©2005 Deloitte & Touche LLP. Private and Confidential

““The Business Network The Business Network for International Trade”for International Trade”

China.

Ian HeslegraveDirector - China Tax & Business Services

The Route to Market

18 January 2006

©2005 Deloitte & Touche LLP. Private and Confidential

Background

– 2 years in China – based in Shanghai 2002-04

– Assignment based on developing Deloitte’s indirect tax practice

– Also involved with – inbound investment, direct tax, customs, regulatory, logistics, location planning, supply chain, sourcing etc

– Now advising UK clients on all aspects of doing business in China

Ian HeslegraveDirector – China Tax & Business Services

©2005 Deloitte & Touche LLP. Private and Confidential

Ten Rules for Doing Business in China

1. Everything is possible

2. Nothing is easy

3. Patience is the essence of success

4. The answer ‘Yes’ is not necessarily an indication of agreement or confirmation

5. “You don’t understand our country” means they disagree

6. “Provisional regulations” means they can change the rules anytime they want, even retrospectively

7. “Basically, no problem” means BIG problem

8. “Signing a contract” means the beginning of the real negotiation

9. When you are optimistic, think about Rule No.2

10. When you are discouraged, think about Rule No.1

©2005 Deloitte & Touche LLP. Private and Confidential

China’s cost of manufacturing labour is one of the lowest in the world

Average Monthly Wage of Manufacturing Workers (2000-2002)

0 500 1000 1500 2000 2500 3000

United States

UK

Taiwan

Malaysia

Thailand

China

Indonesia

Vietnam

US$/Month

$70/80 for Town and Village manufacturing workers

$112 for Urban manufacturing workers

©2005 Deloitte & Touche LLP. Private and Confidential

How to operate in China?

• Rep Office

• Joint Venture (JV)

• Wholly Owned Foreign Enterprise (WOFE)

©2005 Deloitte & Touche LLP. Private and Confidential

How to operate in China?

Rep Office

• Cannot trade, cannot enter into contracts

• Can act in a liaison capacity – sourcing, looking for supplies, looking for orders, quality control

• Taxation- cost-plus method- deemed profit method- possible exemptions

©2005 Deloitte & Touche LLP. Private and Confidential

How to operate in China?

Joint Venture

• Why do you need a Chinese partner?

- Local knowledge: customers, distribution channels

- Government connections

- Labour representation

• Lessons from failed joint ventures

- Poor due diligence

- Perceived benefit not realised

- Vast difference on business objectives, strategies, financial standing, culture, expectations

©2005 Deloitte & Touche LLP. Private and Confidential

How to operate in China?

Wholly Owned Foreign Enterprise (WOFE)

• Manufacturing Company

• Trading Company

• Foreign Invested Commercial Enterprise (FICE)

• Others

©2005 Deloitte & Touche LLP. Private and Confidential

China Tax for Foreign Invested Enterprises (FIE’s)

• 15% (currently – depending on location)

• Tax breaks for manufacturers– 100% for 2 years

– 50% for 3 years

• Tax reform coming up – 2007– Tax rate to 25/28% expected

– Tax break retention if already granted?

– Withholding tax on dividends?

• Employment taxes/costs– 35/45% depending on location

©2005 Deloitte & Touche LLP. Private and Confidential

Major considerations in moving to China

• Location

• Infrastructure

• Labour supply– Cost

– Reliability

– Training

• Raw materials/components

• Regulatory environment

• Property– Build or rent

• Capitalization

• Repatriation of profits/taxation

• Supply Chain

©2005 Deloitte & Touche LLP. Private and Confidential

Supply chain issues

• Quality and reliability of finished goods and raw materials

• Customs Duty and Procedures

• Tax

• Long delivery/response times

• Increased stock holding/warehousing facilities

• Exchange rate fluctuations

• Transfer Pricing

©2005 Deloitte & Touche LLP. Private and Confidential

What does the future hold?

• Political stability

• Social development and infrastructure

• A desire for wealth creation

• The people want to get out of poverty

• More of the same and continued growth

©2005 Deloitte & Touche LLP. Private and Confidential

Deloitte Practice in China

Location Partners & Staff

Shanghai 560

Beijing 405

Guangzhou 140

Shenzhen 90

Tianjin 65

Nanjing 55

Dalian 35

Suzhou 15

Mainland 1365

Hong Kong 1500

Macau 30

China 2895

©2005 Deloitte & Touche LLP. Private and Confidential

““The Business Network The Business Network for International Trade”for International Trade”