Doing Business in China – Common War Stories

Doing Business in China – Common War Stories

As time passes, I hear from reliable sources the same type of stories, over and over, about doing business in China.  So, I thought I’d pass along some recent reviews:

Assume a taxpayer sets up a Wholly-Owned Foreign Enterprise (W.O.F.E.) and manufactures products (directly or via a contract manufacturer) in China to take advantage of their low labor costs, local manufacturing expertise and logistical location near customers.

Common anecdotes:

40%, I’m told, of your inventory will disappear out the back door of the factory to employees, friends, family and worse, competitors (who will reverse-engineer your product to find and duplicate your core technology).

Your legal, negotiated tax deal (tax rate holidays or rate reductions) signed, sealed and duly recorded with one provincial minister is abruptly over-turned and subject to renegotiation (with the related required “under-the-table” payments) when the new minister takes over.  Small wonder why, often, the richest guy in town is the government minister.

Say you’re an electronic parts supplier. Your customer’s purchasing manager (assuming you sell your parts to a manufacturer in China that makes a larger product) mishandles your product (stores it too hot or too cold or has it incorrectly installed), and has the Purchase Order for your product cancelled, since it is clearly “defective.”   Then, the purchasing manager has a new Purchase Order approved for a factory owned by a family relative located in the next hamlet, who copies your design.

My Favorite:  Large businesses start a tax audit with a “conference meeting” with a team from the tax authority.  This is common throughout the world.  This allows the parties to review the process for conducting the tax audit and to introduce tax issues and areas the tax authority expects to review, so everyone can prepare and move forward in a timely manner.

Recently,  a very large, U.S. public company had their W.O.F.E.  audited.  In the opening conference, the Chinese tax inspector’s opening comments were, paraphrasing: Times are bad in China.  We need money.  Don’t tell me about the tax law or the tax treaties.  How much can you pay?

The company believes they timely filed a legitimate, honest tax return in China.  However, based on the inspector’s comments, that was not relevant.  One must wonder whether their tax system is de-evolving from a vailed-attempt at the Rule Of Law to, unfortunately, a system of blatant pay-offs.  A U.S. company (or subsidiary thereof) must always be mindful of the U.S. Foreign Corrupt Practices Act, under which foreign bribes and pay-offs result in potential U.S. crimes.  Clearly, this is an on-going dilemma.

We’ve heard that a leading Chinese Language Internet Search Provider charges advertising fees as follows:

A company that wants to advertise is charged based on their size and what the Internet company determines they should pay…without regard to the potential “hits” or “eyeballs” their ad will receive. If the advertiser objects and declines to advertise, they shortly thereafter find that information about their company is dropped and no longer comes up as “search results.” That is, it is like as if you decided not to advertise on Google, and the next day, no one could find information on your company by searching on Google… in retaliation for not paying advertising fees. Of course, Google does NOT do that.

Here’s a Wall Street Journal Editorial that outlines the controlled and centralized nature of China’s economy and the growing disparity between rich and poor (the U.S. has also suffered from a growing disparity between rich and poor since the 1960’s, so, unfortunately, the U.S. is no shining example on that issue.)

See: Rich China, Poor Peasants

Doing business in China seems to have a much higher-than-normal level of risk compared to other countries we deal with.  So please be careful.

Economically, most companies have no choice but to do some manufacturing or other business in China.  So, often, these risks are just “factored-in” as a cost of doing business.  Small companies must be very careful as they can’t absorb the type of losses listed above the way, perhaps, a larger company can.

I am always available for questions or comments at (510) 797-8661 x237.

—————————————————————————————————————————————————————————————————————

We hope you found this article about “Doing Business in China – Common War Stories” helpful.  If you have questions or need expert tax or family office advice that’s refreshingly objective (we never sell investments), please contact us or visit our Family office page  or our website at www.GROCO.com.  Unfortunately, we no longer give advice to other tax professionals gratis.

To receive our free newsletter, contact us here.

Subscribe our YouTube Channel for more updates.

Alan Olsen, CPA

Alan Olsen, is the Host of the American Dreams Show and the Managing Partner of GROCO.com.  GROCO is a premier family office and tax advisory firm located in the San Francisco Bay area serving clients all over the world.

 

Alan L. Olsen, CPA, Wikipedia Bio

 

 

GROCO.com is a proud sponsor of The American Dreams Show.

 

American-Dreams-Show-Accounting-firm-in-ca-cpa-tax-advisors-groco-alan-olsen

The American Dreams show was the brainchild of Alan Olsen, CPA, MBA. It was originally created to fill a specific need; often inexperienced entrepreneurs lacked basic information about raising capital and how to successfully start a business.

Alan sincerely wanted to respond to the many requests from aspiring entrepreneurs asking for the information and introductions they needed. But he had to find a way to help in which his venture capital clients and friends would not mind.

The American Dreams show became the solution, first as a radio show and now with YouTube videos as well. Always respectful of interview guest’s time, he’s able to give access to individuals information and inspiration previously inaccessible to the first-time entrepreneurs who need it most.

They can listen to venture capitalists and successful business people explain first-hand, how they got to where they are, how to start a company, how to overcome challenges, how they see the future evolving, opportunities, work-life balance and so much more..

American Dreams discusses many topics from some of the world’s most successful individuals about their secrets to life’s success. Topics from guest have included:

Creating purpose in life / Building a foundation for their life / Solving problems / Finding fulfillment through philanthropy and service / Becoming self-reliant / Enhancing effective leadership / Balancing family and work…

Untitled_Artwork copy 4

MyPaths.com (Also sponsored by GROCO) provides free access to content and world-class entrepreneurs, influencers and thought leaders’ personal success stories. To help you find your path in life to true, sustainable success & happiness.  It’s mission statement:

In an increasingly complex and difficult world, we hope to help you find your personal path in life and build a strong foundation by learning how others found success and happiness. True and sustainable success and happiness are different for each one of us but possible, often despite significant challenges.

Our mission at MyPaths.com is to provide resources and firsthand accounts of how others found their paths in life, so you can do the same.

Posted in

What Should You Do if You Can’t Afford to Pay Back-Taxes?

Paying taxes is no fun. Owing back taxes and not being able to pay them is much worse. Many people get into tax trouble when they end up owing money to the IRS and they don’t have the means to pay it off. This can cause a lot of stress, anxiety and even fear or…

You Still Have Time to Make These Tax-Savings Moves

It’s that time of year again. No, we’re not talking about Christmas. It’s time to get serious about tax savings. It wouldn’t be December unless we had some last minute tax tips to help you save money before the year ends. Whether you count yourself among the highly successful or the middle class, these are…

Don’t Wait to Hire a Tax Pro for the Upcoming Tax Season

This is after Christmas when everyone is scrambling for those after Christmas deals at the stores and whatever else it takes to be ready before the big day. Likewise, there are a lot of people that end up scrambling for a tax pro as soon as the tax season starts because they forget to take care of…

What Can Small Businesses Do to Plan for Tax Season?

There are only a few days remaining in 2015. The bad news is your time for tax saving for this year has almost expired. The good news is you still do have a few days to make some moves that can help you save on taxes for your small business. Not every move is right…