china's business environment & mncs in china

China’s Business Environment & MNCs in China Making the Right Moves

Grand Hyatt Hotel , Beijing 26 November 2014

MNCS IN CHINA Making the right moves

MNCs IN CHINA | SILK ROAD ASSOCIATES | 3

CASE STUDY

Blue Moon: a nimble private competitor

MNCS IN CHINA

Key Takeaways

A still growing but more complex China

Selling to China’s many cities is not as easy as it looks

New business models are disrupting multinationals

Finding new efficiencies in a slower growing China

Talent management and labour shortages

China’s changing role in global strategy


The opportunities in China remain vast compared to other emerging markets, even the other BRICS

China’s economy is larger than the combined value of Russia, Brazil, and India.

China’s economy has grown by $1.5tn in the

past two years.

BRAZIL $2.3 TN

RUSSIA $2.0 TN

INDIA $1.9 TN

That’s equivalent to the combined output of Sweden, South Africa,

and Nigeria

CHINA $8.4 TN


GUANGDONG

JIANGSU

SHANDONG

HONG KONG

GDP, $bn

The opportunities in China remain vast compared to other emerging markets, including neighbouring markets


MNCs are in ‘China for China’. But does their global strategy reflect the change?

The primary reason to be in China is to serve the China market, or to be ‘in China for China’.

Source: American Chamber of Commerce in Shanghai & European Chamber of Commerce in China.

American firms

69%

European firms

75%


>10 million 1 million to 10 million < 1 million

Source: Silk Road Associates, local statistical authorities

MNCs are having to reconsider how they tap into the country’s many ‘smaller’ cities

Population by city Circles denote relative population size

Shanghai FTZ

Anti-graft measures

E-commerce

Rising affluence

Shadow banking

Big data Digital media

South China Sea

Chaori

Higher capital costs


6

8

10

12

14

2000 2002 2004 2006 2008 2010 2012

Boom! Growth reaches it’s peak of 14% in early 2008 ahead of the Olympics and global crisis

Real GDP growth % change

A new focus on efficiency, not (just) volumes as GDP growth slows on a structural basis

The early years Earlier reform measures and WTO-entry kick-start a decade of growth

Bust (?) Fiscal stimulus produces a mini-recovery, but growth rates remain on structural decline

Source: Silk Road Associates, China National Statistical Bureau


85

65

65

60

50

45

35

25

25

20

The speed of ageing is unprecedented as the region’s youth population declines steeply

The speed of ageing in Asia will be traumatic.

2020

2030

2035

2060

2070

2095

2005

2010

2015

2035

Thailand

Vietnam

China

Indonesia

India

Philippines

Germany

U.K

France

U.S.

Year median age reaches 40 yrs & number of years taken to rise from 30 to 40 yrs

Source: United Nations Population Division


0.3 1.3 2.1 5.8 4.7

6.0 10.0

15.7 8.5

16.6

3.4

14.5

GDP ($bn)

2000 2012 Africa

Latin America

Japan

United States

European Union

Emerging Asia

China

GDP ($bn)

MNCs are having to rethink China’s role in their global and regional strategies

THE RISE OF THE AEC | SILK ROAD ASSOCIATES | 12

Helping our clients grow their commercial footprint in China, Southeast Asia, and the Middle East

About Silk Road Associates Silk Road Associates is a strategy consultancy helping clients grow their commercial footprint across the Silk Road region with a focus on China, Southeast Asia, and the Middle East. We provide a range of services from business strategy, market studies and operational support. Our directors include experienced consultants, business strategists, economists, and operational specialists. Our clients are present in a variety of industries and include multinationals, mid-market companies, and financial institutions. Founded by Ben Simpfendorfer, a world-leading specialist in the commercial rise of Asia and the Middle East, we understand the challenges of operating across multiple countries and within an increasingly interconnected region. With offices in Hong Kong, Beijing, and Melbourne, we also provide insightful and independent local knowledge on the region’s fast changing markets. Visit us at www.silkroadassoc.com

Hong Kong 1801 Wheelock House 20 Pedder Street, Central +852 2293 2236 Melbourne 8/350 Collins Street Melbourne, 3000, Victoria +61 (3) 8601 1135

MNCs in China Strategies in an

Urbanizing China

David Frey Partner, Head of Strategy & Operations

KPMG in China

October 7, 2014

MNCs in China Making the Right Moves

Recent report assessing current challenges and opportunities for multinationals in China

1 A still growing but more complex China

2 China’s changing role in global strategy

3 New business models are disrupting multinationals

4 Selling to China’s many cities is not as easy as it looks

5 Finding new efficiencies in a slower growing China

Top 50 in both 2007 & 2025 Entering by 2025 Exiting by 2025

China’s cities are rapidly transforming

Athens Barcelona Denver Detroit Hamburg Lille Melbourne Munich

Minneapolis-St. Paul Nagoya Oslo Rhein-Main Rio de Janeiro Stuttgart Taipei Vienna

Exiting the Top 50 by 2025

Bangkok Beijing Chengdu Chongqing Delhi Doha Foshan Guangzhou

Hangzhou Mumbai Nanjing Shenyang Shenzhen Tianjin Wuhan Xi-an Source: McKinsey Global Institute; KPMG Analysis

Entering the Top 50 by 2025

75% of all newcomers

will be in China

China’s New Urbanization Objectives: Foreign Investment, Technology & Knowhow as Critical Drivers to Improving Sustainability

Foreign Direct Investment (FDI) and Domestic Direct Investment (DDI) Attraction Strategies

Investment Requirem

ents Funding Sources Debt Structure (e.g. Municipal Bond Financing) –

Domestic and International Investment Communities

Financial Management Capability Development

Skills

Urbanization Path

Enhanced Health Care, Livability, and Work-Life Balance

Smart City: Transportation and Resource Efficiency

Infrastructure Development

Urban Planning and Design

Strategy

Rural to urban: Transferring population bases from rural environments to cities and towns 1

Improved city planning: Optimize the layout and form of urban areas 2

Environmental sustainability: Enhance sustainable urban development 3

Better integrated society: Properly integrate rural and urban developments to improve living standards outside existing city areas

4

Reform of social institutions: Improve efficiency of the social institutions that will manage urban development. This will include reforming the Hukou system

5

China’s ‘New-type’ urbanization: What is it?

The stated goals of China’s ‘New Type’ urbanization plan 2014-2020

M3 Global Direct Dialogue

• The Development Research Center of the State Council

• Ministry of Finance

Government participation by: Main Urbanization Topics: • Priorities for China's reform

• Infrastructure & Global City System Reform

• Fiscal reform

Working relationships with the architects of urbanization in China

Infrastructure Finance

KPMG-PRC Government Joint Local Bond seminar (closed door)

Main topics: • The development of a bond

market for China’s local government, and the risk prevention measures for local debt

• Pilot reform cities

• KPMG’s suggestions on a path to issuing local bonds was submitted to the Premier’s office in 2013

New Urbanization

Joint seminar by KPMG Cities CoE leadership team and DRC Urbanization team

Main topics: • World urbanization trends

and the potential of smarter greener urbanization in China

• Sustainable urbanization and the role of the government

• Urbanization financing strategies

Main topics:

• Sustainable building and technology standards

• Understanding the intelligent city

• What makes a city work from a global perspective?

• How can Chinese cities attract local and international funding?

City Development and Planning

Mayors forum on urban development and planning in July 2013

Shaping the debate on China’s urbanization KPMG’s perspective and context

In the news on urbanization & infrastructure

January 24, 2014

David Frey, KPMG China Head of Strategy & Operations Consulting CCTV, following a speech at The People’s Hall on “The Social Impact of China’s New Urbanization”

Given the recent slowdown and fears over repercussions from infrastructure-induced government debt, managing that kind of economic redirection may seem tricky. But then again, so does doubling the country's length of high-speed rail between 2011 and 2015 -- and that goal is on track so far. Says Stephen Ip, KPMG China's lead Partner for Government and Infrastructure: “A lot of things happen in China that you don't think could.”

China’s urban future: Financing a new eraof urbanization

Principal Authors:

David FreyPartner, Head of Strategy &OperationsConsultingKPMG ChinaEmail: [email protected]: +86 10 8508 7039

According to China’s National New-TypeUrbanization Plan (2014-2020), released in March 2014, approximately RMB42 trillion(USD6.75 trillion) will be required to finance China’s urbanizationefforts over the next seven years.1 China’s Premier, Li Keqiang,acknowledged that “the scale of China’s urbanization isunprecedented throughout human history”, and this New-TypeUrbanization would unleash enormous consumption demand torestructure the economy and increase national development.2

The methods China employs to financeurbanization in apotentially transformative era will be critically important for centralgovernment policymakers to ensure sustainablegrowth andeconomic stability. Through a recent series of reforms,China’spolicy planners have demonstrated that they are facing toughissues by adopting critical measures in forwardthinking ways.Asa result, dramatic opportunities now exist to transform themethods by which China allocates and deploys capital toincrease economic efficiency.

This article focuses and expands on the diverse elementsunderlying future financing mechanisms to support a new era ofurbanization in China, including:

“China needs to learn more about the world, and the world also needs to know more about China.”- Xi Jinping, President of China, speech at the Chinese and foreign

reporters’ conference of the new Central Politburo Standing Committee ofthe Communist Party of China, November, 15, 2012

Richard DawsonPartner, Head of Asia Pacific Debt AdvisoryKPMG ChinaEmail: [email protected]: +852 2140 2392

Simon GleavePartner, Head of Asia Pacific Financial ServicesKPMG ChinaEmail: [email protected]: +86 10 8508 7007

Published May 21, 2014

62 pilots Li Keqiang recently announced 62 pilot areas

for China’s new-type urbanization

Key purposes of the pilots: 1. Develop an urbanization cost-sharing mechanism between

corporations and central, provincial, and municipal levels of government

2. Set up a more diversified urbanization financing regime to rebalance the reliance on land sales

3. Improve the “City setup” model to lower the administrative costs of upgrading “counties” to “cities”

4. Address Hukou challenges for the newly urbanizing agrarian population

Recent significant developments in China’s urbanization initiatives 62 pilot locations for the New-Type Urbanization Plan

THE RISE OF THE AEC | SILK ROAD ASSOCIATES | 20

>70 cities Chinese cities and counties recently dropped

GDP as primary KPI

What removing GDP as the primary goal means: 1. Significant step away from “growth at all costs”, and a

refocusing on quality of growth and poverty reduction 2. Use of newly developing sustainability KPIs for government

officials

Recent significant developments in China’s urbanization initiatives >70 cities announce shift focus from GDP to quality growth

“We can no longer simply use GDP growth rates to decide who the (party) heroes are” -- President Xi Jinping

What does it all mean? Emerging opportunities for MNCs

Finance Minister Lou Jiwei officially addressed the further development of Public Private Partnerships in the

National Fiscal Conference in December 2013

Sectors experiencing significant transformation from New Type Urbanization policy development

Education 3

1 Greentech (new energy, advanced building materials, etc.)

Financial services & public finance

5

4 Infrastructure & project finance – public private partnerships (PPP)

2 Health care

6 Logistics

…..as well as those sectors benefitting more generally from rising consumption and creation of services industries

Central Government Positioning – Gaining Prominence, Recognition, and Enhancing the Strategic Value Proposition 1

Understanding Urban Demand Shifts – targeting emerging population centers of the future with data driven approaches

2

Logistics and Supply Chain: Developing the future operating model in a China shifting inland 3

Industry Cluster Investment Planning: Understanding government industry plans and aligning corporate strategies to future government direction

4 Health Care, New Energy and Sustainability: Positioning new technologies and knowhow into China’s transforming value chains (both for new entrants and new innovations from long-established operators)

5

How is KPMG helping clients to gain strategic traction in an urbanizing China?

Some examples of current work with and around MNCs in China:

© 2014 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong. The KPMG name, logo and ‘cutting through complexity’ are registered trademarks or trademarks of KPMG International Cooperative (KPMG International).

David Frey +86 (10) 8508 7039 [email protected]

China Business Environment: Moderating optimism due to increased

competition and persistent policy challenges

John Lenhart The US-China Business Council

November, 2014

Today’s Agenda

• Challenges and Opportunities: USCBC 2014

Business Climate Survey

• Key Issues: Anti-corruption campaign Competition policy enforcement US-China relations

• Open Discussion – Q&A

25

Market Performance and Outlook

USCBC 2014 China Business Environment Surve

26

Five-year outlook for business in China shows clear trend of moderating;

10% per year shift over past 3 years

27

57% 58% 48%

39% 31%

37% 33% 42%

49% 54%

4% 8% 6% 7% 14%

2% 1% 4% 3%

1% 2%

2010 2011 2012 2013 2014

Pessimistic Somewhat pessimistic Neutral Somewhat optimistic Optimistic


China remains prominent in overall company strategy

28

18% 23% 22%

15% 22%

74% 71% 72%

81%

71%

6% 4% 5% 3% 7%

2% 2% 1% 1% 0%

2010 2011 2012 2013 2014

Top priority Among top five priorities One of many non-key priorities Not a priority

USCBC 2014 China Business Environment Sur

Are your China operations profitable? Overwhelmingly, companies still say YES

29

87% 85% 89% 91%

83%

13% 15% 11% 9%

17%

2010 2011 2012 2013 2014

Yes

No


But profitability compared to previous years is trending down

30

58% 62%

55%

30%

44%

28% 28%

35%

49%

29%

14% 10% 10%

21%

27%

2010 2011 2012 2013 2014

Increased

Remained essentially unchanged


As is profit margin rate of China-based operations compared to overall operations

31


68%

60%

45%

31%

42%

20% 19%

30% 30% 27%

12%

20% 25%

39%

31%

2010 2011 2012 2013 2014

Better Same Worse

Company resource commitment in next year is not shrinking, but less companies are accelerating their investments

32

USCBC 2014 China Business Environment Survey

66%

73% 67%

52% 50%

34%

26% 31%

41%

48%

0% 1% 2% 7%

2%

2010 2011 2012 2013 2014

Will accelerate

Will remain unchanged

Will be curtailed

Primary Restraint on Increased Profitability in China

33

6%

1%

8%

8%

21%

26%

31% Competition

from domestic competitors

Rising costs

PRC government policy/regulation

Competition

from international competitors

Insufficient

managerial or other personnel

Insufficient

capacity to meet

USCB 2014 China Business Environment Survey

Top Challenges Faced in China Market


34

Top 10 Challenges

1. Competition with Chinese companies in China

2. IPR Enforcement

3. Foreign investment restrictions

4. [Tie] Human resources: Talent recruitment and retention

4. [Tie] Cost increases

6. Uneven enforcement/implementation of Chinese laws

7. Licensing

8. Transparency

9. Nondiscrimination/national treatment

10. Overcapacity in China market

35


Overlapping concerns with rising competition and protectionism run throughout Top 10


2. IPR Enforcement





7. Licensing

8. Transparency



36


Who are your competitors in China?

37


91%

79%

61%

US and other foreign companies

Chinese non-state-owned and private companies

Chinese state-owned enterprises (SOEs)

Competition with Chinese Companies

Are non-SOE Chinese competitors receiving the same benefits?

Yes 14%

Suspect but not certain

67%

No 19%

38


Presenter

Presentation Notes

Competition with domestic companies jumping to the # 1 concern seems to be impacting all companies as local firms become more capable. Concerns over competition have been rising over the past four years.

Signs of Protectionism in China

39

Multiple responses allowed

13%

2%

21%

26%

26%

36%

39%

42%

46%

54%

56% Discriminatory enforcement

Licensing

Standards setting

Government pressure to favor Chinese firms

Subsidies

Government procurement/buy

local

Chinese media investigations

M&A Approvals

Adjudication in commercial courts

Other


40


Intellectual property protection continues to be priority concern


2. IPR Enforcement





7. Licensing

8. Transparency



Not concern

ed 9%

Somewhat

concerned

43%

Very concern

ed 48%

Intellectual Property Rights Protection

Level of Concern about IPR Enforcement

IP Infringement of Greatest Concern

Trade Secrets

33%

Trademark

28%

Patent 27%

Copyright 7%

Other 6%

41


Presenter

Presentation Notes

Not much change on China’s IPR enforcement efforts. The concern on patent infringement increased while concern on trade secrets decreased.

Over the past year, China’s protection of IPR has…

42

0%

37%

59%

3% 1%

3%

53%

43%

1% 0% 3%

48%

44%

4%

0% 1%

41%

54%

4%

0% 2%

37%

57%

4%

0%

Greatly improved

Somewhat improved

Remained unchanged

Somewhat deteriorated

Greatly deteriorated

2010 2011 2012 2013


Impact of China’s IPR Enforcement on Types of Activities Companies Undertake in China

43

Multiple responses ll d

48%

38% 37%

30%

23%

Limits R&D activities in China

Limits products co-manufactured or licensed

in China

No impact


Rising costs continue to put pressure on company margins


2. IPR Enforcement





7. Licensing

8. Transparency



46


Are rising costs a concern for your company operations n China?

45

Yes 90%

No 10%


Top Cost Concerns

46

Multiple responses allowed


1%

15%

26%

26%

30%

30%

32%

33%

Other

Payroll taxes/social insurance for expats

General inflation outlook

Rising tax burden

Land purchase or rental costs

Rising costs of product/operational compliance

Rising costs of materials

Rising costs of energy and utilities

Human resources costs 94%

Wage Increases in the Past Year

47

1%

7%

57%

29%

7% 6%

12%

61%

18%

3% 7%

16%

63%

13%

1%

Did not raise wages

Less than 5 percent

Between 5-10 percent

Between 10-15 percent

Over 15 percent

2012 2013 2014


At what level was turnover most acute?

48

1%

36%

31%

16% 16%

1%

39%

32%

19%

9%

2%

42%

25%

17%

14%

Senior management White collar entry level staff Entry-level factory operator/technician

2012 2013


Thank you !

The US-China Business Council

John Lenhart, Chief Representative, Beijing Email: [email protected]

Focus Issues in 2014: Anti-corruption campaign

Enforcement of Competition Law US-China relations

• Top-down campaign to tackle corruption and bribery at all levels Aimed at improving

operating systems for the Communist Party

Accompanying measures reduce travel, limit extravagance, restrict power

• “Tigers” and “Flies”: investigations active from working level to highest levels

• Watch for 4th Plenum developments on “rule of law”

Source: http://views.ce.cn/view/ent/201401/16/t20140116_2141078.shtml

Anti-corruption campaign

51

Corruption

Source: http://www.economist.com/news/china/21595029-communist-partys-anti-graft-campaign-has-had-surprising-impact-new-report-shows-how; http://www.bbc.com/news/blogs-china-blog-26864134; http://www.businessinsider.com/chinas-corruption-crackdown-impacts-fai-2014-6

Retired and active officials, ranging from the highest levels of the central government to local cadres have all been

investigated:

Corruption

• Change in official behavior • Reduced luxury spending • Slowdown in economic activity • Systemic impact remains unclear…

• 182,000 officials disciplined in 2013 • Nearly 50 high-level officials have come under investigation

this year • 31 senior SOE executives in sectors including oil and

telecom

52

Impact

Presenter

Presentation Notes

“It is easier for an official to do nothing and retire comfortably, than do something risky and be sent to jail due to a perceived misstep.”

http://www.bbc.com/news/blogs-china-blog-26864134

http://www.economist.com/news/china/21595029-communist-partys-anti-graft-campaign-has-had-surprising-impact-new-report-shows-how

Key Drivers • Expanding domestic

regulatory capacity – shift from regulation via “approvals” to regulation via “supervision”

• Chinese citizen and company concerns – maintenance of affordable prices

• Industry and policy-related drivers – some cases appear to be motivated by concerns beyond fair competition

Key Characteristics

• Investigations tend to focus on consumer-facing sectors; not focused solely on foreign companies

• Key company concerns: Lengthy review times for

acquisitions Calculation methods for

pricing and merger conditions

Participation of legal counsels and due process

Competition Enforcement Trends

• Companies seeking to understand more information – concerned with potential

• Preparing staff to interact with investigators maybe important in consumer driven sectors

• Media reports likel e aggerating the se erit of foreign firm 53

Implications

Competition Law Enforcement

Very concern

ed 25%

Somewhat

concerned

61%

Not concern

ed 14%

Concern about China’s Competition and Antitrust Legal and

Enforcement Environment

54

Most Significant Concern about Competition

and Antitrust Issues in China

Legal and

regulatory

framework

36%

Enforcement

56%

Other 8%

SCBC 2014 China Business Environment Survey


Biggest Challenges in AML Enforcement

55

3%

20%

27%

33%

34%

54%

59%

64%

Other

Inability to have representation by legal counsel

AML provisions that limit common business practices

Insufficient capacity among enforcement agencies

Lack of due process in AML enforcement proceedings

Excessive focus on foreign companies

Lack of clarity on AML review key criteria and definitions

Lack of transparency in AML reviews

4 China Business Environment Survey; multiple responses allowed


US-China Relations

56

Current relations marked by difficult balance between competition and cooperation

• “New Great Power Paradigm” – Highest levels recognize the importance of maintaining stable cooperative relations

• Political tensions remain, structural shifts changing – Traditional tensions are complicated by a structural shifts that make conflicts more consistent and complicated

• Cyber Security – Potential threat to stable commercial relationship

• Bilateral Investment Treaty (BIT) – Important opportunity for substantive progress in commercial relations

Bilateral Relations

USCBC analysis in our Reform Scorecard reveals few

concrete policies have been released that make significant progress on foreign company issues.

Reform progress?

57

Economic Reforms

2014 China Tax Updates

David Ling Partner in Charge, NCN Tax 2014.11

Economic Environment

60

Tax revenue (2013.1-9 vs. 2014.1-9)

Data source: Ministry of Finance website

Unit: CNY100million

0

5000

10000

15000

20000

25000

2014. 1-9 2013. 1-9

Domestic Value Added Tax (VAT)

Business Tax

Domestic Consumption Tax (CT)

Import VAT&CT Corporate Income Tax

Individual Income Tax

Others

61

Tax revenue vs. tax inspection revenue for 2008-2013

2008-2013 Tax revenue 2008-2013 Tax inspection revenue

Data source: Ministry of Finance website and tax news

Unit: CNY100million Unit: CNY100million

0

20000

40000

60000

80000

100000

120000

2008 2009 2010 2011 2012 2013 0

200

400

600

800

1000

1200

1400

2008 2009 2011 2012 2013

Presenter

Presentation Notes

International Tax

Agenda

1) Developments in China’s tax treaty network

2) BEPS and the impact on China tax policy development

1) Developments in China’s tax treaty network

Belgium

France

Switzerland

Netherlands

2013.5 2013.9 2013.11 2013.12

PRC-Belgium DTA effective

from 29 Dec 2013

2014.3

Germany

2009.10 2011.6

U.K. PRC-UK DTA

effective from 13 Dec 2013

Belgium UK Netherlands Switzerland France Germany Russia

Date of signature 1 Oct 2009 27 Jun

2011 31 May 2013 25 Sept 2013 26 Nov 2013 28 Mar 2014 13 Oct 2014

Effective date 29 Dec 2013 13 Dec

2013 31 Aug 2014 15 Nov 2014 Not yet effective

Not yet effective

Not yet effective

Dividend 5% (direct shareholding >= 25%); otherwise 10%

Interest 10% 5%

Royalties 7% 6% / 10% 6% / 10% 9% 6%/10% 6%/10% 6%

Capital gains 0% (shareholding < 25% over 12-month period and non-land-rich); otherwise 10% 0%*

Subject to beneficial ownership test

Re-negotiated treaties with European countries

2014.11 2014.8

PRC-Netherlands DTA effective

from 31 Aug 2014

PRC-Switzerland DTA effective

from 15 Nov 2014

2014.10

Russia

* Note：the transferred company should be non-land-rich, otherwise 10%

Description/Income stream 1984 DTA New DTA (Applicable from 1st Jan 2014)

Active income

Construction PE 6 months 12 months

Services PE No provision 183 days

Technical fees Could be taxable in China at 7% on service income even though no PE in China

Deleted

Passive income

Dividends 10% 5% for shareholding of at least 25%

Interest 10% 10%

Royalties 10% / 7% 10% / 6%

Limitation of Benefits

No provision An LOB paragraph is added to the three passive income Articles

Capital gain

Property-rich companies

Taxable in China under domestic tax rules

Taxable if “50% value threshold” is exceeded

Non-property-rich companies

Taxable if at least 25% shares held over the latest 12 months

New UK-China Double Tax Agreement

2) BEPS and the impact on China tax policy development

What is the Base Erosion and Profit Shifting (BEPS) Action Plan? ■ Commissioned by G-20 and issued by OECD in

July 2013 − Clarification OECD Model Tax Treaty and OECD

TP Guidelines − Recommend changes in domestic rules and tax

treaties to align taxation of profits with economic activities/value creation

■ Purpose of BEPS Action Plan − Aims to create a single set of consensus-based

international tax rules to address BEPS, to protect tax bases while offering increased certainty and predictability to taxpayers

■ An aggressive timeline

OECD BEPS Action Plan Action Deadline

1 Addressing the tax challenges of the digital economy Sept ’14

2 Neutralise the effects of hybrid mismatch arrangements Sept ’14

3 Strengthen CFC rules Sept ’15

4 Limit base erosion via interest deductions/other financial payments Sept/Dec ’15

5 Counter harmful tax practices more effectively taking into account transparency and substance

Sept ‘14 & Sept/Dec ’15

6 Prevent treaty abuse Sept ’14

7 Prevent the artificial avoidance of PE status

8 Assure that TP outcomes are in line with value creation: intangibles

Sept ‘14 & Sept ’15

Action Deadline

9 Assure that TP outcomes are in line with value creation: risks/capital Sept ’15

10 Assure that TP outcomes are in line with value creation: other high-risk transactions

11 Establish methodologies to collect and analyse data on BEPS/actions to address it

Sept ’15

12 Require taxpayers to disclose their aggressive tax planning arrangements Sept ’15

13 Re-examine TP documentation Sept ’14

14 Make dispute resolution mechanisms more effective Sept ’15

15 Develop a multilateral instrument Sept ‘14 & Dec ‘15

Sept 2014 deliverables OECD released Discussion Drafts - 31 Oct & 3 Nov 2014

Sept ’15

Sept ’15

Cross border intra-group payments under scrutiny

-

Authorities targeting deductions for outbound services/royalties • OECD ‘substantial activities’ requirement leads to questions on “value add” • SAT Directive 146 (July 2014) requires scrutiny of service fees/royalty payments prior to

extensive audits

Greater information gathering of cross border payments

• Automatic information exchange platform, supported by China’s recent adherence to Multilateral Convention

• Inclusion of related party service fees, interest and royalties in Chinese version of CbC?

Sustainability of recharge, IP holding and shared service arrangements • MNE internal review needed, particularly for foreign IP holding companies in low tax

jurisdictions, with transferred patents and brand rights

Other implications of 2014 Deliverables More rigorous tax enforcement of outbound investment

• BEPS work intersects with increased Chinese focus on outbound investment • SAT Announcement 38 (July 2014) beefs up reporting on Chinese MNEs’ overseas CFCs

Prevention of “Double non-taxation” of offshore share transfers

• Circular 698 supported by BEPS concepts for indirect share transfers • “Double non-taxation” principle guides both reporting and capital gains tax enforcement

China tax authorities draw BEPS support for treaty abuse approach

• BEPS Action plan can be read in support of Chinese rules (e.g. Circular 601 on beneficial ownership)

• Large scale examination of dividend DTA WHT relief claims launched with Shui Zong Han [2014] No. 317 (August 2014)

China authorities’ international EoI commitments

■ Multilateral Convention on Mutual Administrative Assistance in Tax Matters on 27 August 2013 − China became the 56th signatory to this Multilateral Convention on 27 August 2013, allowing China to:-

o Exchange information with other signatories more readily/automatically o Co-operate with overseas countries in joint tax investigations o Seek foreign assistance in recovering delinquent taxes

■ China’s agreement with the US on FATCA, and “China FATCA” (Circular 642) − China has reached an “agreement in substance” for a Model 1 IGA with the US, effective 26 June 2014

■ 7th Meeting of the Global Forum on Transparency and Exchange of Information for Tax Purposes on 28-29 October 2014 − Commitments by majority of members to implement the new international standard on automatic

exchange of information (AEOI) − China and Hong Kong indicated willingness to undertake the first exchanges of information by 2018

Exchange of information (EoI) commitments for China

73

David Ling Partner in Charge, Tax Northern China, KPMG +86 10 8508 7083 [email protected]

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David Frey Head of Inbound, KPMG China

The image cannot be displayed. Your computer may not have enough memory to open the

David Ling Partner, KPMG China

The image cannot be displayed. Your computer may not have enough memory to open th John Lenhart Director & Chief Representative, US-China Business Council

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Ben Simpfendorfer Managing Director, Silk Road Associates

Panel Discussion

Moderated by Anson Bailey The image cannot be displayed. Your computer may not have enough memory to open the image, or the image may have been corrupted. Restart your computer, and then open the file again. If the red x still appears, you may have to delete the image and then insert it again.

Principal, Business Development KPMG China

Bernie Stefan Vice President Strategy & Business Development Nestlé Great China Region

Thank You

China’s Business Environment & MNCs in China Making the Right Moves

Grand Hyatt Hotel , Beijing 26 November 2014

china's business environment & mncs in china

Business

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