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15.2. General Issues

As a foreign company, it can be difficult to adjust to the tax laws and regulations in regard to how they differ from their home country. In addition, there are several areas in regard to taxation which are not necessarily related to the law and regulations themselves. These areas include:

  • Uniformity in implementation
  • Notification of implementation
  • Equal treatment of domestic and foreign or foreign enterprises
  • Corruption

Uniformity in implementation refers to the fact that new laws or regulations issued at the national level can take significant time to be implemented at all local levels. This is due in large part to the size of China, but also due to the discretionary powers of local tax authorities. While implementation is usually quite quick for larger cities such as Shanghai and Beijing, it can take a significant amount of time for implementation to take place throughout China as a whole. While it will not greatly impact companies with operations in a single location, companies with multiple operations spread throughout China will be subject to increased administrative burdens keeping their operations in line.

Notification of implementation refers to the amount of notice given to companies before changes in tax regulation implementation are applied. In the cases of most large changes, notice is given far in advance. But smaller changes or delayed implementation from past regulation changes can often go into effect at the local level with little notice,in some cases 30 days. It is therefore important that companies actively stay aware of potential changes and keep in close contact with their local tax authorities.

Equal treatment of domestic and foreign enterprises was significantly improved when China’s Corporate Income Tax Law went into effect in 2008. It essentially leveled the playing field by apply the same rules and regulations to domestic companies and foreign companies alike. But, issues still remain with local tax authority giving preferential treatment to domestic companies, particularly state-owned companies.

Corruption in China can be a concern for foreign companies. Although there have been some very public cases highlighting the crackdown on corruption in China over the past few years, in reality corruption practices remain a big issue. Such practices in regard to taxation are typically graft corruption, primarily bribes, to attain favorable treatment or avoid certain penalties. Corruption may seem to be a problem more common with domestic companies, but in reality foreign companies have been known to engage in corrupt practices as well.

Corruption is not an easy issue to fix, but foreign companies working with or in China should realize that bribes and other forms of corruption are not "just the way business is done" in China, or necessary to maintain a successful operation. In reality, such practices are rarely, if ever, needed or requested when simply conducting operations and handling tax issues as per relevant law.

In addition to not being needed, foreign companies should also keep in mind the ramifications of any corruption practices in China in relation to anti-corruption laws in their home jurisdictions. EU anti-corruption laws, OECD anti-bribery convention, and the US foreign corrupt practices act all provide for significant penalties for companies conducting such practices in China (or any overseas jurisdiction).