Foreigners Can "Enjoy" Social Security Benefits in China, but Higher Cost to Send Expats to China

The Standing Committee of the National People's Congress passed China's Social Security Law which has taken effect on July 1 2011. It is the first comprehensive law that focuses on the PRC social security matters. The law not only provides new administrative measures to improve China's social security system but also provides guidance on foreign nationals' participation in China's social security system. Under the new law, foreign employees and their employers need to pay social security, foreign nationals will receive medical, retirement, unemployment and maternity benefits similar to those for Chinese citizens.  

This new law has caused a stir among foreigners working in China. Despite of the concerns and disagreement from foreigners and their employers, the Chinese government has moved quickly to implement the new law.

There are many unanswered questions.  For instances, a foreigner who loses the job in China instantly loses the right to live in the country, how would that person benefit from the unemployment insurance he or she has been paying for?  For those self-employed foreign individuals in China without formal employment relationships with Chinese legal entities, would the law apply to these foreign nationals?  For foreign individuals with employment in their home country but assigned to work in China (e.g. a US expat working in China), it may create duplication in social security contributions since those employees normally would need to make social security contributions in their home countries. Would there be a special waiver for situations like this?  Most foreigners work in China for less than five years, will the employer's and employee's contributions be refundable when the foreign national departs China?

From now on, multinational companies doing business China as well as Chinese companies directly hire foreign nationals should factor the additional cost into the total employment cost when they are to hire any foreign individuals.

What Does RMB Internationalization Mean to the US multinationals?

Through most of its history, the value of the RMB was pegged to the U.S. dollar. As China pursued its gradual transition from central planning to a free market economy, and increased its participation in foreign trade, the RMB was devalued to increase the competitiveness of Chinese industry.

Since 2005, the RMB exchange rate has been allowed to float in a narrow margin around a fixed base rate determined with reference to a basket of world currencies. The Chinese government has announced that it will gradually increase the flexibility of the exchange rate. China has initiated various pilot projects to "internationalize" the RMB in the hope that it will become a reserve currency the long term.

The big first step is to allow banks and companies to settle payments with cross-border trading partners in RMB. Simply, a US multinational can now pay a Chinese supplier in RMB, and a qualified Chinese buyer can pay a US supplier in RMB. 

All of this is great news for the US multinationals. For US companies selling in China, if their customers have the necessary clearance to get their onshore RMB payments converted to offshore RMB, US treasurers will have a lot more flexibility with the cash they generated and have better control of the exposure to RMB-to-US dollar appreciation.  

Also many US companies that have struggled to benefit from the excess RMB they have piled up on the mainland will benefit from the RMB internationalization.  Known as a long-standing problem, due to the Chinese government regulations, it has been very difficult to get money out of China. Now these RMB-rich US companies will be able to use their excess RMB in certain cross-border trading.  Will US companies convert their offshore RMB in HK to US dollars and sent it back to the US headquarter?  Some companies in need of cash in the US might do that. But I think, in most cases, US companies would have little motivation to do so considering 1) the heavy US tax on profit repatriation; 2) the potential appreciation of RMB.  A sophisticated treasurer would have the opportunity to use a base of RMB deposit to set up a multinational notional pooling, which can recycle excess RMB into a US dollar pool to fund the rest of the company's operation without the balance sheet cost.

Experts say that RMB could be fully convertible by 2015.  The Chinese government definitely has made the decision to head into that direction, but it is dealing with the conversion process with great caution, we shall stay tuned on further developments.  I look forward to sharing more on this topic with my blog readers in the near future.

The Long-waited China VAT Reform

Value Added Tax ("VAT") reform in China has been the topic of discussion for several years. The existing indirect tax system makes a distinction between the supply of goods and the provision of certain services. VAT is applied at the standard rate of 17% to the sale of goods in China, the provision of repair, processing and replacement services, and the importation of goods into China. It taxes the ’value added’ by allowing business taxpayers a credit for the tax embedded throughout the supply chain.  On the other hand, Business Tax ("BT") is levied on services and transfer of intangibles and real property. Rates range from 3% to 5 % (with a maximum 20% rate applying to the entertainment industry).  BT incurred by suppliers in the supply chain is not recoverable for the taxpayers. In some cases both VAT and BT may be levied, which would create double tax situations.

The Chinese State Council announced that it will launch the much-anticipated pilot VAT reform program on January 1 2012. The grogram initially will apply to transportation and "modern service" industries in Shanghai. The government is expected to gradually expand the grogram across the nation when conditions permit.  The aim of the pilot program is to resolve the double taxation issues under the prevailing system and to foster the development of specified modern service industries by gradually transitioning these industries from liability to Business Tax to liability to VAT. If implemented nationwide, the reform could lead to a drop in tax collection of about RMB400 billion a year.  But the policy could help business to grow and lead to overall tax revenue increase in the long run.

International Corporate Tax School in Kuala Lumpur

I am back in Kuala Lumpur again, this time for the Deloitte International Corporate Tax School, a four-day in-depth training on OECD and UN tax treaty model. In the world of practicing international tax, a deep understanding of the treaties is extremely important. We have a good mix of people from various Deloitte offices, including Thailand, Indonesia, Malaysia, Vietnam, India, Singapore, Brunei, and Hong Kong. It was an excellent week of learning.

Apart from the training, I managed to get out to explore the city by KL railway and shop at Central Market where I bought Malaysian fabrics like songket and batik.

Deloitte Reveals Asia Pacific’s 500 Fastest Growing Technology Firms for 2011

The tenth annual Technology Fast 500 Asia Pacific Awards ceremony was held at the Ritz Carlton Hotel on Thursday, December 1, 2011, attended by 250 C-level executives and senior management from winning companies across Asia Pacific including Australia, Mainland China, Hong Kong, Macau, India, Japan, Malaysia, New Zealand, Singapore, South Korea, Taiwan and Thailand.  As a member of Deloitte AP ICE team, I had the pleasure to attend the award ceremony.

This year’s fastest growing company, The Store Corporation (Yihaodian) from China, grew an incredible 19,218 percent over three years. Yihaodian is a fast-growing e-Commerce company in China that provides customers with a one-stop shopping platform where customers can buy all their essential daily items at competitive prices. Since its launch, Yihaodian has achieved a significant position in China’s online grocery sales market and currently has over 4,000 employees and five major distribution networks in Shanghai, Beijing, Guangzhou, Wuhan and Chengdu, serving its rapidly expanding customer base. Gang Yu, Chairman and Chief Executive Officer of Yihaodian, said: “Our core competitiveness lies in our strong supply chain management, which enables us to sell fast-moving consumer goods. We have established an integrated shopping platform from the beginning, providing our customers with one-stop shopping convenience and the best customer service experience.” He also said that the convergence in the industry will bring exciting new opportunities, such as social community shopping, mobile e-commerce, micro-blog sales, e-merchandising and cloud computing."

This year, the average revenue over three years across the Top 500 ranked firms increased by 476%, which is more than the 374% increase in 2010.  The Top 5 firms realized an average revenue growth of 9,910%, which was just shy of the 10,338% growth last year.

It was quite amazing and inspiring to meet entrepreneurs with innovative minds from various industries including Semiconductor, Electronics, Bio-tech, Internet, Telecommunication and Networking.  I was the Deloitte representative sitting at a table with executives from winning companies, as one of my roles at Deloitte AP ICE is advising Asia Pacific based companies when they expand overseas, I was excited to see many of these companies are not only growing fast and furious in the Asia Pacific region, but also expanding to North America and Europe in a fast pace!