BizChina

The Eileen Eats blog did an excellent, though very disquieting, post on the state of Chinese food. The post is entitled, "Food Safety– Can’t let your guard down," and it has the following money quote:

Hung Huang, chief executive of the China Interactive Media Group in China, said recently in an article in the New York Times that China as a nation of food lovers is going on a diet. “Not because we don’t love to eat anymore,” she said, “but because we just don’t know what is safe to eat.”

CLB's own Steve Dickinson wrote a Wall Street Journal column earlier this year, entitled, "Food Fumble," discussing how China's new food safety laws will do little to solve China's food safety problems.

What will work? When will it work? What do you think?

My wildly unscientific observations tell me that about nine out of ten companies that go into China legally end up succeeding. My wildly unscientific observations also tell me that about eight out of ten companies that go into China illegally end up failing within a couple of years. Of the other two companies that went into China illegally, one usually becomes legal within a few years and ends up suceeding and the other one ends up failing a few years later.

I have no idea on the accuracy of my statistics, but I truly do make an effort to keep up with every company that contacts my law firm. I do this by every six months or so sending an email asking them how things are going in China. These emails go to those companies that chose not to retain my law firm, but instead to do things illegally in China, and to those that did. No science here, but a bit more than a feeling....

I thought of all that today when I read in the highly respected Economic Observer of how China is cracking down big time on China Rep Offices. Let me start out by saying that I am generally (not always) not a big fan of Rep Offices and that for every WFOE my law firm registers for our clients, we probably do around one Rep Office. The biggest problem with Rep Offices is that their utility is limited. Rep Offices are not to make money in China. Rep Offices are mostly to be used to market the home office. The Rep Office is not to engage in sales within China. The last Rep Office we did was for a US company that makes multi-million dollar equipment in the United States. The point of the Rep Office was to market that equipment within China, with the contracts for the sale of that equipment to be with the US company and the payments for that equipment to go to the US company and the manufacturing of that equipment to occur in the US, and the shipment of that equipment to come from the US to China. So far, near as I know, all of the sales have been from our US client to US and other foreign businesses doing business in China. These businesses pay our client in US dollars, all outside China, no problem. That is a legitimate Rep Office.

The problem is that Rep Offices are easier and cheaper to form and register in China than Wholly Foreign Owned Entities (WFOEs). This sometimes leads cash-strapped companies to want to start in China as a Rep Office and then later convert to a WFOE. This is usually a bad idea. It is a bad idea because if your China based business operations in China do not legally entitle you to operate there as a Rep Office, you are operating there illegally. Some may believe that operating in China as a Rep Office is better than operating in China without having registered as anything at all, but I am not so sure. I have absolutely no evidence to back this up, but my sense is that if you are going to operate illegally anywhere, you are probably going to be better off being entirely off the gird, than half on it.

Starting as a Rep Office with plans to convert to a WFOE at some later date is also usually a bad idea because the conversion is not likely to be smooth. It is not as though one can start as a Rep Office and then smoothly file one piece of paper with some governmental office saying "I want to convert to a WFOE now, so here is my 10,0000 RMB conversion fee." No, not at all. The way one "converts" to a WFOE from a Rep Office is more like having to go through all of the rigmarole of shutting down the Rep Office in China (no small task) AND having to go through the whole rigmarole of forming a WFOE from scratch.

I mention all this because I have just learned from the Economic Observer (a highly regarded Chinese publication) that China has stepped up its crackdown on illegally operating foreign Representative Offices. The article is entitled, "China Cracks Down on Foreign Representative Offices," and it makes a whole lotta sense. To grossly summarize, it says that the Chinese government is sick and tired of full fledged businesses operating in China as Rep Offices and it is going after those businesses that are doing so. It is increasing the fines to 500,000 RMB (around USD$75,000) and stepping up enforcement. The article talks about how the government is looking at a shortfall in 2009 tax collection and going after illegally operating Rep Offices is one of the measures it will be taking to increase collections.

No surprise to me....

Ernst & Young is out with a very informative online publication on indirect taxes in China (h/t All Roads). The publication is entitled, "Navigating Chinese Indirect Taxes," and it provides a great overview of these taxes and how they can, and almost certainly will, impact your China business. It starts out with the following general comments regarding indirect taxes in China:

Indirect taxes (specifically Value Added Tax, business tax, customs duty and consumption tax) play an important role in China, accounting for almost 60% of the government’s tax revenue. Newly revised regulations are changing how indirect taxes are treated in China. But these are often the forgotten tax on business. Tax directors may overlook these costs as they are above the line and usually not directly visible within the accounts or financial statements.

We are often surprised to learn that many companies have yet to grasp the significance of the indirect taxes passing through the organization. More often than not, indirect taxes are viewed as process-oriented throughput costs rather than as a direct charge to the bottom line that should be managed through proactive and concerted efforts. It is not common for companies in China to employ dedicated resources accountable for the risks and costs that arise from processing indirect taxes. This approach creates risks and results in missed savings opportunities.

I am constantly telling our clients that taxes in China are really not all that different from taxes in the United States. China's business tax system is generally (cough, cough) logical and manageable and is not to be ignored. What this means is that if you are a small to mid-sized company doing business in China legally, you need someone either inside or outside your company handling your financial books and you need a good accountant overseeing it all. Because you are a foreign business and your operations may have tax repercussions not only in China, but also in your home country, it almost always will make sense for your accountant to at least be familiar with both China's tax laws and those of your home country. These people are few and far between and cannot be found at all outside China's bigger cities.

What do you think?

Sometimes big events can be so complicated, controversial and unwieldy, there is hardly any point in reading current reports because they are likely to be so biased and/or inaccurate as to be of no value. In those instances, particularly when the underlying topic is not of huge interest to me, I generally pretty much stop reading articles on it and just wait for the dust to settle. I think the common wisdom is that real dust settling (and releasing of key documents) and gaining of perspective usually takes around 50 years.

And though I would love to be able to look at China's recent Rio Tinto arrests from the perspective of fifty years hence, that is obviously not possible right now. So instead, I will turn to an excellent FT.com by Arthur Kroeber, somewhat mis-titled, "Rio Tinto arrests reveal China has growing-up to do."

The thrust of the article is that China is a relatively safe place in which to do business, particularly as compared to Russia. I agree. China has done an amazing job making it clear to its higher level government functionaries that routine foreign company filings are strictly off limits for corruption. Here is what I mean by that. My firm has done hundreds of company and trademark registrations in China and not one single time have we ever been hit up for "extra" money and not one single time have we ever felt we were treated unfairly or differently for not making any such offering. Without naming names, I will just say that is absolutely not the case for other developing market economies in which my law firm is active. In one country, where a registration should take a month, we are often told that we should pay a couple thousand dollars extra to speed things up so that it does not take six months. Kroeber's article captures this:

Historically, China has done a good job of not letting its opaque authoritarian political system and vast legal grey areas get in the way of business. Annual foreign direct investment flows that now exceed US$100bn testify to China’s success in creating a stable and predictable business environment, despite well-advertised corruption problems.

He goes on to say that Rio Tinto has not really changed this:

The Rio Tinto detentions, which elevated an acrimonious but ultimately quite ordinary commercial dispute into a matter of national security, threatened to destroy, at one stroke, an imperfect but notable reputation for reliability built at great cost over three decades.

The bland denouement averts that catastrophe. The coda will likely be a quick trial in which Stern Hu, Rio’s Australian-citizen iron-ore negotiations boss, will be convicted and then immediately repatriated to Australia, probably on some spurious health grounds; his three less fortunate Chinese-national colleagues will likely receive relatively light sentences of a couple of years.

I agree.

For more on CLB's take on the Rio Tinto case, check out the following:

-- China's Rio Tinto Arrests. Everyone Just Move Along....

-- "China's Rio Tinto Case. Everyone Move Along..."