Investing in Cross-border E-Commerce in China
- CW is pleased to announce that our firm is launching a new business division which provides cross-border e-commerce solutions to small and medium-sized firms. The new division is operating under a joint venture MHnCW Limited, partnering with Minihome Media, an omnichannel e-commerce and marketing service provider based in Hong Kong.
- Cross-border e-commerce has attracted a great deal of attention from overseas brands and retailers. The following article provides a general overview of how cross-border e-commerce works in China.
Chinese spenders seldom shy away from any opportunity to show off their purchasing power. According to the “China Cross-border E-commerce Market Research Report 2018-2019“, China’s cross-border e-commerce transactions have reached RMB 9.1 trillion in 2018 with over 100 million users. It is later reported that the market‘s transaction volume reached RMB 9.9 trillion in 2019, with a compound annual growth rate of 27%. It is projected to reach RMB 26.8 trillion in 2025, with a compound annual growth rate of 18.1%.
Although the term “cross-border e-commerce“ may be self-explanatory, it has become increasingly sophisticated in the past decades. “E-commerce“ is generally understood as advertising, sale, and distribution of products through electronic means. From consumers’ perspective, while domestic e-commerce offers products available within the country, cross-border e-commerce enables them to purchase products directly from overseas markets.
In recent years, the cross-border e-commerce business in China has attracted a great deal of attention from overseas brands and retailers. In terms of policymaking, China truly stands out in the global arena in fostering cross-border e-commerce. Of course, the country has gone through nearly a decade to formulate and adjust its cross-border e-commerce policies and regulations. It has managed to address many different aspects such as tax, logistics, electronic information, intellectual property rights, and data protection.
Cross-border e-commerce vs. general trade
To understand how “cross-border e-commerce” works in China, one should first distinguish this term from “general trade“.
General trade often refers to the import and export of goods by an entity legally established in China with an import/export permit. The Chinese entity undertakes the obligations as an importer or exporter. When importing goods, the Chinese entity, acting as an importer, must first buy the products from the overseas seller, handle the customs clearance and pay the duties and taxes on CIF price before the products are sold in the China market. After the customs formalities, the products are often sent to a warehouse or physical shops. Under the general trade model, foreign brands and retailers must either find a Chinese importer or set up a Chinese subsidiary to sell in the China market.
With the emergence of cross-border e-commerce, selling to China allows overseas brands to take a more direct approach. They do not need to find a trading partner who is willing to pay for imported products before selling them, nor do they need to apply for a Chinese business license to import on their own. Instead, the overseas company can set up an online shop on any cross-border e-commerce platform, so long as they meet the platform‘s requirements. However, the market seems primarily dominated by only a handful of platforms such as Tmall Global, JD Worldwide, and NetEase Kaola. These large platforms usually prefer working with well-known brands with a good reputation, high-quality products, and sound financial strength. There are other marketplaces that cost lower for SMEs. Some are specialty platforms that offer their specialty in selling to a niche market. Regardless, the intricacy in selling to China through cross-border e-commerce is that placing your products on any platform, big or small, doesn‘t guarantee success at all. New entrants must carefully study the Chinese market, the logistics solutions, the regulatory framework and be vigilant in the cost/benefit analysis before moving forward.
- Logistics models
On the logistics side, the sellers can choose the direct purchase imports model (B2C) or the bonded imports model (B2B2C).
If a direct purchase imports model is chosen, all individual parcels are packed and labeled overseas. The seller will then arrange to deliver the products to China via post or express delivery services. Prior to the arrival of goods in China, three documents must be sent to the customs network electronically: the online order, the payment transaction, and the logistics order. The package is then cleared if the information pertained in the three documents all match with each other. Finally, the local express company will handle the last-mile delivery to the buyer.
Under the bonded imports model, the sellers will first stock their products in a special customs supervision area (such as a bonded warehouse) in China without payment of duties. Upon confirming an order online, the products are picked, packed, labeled, and shipped to the buyer. Compared to the direct purchase imports model, the bonded imports model provides a quicker response in the logistics process. For one thing, the products are already located in China before the buyer places an order. For another, as China continues to extend the geographic coverage of the pilot scheme for cross-border e-commerce retail imports, more and more cities will ramp up efforts to enhance its capability and efficiency in handling cross-border e-commerce retail imports.
It’s also important to note that cross-border e-commerce is not applicable to all commodities. In 2016, China introduced the first version of the “List of Imported Commodities for Retail in Cross-Border E-Commerce”, which is widely known as the “Positive List“. The list provides transparency and guidance on items allowed to be imported into China through cross-border e-commerce. It was later updated respectively in 2018 and 2019, covering a total of 1,413 items that are in great demand by Chinese consumers.
- Payments,duties, and taxes
Another key difference between cross-border e-commerce and general trade is the payment of duties and taxes. Importing goods to China generally involves import tariffs, value-added tax (VAT), and consumption tax. General trade requires the importer to pay for the import tariff, VAT, and consumption tax during import. Under the cross-border e-commerce scheme, the consumers are the taxpayers. When an individual customer places an order online, the e-commerce platform will calculate the applicable duties, taxes, and logistics costs. The customer then pays the total amount via an e-payment system which can be integrated into the e-commerce platform.
China imposes single and annual transaction limits per person under the cross-border e-commerce scheme. Currently, the tariff-free quota on a single transaction is RMB 5,000, and the annual quota per person is RMB 26,000. Under these limits, even though the import tariff is set at 0%, the VAT and consumption tax are levied at 70% of the standard rate applicable to the type of goods, which is generally referred to as “cross-border e-commerce integrated tax“. Online shoppers who have not exceeded their single and annual transaction quota are subject to an integrated tax rate of 9.1% for most products. For high-end cosmetics, the integrated tax rate is 23.5%. Over these limits, the consumers will need to pay full import tariff, VAT, and consumption tax. Considering that the integrated tax is added to the e-commerce retail price, overseas sellers should be careful in their pricing strategy.
Selling to China via cross-border e-commerce is indeed an attractive business model for many overseas brands. Yet, it is not without challenges, such as trademark infringements, identity fraud, payment fraud, and counterfeit goods. China is determined to address these issues and even introduced the E-Commerce Law in early 2019.
Under the new law, consumers who buy fake goods through cross-border e-commerce can hold direct accountability to either the overseas seller or the platform. As the platform needs to bear joint and several liabilities, the sites must carefully review and supervise the merchants and products to avoid liability for compensation caused by counterfeit goods. Furthermore, new policies on safety, taxation, logistics, after-sales, and other aspects of imported goods are brought upon to ensure strictly following of rules, protecting consumers‘ rights and interests.
Notable platforms and online marketplaces for cross-border e-commerce
After implementing the E-Commerce Law, the China market has been more welcoming to foreign companies that wish to sell cross-border. With improved standards and structure over the sector, e-commerce continues to be a competitive market ground for brands to sell in China. Here are a few notable platforms and online marketplaces:
- TmallGlobal tmall.hk – This is the sister website of Tmall.com and is currently the largest cross-border B2C platform, owned by Alibaba Group.
- JD Worldwidejd.hk – This is the cross-border platform of jd.com. JD is known to be a major competitor of Tmall.
- NeteaseKaola kaola.com -NetEase Kaola, launched by NetEase in 2015, is one of the market leaders in the CBEC sector. On 5 September, Alibaba announced to fully acquire NetEase‘s cross-border e-commerce (CBEC) platform NetEase Kaola for about US$2 billion.
- Xiaohungshu小紅書or Little Red Book xiaohongshu.com – Xiaohungshu is a fast up-comer in China‘s cross–border e-commerce business. Over 70% of the users as post-90s. The site focuses on the use of media in promoting various areas in lifestyle, such as beauty, travel, food, and entertainment.
- Ymatouymatou.com – Ymatou was founded in 2009 in Shanghai, focusing on high-quality foreign products and discounted sales.
The global consumption habits under the pandemic has increased users’ demand and transactions in high-quality cross–border e-commerce. With the favorable substantive policies successively promulgated in China, cross–border e-commerce is forecasted to enter a new stage of development and growth. In no time, China will become the world’s largest and fastest-growing market for cross–border e-commerce.
On a final note, CW is pleased to announce that our firm is launching a new business division focusing on providing cross-border e-commerce solutions to small and medium–sized firms. The new division is under the operation of a joint venture, MHnCW Limited, partnering with Minihome Media, an omnichannel e-commerce and marketing service provider based in Hong Kong.
If you are interested in joining our platform, please contact our Delilah Li via firstname.lastname@example.org.
Written by Delilah Li, China Consultancy Team, CW CPA
Greater China Updates – March 2021
China Aiming to Innovate on the AI Industry
The Chinese authorities of the Ministry of Industry and Information Technology (MIIT) have announced, at the end of February of 2021, 5 new development zones dedicated to the innovation of the AI industry. Previously, there were only three zones: Shanghai (Pudong New District), Shenzhen, and Jianan-Qingdao, with the new additions in Beijing, Tianjin (Binhai New District), Hangzhou, Guangzhou, and Chengdu, the number has increased to 8.
Each zone will innovate on AI towards a specific purpose:
- Beijing: Manufacturing intelligent vehicles in the framework of the Winter Olympics
- Tianjin: Coordinate the development of the Beijing-Tianjing-Hebei area through the Pilot Free Trade Zone
- Hangzhou: Focused on the development of the Hangzhou smart city and modern services
- Guangzhou: Developing the supply change to integrate Great Bay Area (Guangdong-Hong Kong-Macao)
- Chengdu: Connection to the Belt and Road Initiative focusing on the medical and financial sectors
China Transfer Pricing: Latest Guidelines on Cross-border Payments
The State Administration of Foreign Exchange (SAFE) has issued a new set of guidelines to settle the payment in foreign currencies and receipts for Transfer Pricing (TP) adjustments. China keeps strict rules on foreign exchange controls, making it difficult for MNCs to settle TP payments. The newly released guidelines are an attempt of the Chinese authorities to ease these processes.
Generally, cross-border payments are categorized as payments in current accounts or capital accounts. However, there are certain cities running pilot programs for TP. The guidelines aim to align SAFEs and banks’ procedures as well as those in the pilot zones. The new guidelines deliver three proposals:
- TP adjustments: It will be necessary to present relevant information and supporting documentation such as invoices, profit adjustments, Additionally, these transactions will be processed as the original trade category, either products or services, allowing banks to treat them as transactions and letting them process the bank remittances for TP adjustments.
- Cost-sharing adjustments: As with the TP Adjustments supporting documents and information will be required. However, SAFEs must deliver a report on the sub-category.
- Others: Circular 14 will govern these schemes. However, there are not more details about it now.
Pilot Cash-Pooling Service for Multinational Companies Launched in Shenzhen and Beijing
China’s monetary authorities have decided to launch the first batch of pilot projects in Shenzhen and Beijing to facilitate further the use of cross-border funds by multinational enterprise groups. The pilot projects will allow large multinational companies with relatively high credit ratings to purchase foreign exchange at will within a certain limit. The purchased funds can be deposited in the domestic primary account for cross-border payment.
Visa Facilitation for Applicants Inoculated with Chinese COVID-19 Vaccines
China is easing entry restrictions for foreigners inoculated with Chinese COVID-19 vaccines. During the week of 15 March 2021, Chinese embassies in multiple countries have introduced the conditions in which a visa application shall be supported if the visa applicant has received their Chinese COVID-19 vaccination and a vaccine certificate. Travelers who wish to enter China should first contact their respective Chinese embassy to obtain the latest visa application instructions.
What other items be registered as a trademark in China?
In China, not only company names, logos, words or drawings can be registered as trademarks, colors, smells, and even sounds can be registered trademarks too, as long as they are distinguishable. Yet, the distinctiveness of colors, smells, and sounds can be highly subjective. Therefore, the process and requirements of registering colors, smells, and sounds as trademarks are not so clear. Nevertheless, with the raising awareness of intellectual protection in China and the power of social media, we shall see more and more registration applications for these new concepts in the future.
Tips for maintaining your Hong Kong corporate bank account active
Opening a corporate account in Hong Kong in recent years is not so easy or quick. The banks follow a strict policy to guarantee that no illicit businesses are being conducted even after the bank account is opened. If they detect any account irregularities, the bank may reject the account opening application or close the existing account. Here are four tips to avoid bank account suspension:
- Maintain minimum account balance required by the bank
- Respond to your bank regarding the annual assessment of your account
- Keep your company information up-to-date
- Avoid leaving your account stagnant for a long period
E-commerce in the European Union and its VAT changes in 2021
The European Union will implement new Value Added Tax (VAT) regulations on cross-border e-commerce businesses on 1 July 2021. Due to the increase in globalization, international trade and the need for worldwide tax controls, the new regulation aims to simplify and modernize the procedures.
How will this affect exporters from China? How can you regulate your sales in EU?
In response to the increase in globalization, international trade, and the need for worldwide tax controls, on 1 July 2021, the European Union will enact the new regulatory package of Value Added Tax (VAT) on e-commerce.
The package introduces the ‘Import One-Stop Shop’ electronic portal, which regulates the payments of e-commerce VAT in each member state. This change concerns the growth of e-commerce and digitalization, which have boosted international trade; Companies based in the European Union selling online can also export to mainland China and Hong Kong, and vice versa.
KEY CHANGES IN VAT REGULATIONS
- Changes in VAT declaration
The regulation includes an important change of the VAT collection method on e-commerce. Previously, VAT was paid in each European Union member state, depending on the seller’s location. To illustrate, if a seller in Germany sells products online to a Spanish client, VAT would be declared and taxed in origin, Germany.
As of 1 July, 2021, tax will be declared in the state where the buyer is located and the purchase is made. Hence, in the previous example, the VAT declaration would be made in Spain. This regulation also affects sellers outside the European Union.
- Exemptions of the VAT
The current system permits VAT exemptions on products imported to EU which are less than €22, while those products exporting from EU are still subject to VAT. This exemption makes imported products more competitive in terms of price compared to those of European origin.
The regulations as of 1 July will eliminate the e-commerce VAT exemption for products with a value of less than €22, which implies that all imports to EU, even those of little value, will be charged VAT at the destination. This is one of the most supported initiatives since it can balance the playing field between imported products and local products.
Meanwhile, imports of products with a value of less than €150 are still not subject to customs duties and do not require a full customs declaration.
IMPLICATIONS FOR ONLINE SELLERS FROM MAINLAND CHINA OR HONG KONG
The different online platforms and marketplaces are contemplated in this regulation as these platforms are, by far, the most used vehicles for the sale of online products from overseas, including China and other parts of Asia. On behalf of users and buyers, the platforms will act as guardians of compliance with the e-commerce VAT, which especially includes those outside the European Union member states and that import from non-member countries.
Although the general concern for exporters whose sales cover the entire EU territory is how to make the declaration in multiple states, the ‘Import One Stop Shop’ records, and files all declarations across the EU. On the contrary, if the seller does not want to use the ‘Import One Stop Shop’, the alternative is to allow the final consumer to pay VAT when the product is delivered, and all responsibilities and declarations rest on the consumers.
The foreign trade community is concerned about the increase in costs borne by the final consumers. As VAT is an indirect tax, it is transferable to final consumers. For example, a European consumer who initially purchases a product imported from China valued at €20 may have to pay €24.2 for the same product in Spain after the implementation on 1 July 2021.
There is a worldwide trend for regulation of VAT on imports. To demonstrate, some cross-border trading platforms in China require companies that ship products to pay VAT in advance for all merchandise.
How quickly will the final consumers adapt to the VAT regulations of electronic commerce in the European Union, especially in pandemic times? It is only a matter of time the end consumers adapt to these changes.
Written by Luz Deneb Martínez, Latin Department, CW CPA
Ecuador: Laws and Regulatory Changes for Entrepreneurs and Startups
Article presented by the firm of auditors and business consultants Audit Corporate and Tax Corporate, Member of Allinial Global
Contact Email: Diego Zambrano
The entrepreneurship law and regulatory changes in 2020 correspond to the creation and management of companies in various industries in Ecuador. Details of changes shall be in force in 2021, which led to noticeable results.
Organic Law of Entrepreneurship and Innovation
The Official Gazette Supplement No. 151, published on 28 February 2020 (Friday), focused on the Organic Law of Entrepreneurship and Innovation. A summary of the main aspects addressed by the standard includes:
- Creation of Simplified Stock Companies (SAS);
- Companies of Benefit and Collective Interest
At the time of adopting the status of a company of benefit and collective interest, a company is obliged to create a positive material impact on society and the environment, where an annual report is presented to the management;
- The definition of “entrepreneur” is provided, and the government entities are established to disseminate the procedures and applicable rates for entrepreneurs;
- It is arranged to develop work and contractual modalities to be implemented in entrepreneurial work, including part-time, legal benefits and others;
- Regulatory frameworks are established for crowdfunding, and other platforms in their different products, such as donations, pre-purchase, investment in shares, reimbursable financing;
- Limited companies are allowed to subsist with a single shareholder;
- The joint-stock company and the limited liability company may subsist with a single shareholder/partner. For its constitution, at least two contracting parties must participate;
- The existence of the position of the commissioner becomes optional. In accordance with the provisions of the statutes, Public limited companies may or may not have commissioners as an oversight body;
- A company will incur cause of dissolution due to losses, when these represent 60% or more of the equity and that this situation is maintained for more than 5 continuous years;
- In companies whose bylaws provide for the existence of a Board of Directors, the Legal Representative of the company may not be president or representative of that collegiate body;
- It is allowed that the financial statements presented to the tax authority are not presented to the Superintendency of Securities and Insurance Companies;
- Holding general meetings through telematic means is allowed;
- It is allowed to carry out capital increases under the compensation of credits, rights of attribution and absorption of losses; When a company registers operational losses and has reserves, these will be eliminated automatically;
- Voluntary and early dissolution does not require prior authorization from the Superintendency of Companies, Securities and Insurance. Therefore, the direct registration of that corporate act in the Mercantile Registry is allowed for the beginning of the liquidation that will be supervised by the control body. The change of name, change of address and modification of the company term do not require prior authorization either;
Less than 50% of the instruments proposed by the regulation to promote the creation of businesses in the country are operational. The Law defined the creation of new types of credit and companies, among others, but only the latter has been effectively operationalized with the creation of firms through Simplified Stock Companies (SAS).
From May 2020 to February 2021, more than 5,000 companies of this type were registered. Another benefit that the norm raises is to generate an employment contract that implies fewer costs for entrepreneurs, this type of instrument was generated last year through new work modalities with durations of only one year, with the cancellation of the eviction.
Hong Kong Budget for Fiscal Year 2021-22 during the times of Uncertainties
On 24 February 2021, the Financial Secretary of the Hong Kong Special Administrative Region, Mr. Paul Chan Mo-po, delivered the 2021-22 Budget Speech.
With the impacts of China-US tension, social incident, COVID-19 pandemic, Hong Kong is faced with a lackluster economy and a deteriorated labour market. Hong Kong expects a record deficit of HK$257.6 billion and HK$101.6 billion for 2020-2021 and 2021-22 respectively, meaning that there would be deficit for four consecutive years. The Financial Secretary’s 2021-22 budget is focused on supporting enterprises, supporting employment and relieving people’s hardship.
2021-22 Budget Highlights
We summarize the 2021-22 budget’s key highlights relating to salaries tax, profits tax, measures to smoothen livelihoods, support enterprises and achieve diversified economy, as follows:
a)HK$5,000 electronic consumption vouchers in instalments to Hong Kong permanent residents and new arrivals aged 18 or above
b) Salaries Tax and tax under personal assessment for 2020-21 will be reduced by 100%, subject to a ceiling of HK$10,000 (2019-20: HK$20,000). The reduction will be reflected in the final tax payable for the year of assessment 2020-21
c) The rate of Stamp Duty on Stock Transfers will be raised from the current 0.1% to 0.13% of the consideration or value of each transaction payable by buyers and sellers respectively.
a) Profits Tax for 2020-21 will be reduced by 100%, subject to a ceiling of HK$10,000 (2019-20: HK$20,000). The reduction will be reflected in the final tax payable for the year of assessment 2020-21
b) Concessionary low-interest loan
c) Extension six months of the Pre-approved Principal Payment Holiday Scheme
d) Waive rates for non-domestic properties for 2021-22, subject to a ceiling of HK$5,000 per quarter in first two quarters and HK$2,000 per quarter for remaining two quarters
Continue to implement relief measures announced last year
e) Waive the business registration fees for 2021-22
f) Water and sewage charges of non-domestic households: waive 75% of charges for every month, subject to a monthly cap of HK$20,000 and HK$12,500 respectively
Achieve diversified economy, Innovation and technology
a) Issue no less than $24 billion of Silver Bond and no less than $15 billion of iBond this year. Lower the eligible age for Silver Bond subscription from 65 to 60
b) Issue green bonds totalling $175.5 billion within the next 5 years, and plan to issue retail green bonds
c) Roll out Green and Sustainable Finance Grant Scheme to subsidise expenses on bond issuance and external review services
d) Strive for the launch of Southbound Trading of Bond Connect within this year, and enhance the domestic Central Moneymarkets Unit
e) Provide subsidy for Real Estate Investment Trusts to list in Hong Kong
f) Launch a Pilot Insurance-linked Securities Grant Scheme to subsidise issuance cost
g) Provide subsidy for Open-ended Fund Companies to set up in or re-domicile to Hong Kong
h) Review tax arrangements relevant to family office business
i) Earmark over $200 million to roll out “Knowing More About IT” Programme, subsidise primary schools to enhance students’ interests and knowledge in I&T and their applications through extra-curricular activities
j) Regularise the pilot scheme which subsidises students studying science and technology in local universities to enrol in short-term I&T related internships
k) Inject $9.5 billion into the Innovation and Technology Fund by two yearly instalments
l) Hong Kong Monetary Authority to consider enhancing its Fintech Supervisory Sandbox to reduce time for launching innovative financial products in the market
m) Press ahead with the development of the Hong Kong-Shenzhen Innovation and Technology Park in the Lok Ma Chau Loop
n) Continue to implement the Science Park expansion and Cyberport 5 development
o) Continue to support the development of 5G networks and applications
p) Commence progressively the operation of the first batch of about 20 R&D laboratories under the “InnoHK Research Clusters” in the first quarter of this year
CW welcome the Budget’s cautious and targeted measures, which pave the way to foster post-pandemic economic resilience and betterment of livelihood.
*For 2020-21, the profits tax is proposed to be reduced by 100%, subject to a ceiling of HK$10,000. (2019-20: HK$20,000)
- Salaries tax is charged at the lower of net chargeable income (Total Income – Deductions – Allowances) at progressive rates or net total income (Assessable Income – Deductions) at standard rate.
- Standard rate remains the same at 15%.
- Progressive rates are as follows:
*For 2020-21, the salaries tax and tax under personal assessment are proposed to be reduced by 100%, subject to a ceiling of HK$10,000. (2019-20: HK$20,000)
The standard rate (for non-corporate owners) remains at 15% for 2021-22.
Written by May Tung, Tax Advisory Services, CW CPA
The diplomatic relationship between Brazil and China began in the 19th century. This relationship became closer in the ’90s due to a more complementary commercial approach. Since 2009, China has been Brazil’s leading trading partner. The economic connections between the countries have brought them closer despite the great geographic distance.
Brazil is a crucial commodities supplier, whereas China provides mostly raw materials, supplies, and machinery to Brazil. China additionally plays a vital role in the Brazilian economy since it buys more than it sells. Since 2010, China is also responsible for heavy investments, especially in energy and infrastructure. In 2019, China invested USD 1.9 billion in Brazil, following the Chinese government commitment made at the 11th BRICS summit in Brasília to invest UDS100 billion.
From January to October 2020, 21.6% of all products imported to Brazil were from China. According to Mr. Yang Wanming, Chinese Ambassador to Brazil, more than 300 Chinese companies invested in Brazil, of which 25 ranked in the top 500 companies globally. The closer connections between the two countries are even more evident now with the joint efforts to elaborate a vaccine against COVID-19.
China considers Brazil as a strategic partner. This scenario presents an opportunity for Brazilian companies that want to expand their businesses to China, even more so after the country’s new Foreign Investment Law came into effect last year, which aimed to make foreign investments in China safer and easier.
Establishing a business in China can present a range of strategic benefits to Brazilian companies, especially to those that wish to partake in product import-export services or establish their operational focus on the Chinese market, from preparation to the distribution of their products services. Although not every company has the same needs, we list a few benefits of establishing a company in China:
- Access to foreign investment protection as a China-based entity
- Obtain Chinese-speaking skilled workforce
- Closer contact with Chinese suppliers
- Access to one of the biggest consumers markets in the world
Understanding the potential of these fruitful economic relations between Brazil and other Latin American countries, Mr. Thomas Wong, Partner of CW CPA, established a team entitled ‘Latin Department’ to serve Spanish and Portuguese-speaking clients. One of CW’s differentiating factors is that we offer experienced native-speaking advisors that attenuate the cultural differences, thus making the navigation through the complex Chinese market smoother.
To date, our Brazil Desk is a division under the Latin department, assisting various sizable Brazilian companies operating in China, with two Brazilian advisors, namely Kemelly Vera and Rafael Fraga. Our Brazil Desk focuses on international retailers, technology equipment manufacturers, and medium-sized traders that are sourcing components from mainland China. If you are looking to capitalize on China’s market opportunities, please contact our Brazil Desk:
Kemelly Vera | LinkedIn profile
Rafael Fraga | LinkedIn profile
Breaking News About Tax Matters Presented by Regulatory Entities in Colombia During February
Article presented by the firm of auditors and business consultants Alfredo López y Cía.
Member of Allinial Global
Contact Email: email@example.com
- The Council of State Contentious-Administrative Chamber
The section four ruled that the ICA, in commercial activities, states that this tax is effective in the municipality upon which the price and the goods to be sold are agreed and it is based on the principle of territoriality of the tax, and reassert the jurisprudence uttered by the same, in the following articles: Exp. 22817 dated 23 November 2018, Exp. 22614 dated 26 September 2018, Exp. 21681 dated 8 June 2016, of Exp. 18413 dated 29 September 2011 and Exp. 14852 dated 19 May 2005. It also states that, “the place where the commercial activities of sale of goods is carried out should be the one where the essential elements of the contract are specified, that is, the price (and within this, the form of payment) and the goods that are sold, regardless of the place where the orders are made.“ Similarly, this regulation states that the destination of the goods or the place where the sale contract is signed are not factors determining the establishment of carrying out the commercial activities.
- Clarification of Simplified Stock Companies issues
Another issue relevant to shareholders’ responsibilities in simplified stock companies (Sociedades de Acciones Simplificadas, “SAS“) was clarified by the superintendency of companies where the law states that shareholders of the SAS are not responsible for the obligations incurred by the company.
Article 2 of the Law 1258 of 2008 states that they would form a legal person other than their shareholder(s) once the SAS are registered in the commercial register. Therefore, following the provisions of the second paragraph of Article 1 of the same rule, except as provided in Article 42 of the law mentioned above on lifting the corporate veil, the shareholder(s) will not be responsible for the labor conditions, tax, or other obligations incurred by the company.
- Tax matters: Realization of income and payments based on shares
Regarding the realization of income and payments based on shares, the tax treatment applicable to payments based on shares is based on an employment relationship that is being executed. The income will be recognized when the option to acquire shares is exercised. If these shares are received as part of the employee’s compensation, the income will be recognized at the time they are delivered, when the employee appears as a shareholder of the company, or the entry is made into the account, whichever comes first. The realization of the income must be taken into account to determine the withholding tax.
- Tax matters: Sales Tax, Exempt Tax under Legislative Decree 551 of 2020
The Directorate of National Taxes and Customs (“Dian“) responds to the query on the validity and conditions of the VAT exemption for the importation and marketing of medical equipment and supplies.
The provisions of Legislative Decree 551 of 2020 came into force on 15 April 2020, as of its publication in Official Gazette No. 51,286, and are not applicable retroactively. The Decree establishes a temporary exemption for the import and sale in the national territory of 211 types of goods and medical supplies necessary and essential for the prevention, diagnosis, and treatment of the Coronavirus COVID-19.
For the VAT exemption to be applicable, those responsible must comply with the procedure established in Article 2 of Decree 551. Failure to comply with these requirements will lead to the non-application of the tax treatment of exempt goods. What is established in the Decree does not only apply from its publication date in the official gazette. Compliance with the requirements established in the standard must also be carried out for the exemption to be applicable.
- Deduction for difficult-to-collect debts
originated in a mandate contract without representation between financially related parties. The deduction for debts that are difficult to collect in a mandate contract is applicable for the principal where the debtors are hired by the agent. The liquid income for recovery of deductions originates in the materialization of any of the economic events described in Article 195 of the tax statute.
Greater China Updates – February 2021
- EU-China Comprehensive Agreement on Investment (CAI)
- Simplification of Business name registration procedures in China
- China to boost VAT e-invoicing and reinforce tax compliance
- New announcement by the Ministry of Finance and the State Taxation Administration on the Pre-tax Deduction of Marketing Expenses
- The importance of details on Employment Contracts
- A decade-long battle of Intellectual Property conflict
EU-China Comprehensive Agreement on Investment (CAI)
A draft of the EU-China Comprehensive Agreement on Investment (CAI) published on 22 January 2021, showed a promising advance in the long-standing negotiations between all the parties involved.
After 35 rounds of negotiations since 2013, CAI becomes the first comprehensive investment protection agreement concluded by China, covering investment liberalization, investment protection, fair and competitive conditions, dispute settlement, and sustainable development.
Key elements of the EU-China CAI:
- Making the conditions of market access for EU companies clear and independent of China’s internal policies.
- Opening new market access in China for EU companies through the elimination of quantitative restrictions, equity caps, or joint venture requirements in various sectors.
- Improving the level playing field by seeking to discipline the behavior of state-owned enterprises to act in accordance with commercial considerations.
- Imposing transparency obligations on subsidies in the services sectors.
- Laying the rules against forced technology transfers.
- Providing transparency rules for regulatory and administrative measures to enhance legal certainty and predictability, as well as for procedural fairness and the right to judicial review.
- In labor and environmental areas, China commits not to use the standards of protection for investment attraction or protectionist purposes.
- Commitments on environment and climate, including to effectively implement the Paris Agreement on climate.
Simplification of business name registration procedures in China
With effect from March 2021, the revised regulation on business name registration will further simplify registration procedures of starting businesses. The ‘business name pre-approval’ stage will be abolished. Hence, this change will allow applications to be lodged through the online business name application system.
Applicants now have the option to inquire, compare and screen proposed business names via the online business name declaration system or directly submit their application to the registration authority. The new regulation and digitalized system grant more flexibility and transparency to its applicants.
However, applicants must ensure their selected business name meets the requirements of these Provisions. All information and materials submitted must be authentic, accurate, and complete. The applicant shall bear legal liability for infringement of others’ legitimate rights and interests.
China to boost VAT e-invoicing and reinforce tax compliance
China has very quickly and efficiently adopted the electronic VAT system. The disruption of COVID-19 has encouraged companies to rapidly integrate their IT resources (ERP, CRM, etc.) with those of tax authorities.
China has advanced its e-invoicing system and technological integration in its fiscal compliance and processes, introducing the feature of issuing ‘Special’ VAT e-invoices on top of its former restriction to ‘General” VAT invoice.
This modern technology adoption promises multiple benefits for companies and tax authorities. Taxpayers of all levels – micro, small, medium, and big enterprises – will reap the benefits of reduced paper-waste and increased efficiency in terms of time and cost. Subsequently, Tax authorities are able to assess real-time information which could strengthen compliance checks.
New announcement by the Ministry of Finance and the State Taxation Administration on the Pre-tax Deduction of Marketing Expenses
The Ministry of Finance and the State Administration announced on 27 November 2020 that the pre-tax deduction is effective from January 2021 till December 2025. This will benefit businesses that incur marketing expenses (advertising and business promotion expenses).
However, the measure will only apply to companies involved in the cosmetics industry (manufacturing or selling goods) and manufacture of beverages and drugs (excluding alcohol).
The businesses benefiting from this policy will be able to deduct up to 30% of their sales revenue in the current year, where expenses were incurred. The excess may be carried forward during the next years.
It is worth noting that tobacco marketing expenses, such as advertising and promotion, are not deductible in calculating taxable income.
The importance of details on Employment Contracts
2020 has revealed many instances in which both employers and employees neglected the importance of labor matters. When all is well, enforcing strict contractual terms seems to be unnecessary.
However, the unique environment arose in numerous conflicts between contractual parties. This revealed the gravity of remaining vigilant to employment contract details. It is imperative to remain attentive to multiple items, including national laws and local policies and rules, termination conditions, duration of the contract (fixed-term, open-ended, specific), clear and concise use of language, and oral agreements. Compulsory contract provisions such as salary, bonus, benefits, working hours, the term of service, probationary period, social insurance program, overtime rate, conflict resolution methods, and other elements also play important roles. Due to its complexity and location variations, whether the company is hiring, dismissing, or relocating employees, it is highly advised that contracts are drafted and reviewed by specialized lawyers.
A decade-long battle of intellectual property conflict
After a decade and over 80 lawsuits, Basketball legend, Michael Jordan won a trial over the Chinese company, Qiao Dan, who has been making use of his name and similar logo for around 20 years.
The Supreme People’s court, equivalent to the U.S. Supreme Court in China, has decided that the company must publicly apologize on mass media and formally announce that they have no ties to the athlete. Despite the inadequate mental damage compensation, China has shown an effort to avoid intellectual property disputes and make it a safer investment destination for foreign brands.
Any trademark dispute can be time-consuming and involve high costs for both parties. Therefore, it is highly recommended to do research on trademark and Intellectual Property Rights and protection to minimize risks.
Your Simplified Annual Compliance Guide in Hong Kong
Are you considering setting up a company in Hong Kong? Perhaps you have a Hong Kong Company but find it confusing to keep up with the compliance. Has your accountant suddenly reached out to you with a new charge that you are not familiar with? This article is to clarify the basic responsibilities that your Hong Kong Limited Company shall take up every year.
Annual compliance in Hong Kong
Annual compliance refers to a set of responsibilities a company should assume once it has been established. You must observe these compliance requirements according to your company’s fiscal year-end and the anniversary date. In Hong Kong, every private company must comply with the obligations administered by these two government entities:
– Companies Registry
– Inland Revenue Department
COMPLIANCE WITH THE COMPANIES REGISTRY
The Companies Registry is the department in charge of registering local and non-local companies in Hong Kong. It maintains records of active and dissolved companies.
Every year, a company should deliver an Annual Return, which contains its particulars, such as the registered office, shareholders, directors, company secretary. If the company does not file the Annual Return after 42 days of the deadline, the company will have to pay penalties. Please see the Annual Return Form “NAR1(Private)_Specimen-e” for your reference.
Business Registration must be renewed upon its expiry date. Normally, if you have applied for a one-year Business Registration, we recommend preparing the renewal of the Business Registration before the anniversary of the company. Please see Business registration specimen for your reference.
Significant Controller Register (SCR)
To enhance the transparency of corporate beneficial ownership, a company
incorporated in Hong Kong must obtain and maintain up-to-date beneficial ownership information by keeping a Significant Controllers Register. The SCR register must be kept at its registered office address or a place in Hong Kong. In the latter case, the company must file a Form NR2 to the Companies Registry reporting the location of SCR. The Register should be open for inspection by law enforcement officers upon demand. Failing to do so will render the company and the responsible person of the company liable to fines.
COMPLIANCE WITH THE INLAND REVENUE DEPARTMENT
The company should prepare financial statements for each fiscal year. The periodicity of the reports will depend on the company and the need for the availability of financial information. The reports can be prepared on a monthly, quarterly, biannual, or annual basis.
Regardless of the size, companies in Hong Kong are required to audit their financial statements and present them together with a profit tax return to the Inland
Revenue Department. The audit should be performed on an annual basis.
Profits tax return (“PTR”)
Annual profits tax returns are normally issued to taxpayers on 1 April each year. Once a Profits Tax Return is issued, the company is required to lodge the completed PTR together with the profits tax computation and the duly signed audited accounts for the basis period. Please see “ebir51” regarding the format of the Profits Tax Return.
Hong Kong Salaries Tax is charged on the assessable income earned by an employee or an office holder in a year of assessment that runs from 1 April to 31 March of the following year.
As an employer, the company has the following reporting obligations to the Inland Revenue Department (“IRD”) if it anticipates that the company hires an employee who is likely to be chargeable to Hong Kong Salaries Tax.
i. Commencement return – The company has to file Form IR56E within 3 months of employing the employee
ii. Annual return – The company has to file Form BIR56A and IR56B. The annual return BIR. 56A is normally issued in early April and the filing deadline of the form (together with completed IR56B, where applicable) is within 1 month from the date of issue.
iii. Cessation return – The Company has to file Form IR56F (Employee who is about to Cease to be Employed) or IR56G (Employee who is about to Depart from Hong Kong) one month before the date of termination of the Philippines employee’s employment. IR56G has to be filed in the situation when the employee leaves Hong Kong for good or a substantial period of time usually in excess of 1 month. From the date of filing IR56G and until such time the employee has made tax clearance and can produce to the company a “letter of release” issued by the IRD, the company should withhold all amounts due to be paid to the employee (including salaries, commission, bonus, reimbursement of rent/expense, gratuity, money or money’s worth included).
Please note that the company does not have a tax withholding obligation except in the situation mentioned in (iii) above when the employee is about to depart from Hong Kong.
1. Understand the basic accounting and taxation system and practice in Hong
2. Review in-depth the service proposal you receive from the external accounting and secretarial services provider.
3. Establish a good habit of keeping and organizing business records from day one.
4. Don’t delay the declarations and reporting. This might lead you to the loss of information and records internally and the delay in presenting information to third parties like the banks, and penalties from the authorities.
5. For companies with a large number of transactions, it is important to prepare financial reports on a more frequent basis.
6. Review your financial reports. Once you receive the financial reports from your accountants, go through the information and seek clarifications if you have doubt. A responsible service provider will be able to answer your questions swiftly.
7. Keep your company statutory and business records up to date.
8. Update your bank at least once a year on the company status. Make sure your bank account has sufficient funds for bank charge deduction.
If you have any questions regarding your company’s responsibilities or how to
prepare the information, please get in touch with us and request a free consultation.
Contact: Ms. Lily Xiang, Accounting Manager
Written by Luz Deneb Martínez, Latin Department, CW CPA
5 Tips CFO Should Know Before Adopting Cloud Accounting
- Living in a highly globalized and digitalized world, companies and firms are starting to digitalize their work in order to be more competitive and efficient in the fast-paced business world. One of the crucial features of a firm is to have a clear and transparent accounting record. However, conventional manual accounting systems have been criticized for their low working flexibility and high manual working error. Cloud accounting enables companies with an always up-to-date online solution from any device and anywhere.
Speaking of digitalizing financial management, companies and firms begin to shift their accounting businesses online by adopting cloud accounting services to stay ahead of their competitors. But what do we exactly mean as the ‘cloud’, and why is it important to businesses today?
Cloud accounting refers to the delivery of accounting services through software that is accommodated on remote servers – the ‘cloud’. The accounting software aims to increase the bookkeeping efficiency, integrate your financial administration, and provide real-time reporting of your key numbers. Unlike traditional, desktop-based accounting software, cloud accounting allows employees and business owners to access the same entries with a high accuracy level. Compared to conventional manual accounting systems, cloud accounting enables an always up-to-date online solution from any device and anywhere.
Benefits of Cloud Accounting
Secure financial data storage
Cloud accounting software provides highly secure storage of financial data than traditional, desktop-based software. Similar to online banking services, cloud service providers use encryption to rewrite account information into a series of codes when sending and storing data. Also, as online financial data is password-protected, accountants and companies have to access the same system and retrieve entries with their exclusive passcodes instead of physical flash drives to avoid information breaches.
Cloud providers often offer security measures such as an off-site automatic backup server, multiple segregated networks, and numerous segregated networks. As data are not kept on-site, it mitigates the risks of any natural or human-induced disasters.
Cloud-based accounting allows automatic synchronization of financial data. Keeping your books and bank reconciliation up to date brings complete real-time information and analysis over the corporation’s present financial situation. Instead of going over clutters of past financial reports to check for past mistakes, online accounting saves time. With access to instant reports and financial data, corporations could make informed decisions regarding the business’s financial future with organized numbers, insights, and key data.
Simplify tax compliance and payments
Cloud accounting generates reports and reminders to keep firms docile with the Inland Revenue Department in Hong Kong. For instance, it could show how much firms have paid overtime for a specific tax. Tax payment transactions would also be recorded and exported into relevant tax return templates for digital submission. Shifting accounting workbooks online thus assists in compiling relevant papers and information to file a successful disbursement.
Improve accounting accuracy
In manual entry accounting, there are always reports on the transposed number or erroneous calculations. With cloud accounting software, corporations could leave such concern behind. All relevant financial information like inventory on hand and supplies on hand can be concentrated on one cloud-based file, reducing possible human accounting errors.
Furthermore, online bank feeds are displayed and reconciled on the firm’s cloud accounting file. This ensures nothing is missed or added to avoid confusion and false accrual journals.
Cost-effective based on your company size and needs
To many small and medium-sized companies, it might be impossible to have in-house accounting executives or an accounting department due to the high labor and maintenance costs. By adopting a cloud-based accounting solution, the subscription-based operation that depends on the required number of users and services per company enables firms to control their costs while obtaining precise and accurate accounting records suited to their needs.
The world is changing every day, and new technologies are developed continuously to impact the future of small and medium-sized businesses. Cloud accounting software helps companies minimize their operating cost and maximize their profit in the long term. If you have not heard about cloud-accounting, it is undoubtedly time for you to look into what the fantastic online solutions can offer.
Written by Claudia Tam , Latin Department, CW CPA