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Originally published:
Sep-25-2006
ABC-Amega Executive and Expert in China Provides Insight to Members of International Association
On August 24, 2006, Julian Chen presented a webinar on the 'ins and outs' of doing business in China to the members of the Association of Executives in Credit and International Business (FCIB). Julian is vice president global marketing of ABC-Amega Inc., and chief operating officer for FCIB-China.
The hour-long presentation generated a number of questions of general interest that Julian answers below.
Restrictions on Funds Transfers
Q. Are there any restrictions on companies regarding how much American money can leave China?
Chen: China is still a country that regulates its foreign exchange and maintains capital controls. The Renminbi (Chinese currency) is only partly convertible in capital markets right now. Foreign exchange is controlled by The State Administration of Foreign Exchange (SAFE). While China does allow foreign money (including USD) flow out of China, there are many restrictions.
In terms of trade, SAFE closely scrutinizes trade transactions to ensure that the payment going out is, in fact, equal to the value of the goods imported. If the Chinese buyer is making payment to a U.S. company in advance, the payment is not allowed to be more than 60% of the total amount due by contract. A Chinese company purchasing services from outside the country must first get approval from their local government (often the Ministry of Foreign Trade and Economic Cooperation).
Re: investments – in order to remit money earned through investments made in China to a location outside the country, you must first fulfill the tax obligation, and then get government approval. Once these requirements have been met, the funds may be forwarded out of China.
As China currently has the highest foreign exchange reserves in the world, SAFE has been working to loosen restrictions. I have observed that Chinese companies are encouraged to expand to foreign markets. And Chinese multinationals are allowed to fund their own overseas operations. However, these companies are still subject to foreign exchange safety examinations by SAFE and are required to make a deposit to guarantee the repatriation of profits.
Q. We have a customer in Beijing who continually pays invoices short and then, in a week, pays the rest. He has told us it is because of his bank and how much money he can wire to America. Is he being honest with us?
Chen: This looks like it might be an excuse to me. Banks in China either deny your application to wire transfer money to America, or send the agreed amount based on your application. Normally, the buyer has already obtained import permission from SAFE before he purchases the goods. Since he has the approval of SAFE, the Chinese bank should simply follow SAFE’s instructions for payment in full. If, however, your buyer is telling the truth, then he might need to switch to a different bank in China that is more familiar with international trade.
Credit Information on Chinese Companies
Q. Is it possible to get credit reports on Chinese companies? What about financial information?
Chen: Credit information on Chinese companies is available. A complete credit report normally contains the subject company’s registration information, history, related companies, operations, management background information, financial data, payment information, bank reference and public information (including court record). Financial statements are often available, but their reliability is sometimes suspect.
Unfortunately, each piece of information is collected by different government departments. For example, registration information is maintained by the Industrial and Commercial Administration Bureau of China; audited financial statements may be available from the China Taxation Bureau. Much of the information is maintained at the local government level and provincial governments don’t currently share information with each other. Therefore, access to local credit reporting agencies is required in order to obtain appropriate data on a Chinese company.
FCIB China has established a network of local reporting companies in every Chinese province. They gather the information, assemble it in a Western format and provide it to FCIB members for around USD 100.00 per report. If you would like a sample report and price list, contact me at julian.chen@abc-amega.com .
Government Requirements regarding Invoices
Q. Our understanding is that the government requires all companies who sell within China to use a preprinted invoice provided by the government. Can our company produce a domestic Chinese commercial invoice from our SAP system without using the preprinted invoices provided by the government, assuming it contained all of the government-required information?
Chen: The type of invoice required is dependent upon a number of factors. What is your invoice for – products sold or services provided? Where do your products or services originate – outside or inside China?
If your products are imported into China, you can utilize invoices generated from your internal system. Before the buyer purchased from you, he probably obtained government approval for the import, therefore your invoice will be accepted for tax purposes.
If your products are made in China, I believe you do have to use the preprinted invoices provided by the Chinese government. The government enforces this process because it ensures the appropriate value-added tax (VAT) is collected. The Industrial and Commercial Tax Bureau of China collects company tax based on the preprinted invoices you purchase from the local Chinese government. Your buyer is also required to provide these preprinted invoices for their own tax purposes. Otherwise, the buyer will have difficulty passing a government audit.
If you would like to use your own invoices, then your buyer will need to get approval from the local government (Ministry of Foreign Trade and Economic Cooperation). The buyer will then deduct the tax your company is responsible for before making payment to you. Per MOFTEC (China Ministry of Foreign Trade and Economic Cooperation), the approval document issued to the buyer by the local government protects you (the seller) from being double taxed in your own country.
Q. Can our invoice for local Chinese sales be printed in both Chinese and English?
Chen: I guess you can type both Chinese and English in the empty spaces on the preprinted invoices you obtain from the local government. The bottom line is that it's the little red, oval government seal on the preprinted invoice that counts. As long as that seal is on your invoice, it will be valid and your buyer should accept it.
Q. At the present time, we have an office in Shanghai that is producing invoices for our customers. We will also have the capability to produce invoices from our new facility in Nanjing. We have been told that we must produce our invoices from separate systems because the operations are in separate provinces. Can we somehow generate centralized invoices (for both the Nanjing and Shanghai facilities)?
Chen: This depends upon the legal composition of your two companies in the two different regions. If your Shanghai and Nanjing companies are two independent corporations, then they each need to generate their own invoices. The preprinted invoice your Shanghai company uses is issued by the local Shanghai government (Industrial and Commercial Tax Bureau of China, Shanghai branch). The preprinted invoice your Nanjing offices must use will be issued by the Jiangsu Provincial government (Industrial and Commercial Tax Bureau of China, Jiangsu branch). This is a matter of provincial tax and the fact that the local governments utilize the invoice forms to collect the appropriate value-added tax (VAT).
However, if your Nanjing company’s accounting system is really just a part of your Shanghai company (consolidated), you may be able to centralize your billing system. This is subject to the government’s approval when you register your second company.
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FCIB-China was formed in 2004 by FCIB, The ABC Companies, Inc., parent of ABC-Amega Inc., a worldwide leader in international receivable management, and Henry Chan, a honorary lifetime FCIB member. The organization’s central purpose is to provide training in credit and receivable management to Chinese businesses and government bodies, as well as to international organizations with offices in China or seeking to do business in China.
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