The Western Union Business Solutions Learning Center is a blog provided for general informational purposes only and should not be construed as legal, financial, tax or accounting advice. Consult your own independent advisors regarding your particular needs and circumstances.
When small business owners break into the Chinese market, it's important that they make themselves aware of one of the more complicated aspects of doing business there - navigating tax regulations.
"Chinese taxes are tricky, not uniformly applied and difficult to predict," says Matthew Dresden, attorney for Harris & Moure, an international law firm in Seattle. "We see incredible inconsistencies across companies, cities and agencies." His clients have faced tax rates ranging from 10 to 50 percent for similar goods and services.
Still, it's possible to take steps that could minimize the taxation on a business in China. International business owners can also maintain control of their assets and make the most of each transaction when banking overseas by taking advantage of an online foreign exchange, which offers access to their accounts and the latest exchange rates, 24/7.
— Matthew Dresden, attorney for Harris & Moure
Robert Boyle, principal of Tate Snyder Kimsey, an architectural firm based in Las Vegas, is learning firsthand how complicated Chinese tax laws can be. Although his firm produces all of its design work for Chinese clients within the U.S., the firm still needs to pay foreign taxes on all of it, he says. And figuring out who needs to be paid and how much to pay them has been a complicated endeavor.
"The national, provincial and municipal governments in China - similar to our federal, state and municipal governments - are able to tax foreign firms doing business in China," Boyle says. "The amount of specific taxes levied on a foreign company can vary significantly, based on specific variables such as the percentage of work actually performed within China."
"International companies are able to invoice their Chinese clients in the RMB," says Alfred Nader, vice president of corporate strategy and development at Western Union Business Solutions. "The company must take said invoice to the bank and make the payment in their home currency. Individuals can only do this in select provinces, currently, only in the Guangdong province and there are limitations around what individuals can do. There are no such limitations for RMB payments as long as it is a company. If the company is paying for a service … nothing additional is needed. If the company is paying for an import, they must be a licensed importer with the Chinese government. Often times, one can earn more business in China by making it easier for their clients to pay. Paying in their own currency is as easy as it gets."
Once the bank has the contract in Chinese, they will work with local authorities to distribute the foreign taxes. This is where a lot of uncertainty comes in, Boyle says. "Each province has the ability to levy their own taxes, and they all tax differently," he says.
To minimize the financial risk and time it takes to get paid, Western companies should require at least a minimal payment upfront for any project, Dresden says. This way, taxes are taken out of the upfront payment, so a business owner will know what the tax rate will be and have guarantees that international payments will be made. "Never start work before you get paid," he says.
And whenever possible, write the contract price to be "net of tax," he suggests. This means that the price on the contract is what you will be paid after taxes, requiring the Chinese client to take responsibility for all tax payments. "Some Chinese clients will agree to this and others won't," he admits. "But it's certainly worth asking for."
Example: 1USD = xx INR
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