellectual property protection d. Rule of law and corruption e. Other 20

21 Barry Macdonald Partner, Tax PwC Vancouver (604) Doug Purdie Associate Partner, Assurance PwC Vancouver (604) Doing business in China November 8,

22 Thank you! This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law,, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it All rights reserved. In this document, PwC refers to, an Ontario limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

Patent Box 29 May 2012

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