"Despite the economic slowdown, many U.S. companies continue to leverage the low-cost capabilities of China manufacturers and other benefits of doing in business in China," said Wally Gruenes, managing partner of Grant Thornton LLP's Consumer and Industrial Products group, which serves manufacturers, retailers and distributors. "China may still be in your future. Take time now to make sure it's there for the right reasons."
The white paper, Is China in your Future? Grant Thornton Analysis of China Operations, discusses 10 issues that businesses should factor into decisions involving China expansion:
- Transfer pricing documentation - The overall transfer pricing audit environment has become more stringent in China, and companies should ensure compliance to avoid transfer pricing audits and subsequent adjustments/penalties.
- Tax efficient structuring - The complexities of international tax laws may provide a reduction in total taxes paid.
- Tax compliance - One of the major issues faced by many enterprises in China is the emphasis placed on negotiation with authorities on the tax compliance process.
- Accounting requirements - Accounting laws and regulations have been formulated for enterprises with foreign investment and are generally close to internationally recognized accounting standards, although differences exist. Statutory audits are required for enterprises with foreign investment.
- Incentives for business activities - Most incentives are provided to enterprises that fall within "encouraged industries," regardless of their location or ownership by foreign enterprises.
- Due diligence - Many still underestimate the time it takes to close a transaction and access to information may be restricted or difficult to obtain; financial and tax records may lack transparency.
- Control of foreign investments -Revenue and expenses in foreign currencies must be deposited with or withdrawn from accounts with the Bank of China or authorized bank.
- Corporate governance - Sarbanes-Oxley requires U.S.-listed companies, as well as their China operations, to document and evaluate corporate governance and internal controls over financial reporting. The newly enacted Basic Standard for Enterprise Internal Control, effective July 1, 2009, will require all listed companies in China (including domestic-listed entities of foreign enterprises) to assess and report on the enterprise's internal control system.
- Labor contract law -There are four types of contracts, and the contracts must be written to establish labor relationships.
- Enterprise Bankruptcy Law -Provides for structured regimens of bankruptcy, restructuring and conciliation applicable to any People's Republic of China-incorporated enterprises including state-owned enterprises and foreign investment vehicles, including provisions dealing with cross-border insolvency issues.
The white paper also discusses several benchmarking comparisons including:
- Median return on invested capital (China 50 percent/U.S. 18 percent)
- Reject rates parts per million (ppm) (China 50,000 ppm/U.S. 100 ppm)
- On-time delivery
- Labor and personnel-development practices
- Quality improvement processes/TQM (China 81.7%/U.S. 34.2%)
- Strategic initiatives and inventory management techniques
- Marketing strategies
To obtain a copy of Is China in your Future? Grant Thornton Analysis of China Operations, please go to www.GrantThornton.com/ChinaWP.
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