China has finally unveiled a set of highly comprehensive rules and regulations governing Related Party Transactions under the newly unified legislations for Corporate Income Tax.
On January the 8th 2009, the State Administration of Taxation published the 'Implementation Regulations for Special Tax Adjustments - abbreviated to the 'Implementation Regulations'. The Implementation Regulations establish a basis for the tax authority to make tax adjustments in relation to areas such as thin capitalisation, controlled foreign corporations and transfer pricing. It also provides detailed guidance for Chinese enterprises on entering Cost Sharing Agreements (CAS) and Advanced Pricing Arrangements (APA). In addition, the long awaited Contemporaneous Transfer Pricing Documentation requirement is also set out in the Implementation Regulations.
Apart from the new contents, the Implementation Regulations also supersedes previous major tax circulars governing the administration of Transfer Pricing. With the Implementation Regulations now established, those tax circulars have been revoked.
The Implementation Regulations set the milestone in the development of Transfer Pricing regulations in China. It demonstrates that the Chinese tax authority is strengthening governance of anti-avoidance. The Chinese tax authorities are increasingly capable and competent in dealing with sophisticated Transfer Pricing issues and are moving towards an international standard.
In the following, we highlight some of the key contents of the Implementation Regulations, which could have significant impacts on foreign investors.
Contemporaneous Transfer Pricing Documentation Compliance
The requirement to prepare Contemporaneous Transfer Pricing Documentation is for the first time being formally introduced into China's Transfer Pricing legislation. Currently, such requirement is only imposed on entities with a significant amount of cross-border Related Party Transactions. The previous regulations though did include the criteria for documentations that should be kept by companies and the Transfer Pricing basis relative to companies Transfer Pricing practices.
The criteria for which is defined as below:
* Annual amount of Related Party purchase and sales is not less than RMB 200 million; OR
* Annual amount of other Related Party transactions is not less than RMB 40 million.
The Contemporaneous Transfer Pricing Documentation shall include:
* An Organisational Structure of the Group
* A Summary of Business Operations
* Information on the Related Party Transactions
* A Comparability Analysis
* A Selection and Application of Transfer Pricing Methods
Each obligated entity shall prepare the documents on an independent basis. Each entity within the same group shall submit its own set of contemporaneous documents, no consolidated documentation on the group level shall be accepted. Entities shall submit the documentation for the current fiscal year by May 31 of the following year. The deadline for 2008 has been extended to Dec 31st 2009. Refusal or failure to submit the Transfer Pricing documentation within the time limit could be lead to a fine of RMB50,000. In addition, a penalty interest of 5% per annum could be imposed on the tax payment due from the special adjustments, however this penalty may be waived where if the Contemporaneous Transfer Pricing Documentation is available.
Transfer Pricing Audit
Detailed selection criteria for the targets of Transfer Pricing audits are set out in the Implementation Regulations. The tax authority tends to focus on enterprises with the following features:
* Enterprises with Related Party Transactions of large amounts and multiple types;
* Enterprises with long-term loss, slight profit or fluctuating profit;
* Enterprises with profit lower than the industry level;
* Enterprises with profit mismatching the function and risk assumed;
* Enterprises which have transactions with Related Parties based in tax havens;
* Enterprises which fail to declare Related Party Transactions or which fail to prepare contemporaneous documentations;
* Enterprises which obviously violate the arm's length principle.
The Implementation Regulations permit tax authorities to use public as well as non-public information when carrying out a Transfer Pricing assessment. The tax authority will present a formal conclusion on whether the Transfer Pricing of the enterprise is reasonable or if tax adjustment is necessary. If an enterprise is required to carry out a tax adjustment, it will enter a 5-year tracking period, during which it should submit annual contemporaneous information and documents to the tax authority.
Enterprises with single function of processing activities
The Implementation Regulations reiterate the position that a contract manufacturer, which takes orders solely from Related Parties and which manufactures products for Related Parties, and which does not take on any other functions should not be taking losses resulted from management issues, such as the insufficient capacity, product obsolescence etc. A steady level of profits is expected for such type of entity if the related transactions are conducted on the arm's length basis.
Thin Capitalisation Rule
Prior to 2008, there was no thin capitalisation rule imposed on foreign invested enterprises. Since the unification of the Corporate Income Tax legislation however, foreign invested enterprises are also subject to the thin capitalization requirement. A safe-harbor debt-to-equity ratio of 5:1 for financial enterprises and 2:1 for all other enterprises has been announced. Interests attributable to the excessive leverage portion shall not be deductible for Corporate Income Tax.
The Implementation Regulations further provide detailed guidance on determining whether an enterprise is thinly capitalised. The Related Party debt-to-equity ratio is defined as the sum of the average monthly Related Party debt divided by the sum of the average monthly equity. The back-to-back loans through unrelated parties (e.g. entrusted loans) and debt with third parties that have been guaranteed or supported by a Related Party is also included in the scope of "Related Party Debt". In determining the equity component of the equation, the book value of equity is used rather than the fair market value of equity.
Thursday 9 April 2009
Thursday 12 March 2009
Litigation rises rapidly in Chinese legal market
Litigation levels are rising rapidly in China. This is due to legal reforms that have facilitated litigation, but there is more work to be done.
In 2008 alone, Chinese courts handled 10.71 million cases, around 11% more than in 2007.
In the civil sector, the fastest growth is occurring in labour disputes, followed by cases involving health care, housing and consumer rights.
Due to the economic downturn and the adoption of the new Labour Contract Law, labour dispute cases exceeded 286,000 last year, which is almost double the 2007 figure.
Financial disputes, which account for around 10% of the total cases concluded, have seen a 15% increase, exceeding 1 million.
Intellectual property right infringement cases are also in the top five, with a one-third increase. Between 2003 and 2008, China launched many special campaigns to rectify and standardise intellectual property protection. Wang Shengjun also has stated that Chinese courts will severely penalise IPR infringement.
There have been 3.17 million civil cases handled through mediation, accounting for about 60% of total civil cases. International firms are seeing more potential to expand into alternative dispute resolution work, but domestic firms are also looking to get a piece of the action.
Most Chinese prefer to avoid court litigation, not only because of the complexity and expense that can develop but also because of cultural reasons. But when it comes to unavoidable situations, there is no big difference between litigation and arbitration for clients. Now, we can see that the quality of Chinese judges has improved greatly.
In 2008 alone, Chinese courts handled 10.71 million cases, around 11% more than in 2007.
In the civil sector, the fastest growth is occurring in labour disputes, followed by cases involving health care, housing and consumer rights.
Due to the economic downturn and the adoption of the new Labour Contract Law, labour dispute cases exceeded 286,000 last year, which is almost double the 2007 figure.
Financial disputes, which account for around 10% of the total cases concluded, have seen a 15% increase, exceeding 1 million.
Intellectual property right infringement cases are also in the top five, with a one-third increase. Between 2003 and 2008, China launched many special campaigns to rectify and standardise intellectual property protection. Wang Shengjun also has stated that Chinese courts will severely penalise IPR infringement.
There have been 3.17 million civil cases handled through mediation, accounting for about 60% of total civil cases. International firms are seeing more potential to expand into alternative dispute resolution work, but domestic firms are also looking to get a piece of the action.
Most Chinese prefer to avoid court litigation, not only because of the complexity and expense that can develop but also because of cultural reasons. But when it comes to unavoidable situations, there is no big difference between litigation and arbitration for clients. Now, we can see that the quality of Chinese judges has improved greatly.
Saturday 7 March 2009
New transfer pricing regulations and their impact on foreign businesses in China
China has finally unveiled a set of highly comprehensive rules and regulations governing Related Party Transactions under the newly unified legislations for Corporate Income Tax. On January the 8th 2009, the State Administration of Taxation published the 'Implementation Regulations for Special Tax Adjustments - abbreviated to the 'Implementation Regulations'.
The Implementation Regulations establish a basis for the tax authority to make tax adjustments in relation to areas such as thin capitalisation, controlled foreign corporations and transfer pricing. It also provides detailed guidance for Chinese enterprises on entering Cost Sharing Agreements (CAS) and Advanced Pricing Arrangements (APA). In addition, the long awaited Contemporaneous Transfer Pricing Documentation requirement is also set out in the Implementation Regulations.
Apart from the new contents, the Implementation Regulations also supersedes previous major tax circulars governing the administration of Transfer Pricing. With the Implementation Regulations now established, those tax circulars have been revoked.
The Implementation Regulations set the milestone in the development of Transfer Pricing regulations in China. It demonstrates that the Chinese tax authority is strengthening governance of anti-avoidance. The Chinese tax authorities are increasingly capable and competent in dealing with sophisticated Transfer Pricing issues and are moving towards an international standard.
In the following, we highlight some of the key contents of the Implementation Regulations, which could have significant impacts on foreign investors.
Contemporaneous Transfer Pricing Documentation Compliance
The requirement to prepare Contemporaneous Transfer Pricing Documentation is for the first time being formally introduced into China's Transfer Pricing legislation. Currently, such requirement is only imposed on entities with a significant amount of cross-border Related Party Transactions. The previous regulations though did include the criteria for documentations that should be kept by companies and the Transfer Pricing basis relative to companies Transfer Pricing practices.
The criteria for which is defined as below:
* Annual amount of Related Party purchase and sales is not less than RMB 200 million; OR
* Annual amount of other Related Party transactions is not less than RMB 40 million.
The Contemporaneous Transfer Pricing Documentation shall include:
* An Organisational Structure of the Group
* A Summary of Business Operations
* Information on the Related Party Transactions
* A Comparability Analysis
* A Selection and Application of Transfer Pricing Methods
Each obligated entity shall prepare the documents on an independent basis. Each entity within the same group shall submit its own set of contemporaneous documents, no consolidated documentation on the group level shall be accepted. Entities shall submit the documentation for the current fiscal year by May 31 of the following year. The deadline for 2008 has been extended to Dec 31st 2009. Refusal or failure to submit the Transfer Pricing documentation within the time limit could be lead to a fine of RMB50,000. In addition, a penalty interest of 5% per annum could be imposed on the tax payment due from the special adjustments, however this penalty may be waived where if the Contemporaneous Transfer Pricing Documentation is available.
Transfer Pricing Audit
Detailed selection criteria for the targets of Transfer Pricing audits are set out in the Implementation Regulations. The tax authority tends to focus on enterprises with the following features:
* Enterprises with Related Party Transactions of large amounts and multiple types;
* Enterprises with long-term loss, slight profit or fluctuating profit;
* Enterprises with profit lower than the industry level;
* Enterprises with profit mismatching the function and risk assumed;
* Enterprises which have transactions with Related Parties based in tax havens;
* Enterprises which fail to declare Related Party Transactions or which fail to prepare contemporaneous documentations;
* Enterprises which obviously violate the arm's length principle.
The Implementation Regulations permit tax authorities to use public as well as non-public information when carrying out a Transfer Pricing assessment. The tax authority will present a formal conclusion on whether the Transfer Pricing of the enterprise is reasonable or if tax adjustment is necessary. If an enterprise is required to carry out a tax adjustment, it will enter a 5-year tracking period, during which it should submit annual contemporaneous information and documents to the tax authority.
Enterprises with single function of processing activities
The Implementation Regulations reiterate the position that a contract manufacturer, which takes orders solely from Related Parties and which manufactures products for Related Parties, and which does not take on any other functions should not be taking losses resulted from management issues, such as the insufficient capacity, product obsolescence etc. A steady level of profits is expected for such type of entity if the related transactions are conducted on the arm's length basis.
Thin Capitalisation Rule
Prior to 2008, there was no thin capitalisation rule imposed on foreign invested enterprises. Since the unification of the Corporate Income Tax legislation however, foreign invested enterprises are also subject to the thin capitalization requirement. A safe-harbor debt-to-equity ratio of 5:1 for financial enterprises and 2:1 for all other enterprises has been announced. Interests attributable to the excessive leverage portion shall not be deductible for Corporate Income Tax.
The Implementation Regulations further provide detailed guidance on determining whether an enterprise is thinly capitalised. The Related Party debt-to-equity ratio is defined as the sum of the average monthly Related Party debt divided by the sum of the average monthly equity. The back-to-back loans through unrelated parties (e.g. entrusted loans) and debt with third parties that have been guaranteed or supported by a Related Party is also included in the scope of "Related Party Debt". In determining the equity component of the equation, the book value of equity is used rather than the fair market value of equity.
The Implementation Regulations establish a basis for the tax authority to make tax adjustments in relation to areas such as thin capitalisation, controlled foreign corporations and transfer pricing. It also provides detailed guidance for Chinese enterprises on entering Cost Sharing Agreements (CAS) and Advanced Pricing Arrangements (APA). In addition, the long awaited Contemporaneous Transfer Pricing Documentation requirement is also set out in the Implementation Regulations.
Apart from the new contents, the Implementation Regulations also supersedes previous major tax circulars governing the administration of Transfer Pricing. With the Implementation Regulations now established, those tax circulars have been revoked.
The Implementation Regulations set the milestone in the development of Transfer Pricing regulations in China. It demonstrates that the Chinese tax authority is strengthening governance of anti-avoidance. The Chinese tax authorities are increasingly capable and competent in dealing with sophisticated Transfer Pricing issues and are moving towards an international standard.
In the following, we highlight some of the key contents of the Implementation Regulations, which could have significant impacts on foreign investors.
Contemporaneous Transfer Pricing Documentation Compliance
The requirement to prepare Contemporaneous Transfer Pricing Documentation is for the first time being formally introduced into China's Transfer Pricing legislation. Currently, such requirement is only imposed on entities with a significant amount of cross-border Related Party Transactions. The previous regulations though did include the criteria for documentations that should be kept by companies and the Transfer Pricing basis relative to companies Transfer Pricing practices.
The criteria for which is defined as below:
* Annual amount of Related Party purchase and sales is not less than RMB 200 million; OR
* Annual amount of other Related Party transactions is not less than RMB 40 million.
The Contemporaneous Transfer Pricing Documentation shall include:
* An Organisational Structure of the Group
* A Summary of Business Operations
* Information on the Related Party Transactions
* A Comparability Analysis
* A Selection and Application of Transfer Pricing Methods
Each obligated entity shall prepare the documents on an independent basis. Each entity within the same group shall submit its own set of contemporaneous documents, no consolidated documentation on the group level shall be accepted. Entities shall submit the documentation for the current fiscal year by May 31 of the following year. The deadline for 2008 has been extended to Dec 31st 2009. Refusal or failure to submit the Transfer Pricing documentation within the time limit could be lead to a fine of RMB50,000. In addition, a penalty interest of 5% per annum could be imposed on the tax payment due from the special adjustments, however this penalty may be waived where if the Contemporaneous Transfer Pricing Documentation is available.
Transfer Pricing Audit
Detailed selection criteria for the targets of Transfer Pricing audits are set out in the Implementation Regulations. The tax authority tends to focus on enterprises with the following features:
* Enterprises with Related Party Transactions of large amounts and multiple types;
* Enterprises with long-term loss, slight profit or fluctuating profit;
* Enterprises with profit lower than the industry level;
* Enterprises with profit mismatching the function and risk assumed;
* Enterprises which have transactions with Related Parties based in tax havens;
* Enterprises which fail to declare Related Party Transactions or which fail to prepare contemporaneous documentations;
* Enterprises which obviously violate the arm's length principle.
The Implementation Regulations permit tax authorities to use public as well as non-public information when carrying out a Transfer Pricing assessment. The tax authority will present a formal conclusion on whether the Transfer Pricing of the enterprise is reasonable or if tax adjustment is necessary. If an enterprise is required to carry out a tax adjustment, it will enter a 5-year tracking period, during which it should submit annual contemporaneous information and documents to the tax authority.
Enterprises with single function of processing activities
The Implementation Regulations reiterate the position that a contract manufacturer, which takes orders solely from Related Parties and which manufactures products for Related Parties, and which does not take on any other functions should not be taking losses resulted from management issues, such as the insufficient capacity, product obsolescence etc. A steady level of profits is expected for such type of entity if the related transactions are conducted on the arm's length basis.
Thin Capitalisation Rule
Prior to 2008, there was no thin capitalisation rule imposed on foreign invested enterprises. Since the unification of the Corporate Income Tax legislation however, foreign invested enterprises are also subject to the thin capitalization requirement. A safe-harbor debt-to-equity ratio of 5:1 for financial enterprises and 2:1 for all other enterprises has been announced. Interests attributable to the excessive leverage portion shall not be deductible for Corporate Income Tax.
The Implementation Regulations further provide detailed guidance on determining whether an enterprise is thinly capitalised. The Related Party debt-to-equity ratio is defined as the sum of the average monthly Related Party debt divided by the sum of the average monthly equity. The back-to-back loans through unrelated parties (e.g. entrusted loans) and debt with third parties that have been guaranteed or supported by a Related Party is also included in the scope of "Related Party Debt". In determining the equity component of the equation, the book value of equity is used rather than the fair market value of equity.
Pitfalls, considerations and the latest regulations for Processing Trade in China
China's processing trade has gone through many development stages during its 30 year history, and it continues to play a vital role in China's economy. Offering comparatively low land, labour and production costs, many foreign investors carry out processing trade in the Pearl River Delta, and indeed, over the last thirty years, this region has frequently been referred to as the 'Factory of the World'.
Although processing trade has brought in billions of dollars of revenue, its presence also leads to environmental pollution and the use of the discouraged low technologies. It is worth noting that the Chinese authorities have been strengthening their administration of processing trade by promulgating a number of tax, customs, foreign exchange and business regulations. Keeping track of regulations and any ensuing business implications can pose a challenge for foreign investors.
Enterprises carrying out processing trade should pay attention to avoid potential pitfalls. In practice, the local authorities' administration of processing trade may vary from area to area. Many practical considerations may arise during the operations of processing trade, which include:
• The correct methods for the disposal of defective goods and scraps.
• Assessing the level of unit consumption rate and wastage rate.
• Correct factory transfer arrangement.
• Discrepancies between the quantities of physical inventory, inventory records in customs handbook and accounting ledgers.
• Verification and cancellation of customs handbook.
In addition, foreign investors need to evaluate which processing trade arrangement is the most suitable for their business needs - contract processing arrangement or import processing arrangement.
Before making a final decision, foreign investors may consider certain key factors, such as the importation of bonded equipment, the percentage of domestic sales over total sales, any export VAT refund rates, selecting the right locality from amongst various bonded zones (e.g. export processing zones, free trade zones, bonded logistic zones) as well as the overall tax burden.
This article serves to discuss the common pitfalls and relevant considerations when carrying out processing trade in China. In addition, we highlight the latest regulation and their impacts for processing trade operators.
Prior to our discussion on potential pitfalls, the common features of contract processing arrangements compared with import processing arrangements are highlighted below.
Contract Processing Arrangement
Under a contract processing arrangement, a foreign consignor will engage a domestic company or a foreign invested enterprise (FIE) to act as the processor. The foreign consignor supplies raw materials free of charge to the processor. The processor will process the raw materials and then return the finished goods to the foreign consignor. The processor will charge a processing fee to the consignor. Under this arrangement, the foreign consignor has the ownership of the raw materials and finished goods throughout the whole processing process.
Before entering into a contract processing arrangement, the processor should register a production contract with the local Ministry of Commerce (MOFCOM) to obtain approval for the importation of bonded raw materials, i.e. free of custom duty and import VAT. The production contract should state the list of raw materials and finished goods and their estimated quantities, specifications and amount. The valid period of a production contract is normally six months.
Under a contract processing arrangement, domestic sales of the finished products are not permitted under Chinese law.
Import Processing Arrangement
Under an import processing arrangement, the FIE purchases the raw materials from overseas or from domestic suppliers, and the legal titles of the raw materials are held by the FIE throughout the processing process. After processing the raw materials into finished goods, the FIE will then sell the finished goods to its customers.
An FIE can import bonded raw materials free of custom duty and import VAT for further processing into finished goods and then export the finished goods to overseas customers. Similar to the contract processing arrangement, the FIE should register its production contract under import processing arrangement to the local MOFCOM.
Under an import processing arrangement the FIE is permitted to conduct domestic sales.
Common pitfalls when carrying out Processing Trade
1. Evaluation of locality and type of Processing Trade
The local practice, requirements and preferential treatments for carrying out processing trade may be different from one area to another area. The regulations and treatments for contract processing arrangements are also different from those for import processing arrangements from customs, foreign exchange, taxation and business perspectives. In view of this, it is highly recommended that foreign investors evaluate these factors and make a comparison between contract processing and import processing arrangements before making a final decision.
2. Estimation of Unit Consumption Rate and Wastage Rate
To estimate accurate unit consumption rate and wastage rate of bonded raw materials is not easy. In practice, the unit consumption rate and wastage rate declared by the enterprises are likely to be different from those average unit consumption rate and wastage rate adopted and announced by the customs authority. The discrepancy may cause problems when the enterprise performs a verification and cancellation of its production contract.
Customs authorities are vested in greater power to attest the authenticity and accuracy of unit consumption rates. They can establish upper and lower unit consumption rates.
All of the above poses difficulties for processing trade operators. Furthermore, under certain circumstances, the enterprise might be subject to penalties by the customs in-charge. Negotiation with the customs authorities should be arranged where appropriate.
3. Disposal of Scraps
According to the prevailing regulations, if the scraps arising from processing trade are sold domestically without obtaining any prior approval from the competent authorities, the enterprises may be penalized with back payment of import duties. Enterprises should be aware that the dutiable value of scraps can vary in different zones such as Export Processing Zones and Free Trade Zones. Enterprises should pay attention to the proper compliance and consequences for disposal of scraps.
4. The discrepancy of inventory quantities amongst records
The possible discrepancy amongst the quantities of physical inventory in the warehouses, the inventory records stated in customs handbooks and the accounting ledgers is often a headache to processing trade operators. If an enterprise fails to explain the reasons for the discrepancy, and in cases where the customs in-charge deems the missing bonded inventory as having been sold by the enterprise to domestic customers instead of exports, it may encounter barriers in performing verification and cancellation of the production contracts and be required to pay for the imported custom duty and VAT for the missing bonded inventory.
The latest amendments to Processing Trade regulations
In order to cope with the stern situation of import and export trade caused by the global financial crisis, the Chinese government has adopted a series of measures to maintain the growth of import and export trade. At the same time, Chinese Customs also adopted different measures to enforce the administration on processing trade and the collection of customs duty and import VAT.
1. Frequent Update of Export VAT Refund Rates
The Chinese government increased the export refund rates for the fourth time in 2008. According to Caishui [2008] No.144, the fourth round of increases focuses on certain high value-added products, labour intensive products and high-tech products such as plastic, forestry, mould and glass products, sea food or river food, bags, shoes, hats, umbrellas, furniture, bedding products, lights, watches and bells, certain chemical products, stone products, non-ferrous metal products and certain electrical machinery. The updated tax refund rates for these products now range from 9% to 14%. For details, please refer to Caishui [2008] No.144.
With constantly changing export VAT refund rates, it can be a challenge for processing trade operators to comply with the latest regulations.
2. New Tariff Scheme
In order to promote the steady increase and structural optimization of imports and exports, China has announced its new tariff scheme, which became effective from 1 January 2009. The Customs Tariff Commission promulgated Shuiwaihui [2008] No.40, which defines the new customs tariff implementation scheme.
Under Circular 40, the Chinese government has adjusted its tariff scheme, including changes to the:
• Most Favored Nation rate
• Interim duty rate
• Preferential tariff rate
• Special preferential tariff rate
• Other tariff items
It is recommended that enterprises review the tariff codes of their raw materials and finished goods so as to ensure compliance with the latest development.
3. New Administration for Country of Origin
The PRC General Administration of Customs (GAC) issued Customs Order No.181 on 8 January 2009. This sets out the administrative measures and operational guidelines for country of origin (COO). Order No. 181 will become effective from 1 March 2009. Enterprises should be aware of the new requirements for COO certificates and COO declarations. Requisite documents should be submitted to the customs authorities. Any inconsistency between documents or missing documents may be regarded as an inaccurate declaration and may result in penalties.
4. Customs Deposits
In 2007, MOFCOM and the GAC jointly issued Circular GAC [2007] No.44, which officially took effect from 23 August 2007. According to Circular No. 44, all Categories A and B processing trade enterprises in Eastern China will have to pay deposits equal to 50% of customs duties and import VAT when they either import or export commodities which fall into the restricted category under processing trade. Categories C processing trade enterprises will have to pay deposits equal to 100%.
In effect, this measure forces the majority of processing trade enterprises to pay some form of deposit, and which in turn can place a heavy strain on an enterprise's cash flow.
In this context, Eastern China includes Beijing, Tianjin, Shanghai, Liaoning, Hebei, Shandong, Jiangsu, Zhejiang, Fujian and Guangdong.
In order to alleviate the financial difficulties faced by enterprises under the current economic crisis, MOFCOM and the GAC jointly issued Order No.97 [2008] (Order 97), which became effective from 1 December 2008. Under Order 97, the customs authorities temporarily suspended the 'actual payment' of custom deposits for 1,853 tariff items under the restricted exports category and 272 tariff items under the restricted import category for textile products for Categories A and B processing trade enterprises. Keeping track of the frequent changes in the classification of restricted and prohibited categories under processing trade is challenging for operators and non-compliance may result in penalties.
5. VAT Reform
Effective from 1 January 2009, China implemented a VAT reform.
Prior to the VAT reform, enterprises are not allowed to claim the creditable input VAT for purchasing machinery and equipments. FIEs which fall within the 'Encouraged Category' can import machinery and equipments free of custom duty and import VAT whilst processors under contract processing arrangement can import machinery and equipments free of custom duty and import VAT.
However, under this VAT reform, enterprises are allowed to claim the creditable input VAT for purchasing machinery and equipments. Enterprises cannot however enjoy the VAT exemption for the importation of machinery and equipments and cannot enjoy the VAT refund for the purchase of domestically manufactured machinery and equipments from 1 January 2009 (or from 1 July 2009 if certain conditions can be fulfilled).
Processors under contract processing arrangement are also required to pay import duties for the importation of equipment.
VAT reforms will have an impact on most processing trade operators. Enterprises should evaluate the potential impacts on their business model, tax burden and cash flow.
Conclusion
It is envisaged that in the near future, the Chinese authorities will further strengthen the administration of the processing trade and will expect processing trade enterprises to improve their compliance status. As the Chinese government is determined to tackle environment problems arising from manufacturing activities, measures to eliminate high polluting industries or products are to be expected.
Enterprises must consider upgrading their production process and equipment in order to reduce pollution, whilst considering the use of more environmently-friendly materials during manufacturing.
In order to improve compliance with processing trade regulations and to ensure good preparation for potential inspection by the customs authorities, it is recommended that processing trade enterprises engage professionals and conduct a health check on their processing trade operations. A thorough and comprehensive customs and VAT health check is helpful in identifying an enterprise's existing non-compliance issues, to quantify the potential non-compliance exposures and to devise possible solutions where appropriate.
Although processing trade has brought in billions of dollars of revenue, its presence also leads to environmental pollution and the use of the discouraged low technologies. It is worth noting that the Chinese authorities have been strengthening their administration of processing trade by promulgating a number of tax, customs, foreign exchange and business regulations. Keeping track of regulations and any ensuing business implications can pose a challenge for foreign investors.
Enterprises carrying out processing trade should pay attention to avoid potential pitfalls. In practice, the local authorities' administration of processing trade may vary from area to area. Many practical considerations may arise during the operations of processing trade, which include:
• The correct methods for the disposal of defective goods and scraps.
• Assessing the level of unit consumption rate and wastage rate.
• Correct factory transfer arrangement.
• Discrepancies between the quantities of physical inventory, inventory records in customs handbook and accounting ledgers.
• Verification and cancellation of customs handbook.
In addition, foreign investors need to evaluate which processing trade arrangement is the most suitable for their business needs - contract processing arrangement or import processing arrangement.
Before making a final decision, foreign investors may consider certain key factors, such as the importation of bonded equipment, the percentage of domestic sales over total sales, any export VAT refund rates, selecting the right locality from amongst various bonded zones (e.g. export processing zones, free trade zones, bonded logistic zones) as well as the overall tax burden.
This article serves to discuss the common pitfalls and relevant considerations when carrying out processing trade in China. In addition, we highlight the latest regulation and their impacts for processing trade operators.
Prior to our discussion on potential pitfalls, the common features of contract processing arrangements compared with import processing arrangements are highlighted below.
Contract Processing Arrangement
Under a contract processing arrangement, a foreign consignor will engage a domestic company or a foreign invested enterprise (FIE) to act as the processor. The foreign consignor supplies raw materials free of charge to the processor. The processor will process the raw materials and then return the finished goods to the foreign consignor. The processor will charge a processing fee to the consignor. Under this arrangement, the foreign consignor has the ownership of the raw materials and finished goods throughout the whole processing process.
Before entering into a contract processing arrangement, the processor should register a production contract with the local Ministry of Commerce (MOFCOM) to obtain approval for the importation of bonded raw materials, i.e. free of custom duty and import VAT. The production contract should state the list of raw materials and finished goods and their estimated quantities, specifications and amount. The valid period of a production contract is normally six months.
Under a contract processing arrangement, domestic sales of the finished products are not permitted under Chinese law.
Import Processing Arrangement
Under an import processing arrangement, the FIE purchases the raw materials from overseas or from domestic suppliers, and the legal titles of the raw materials are held by the FIE throughout the processing process. After processing the raw materials into finished goods, the FIE will then sell the finished goods to its customers.
An FIE can import bonded raw materials free of custom duty and import VAT for further processing into finished goods and then export the finished goods to overseas customers. Similar to the contract processing arrangement, the FIE should register its production contract under import processing arrangement to the local MOFCOM.
Under an import processing arrangement the FIE is permitted to conduct domestic sales.
Common pitfalls when carrying out Processing Trade
1. Evaluation of locality and type of Processing Trade
The local practice, requirements and preferential treatments for carrying out processing trade may be different from one area to another area. The regulations and treatments for contract processing arrangements are also different from those for import processing arrangements from customs, foreign exchange, taxation and business perspectives. In view of this, it is highly recommended that foreign investors evaluate these factors and make a comparison between contract processing and import processing arrangements before making a final decision.
2. Estimation of Unit Consumption Rate and Wastage Rate
To estimate accurate unit consumption rate and wastage rate of bonded raw materials is not easy. In practice, the unit consumption rate and wastage rate declared by the enterprises are likely to be different from those average unit consumption rate and wastage rate adopted and announced by the customs authority. The discrepancy may cause problems when the enterprise performs a verification and cancellation of its production contract.
Customs authorities are vested in greater power to attest the authenticity and accuracy of unit consumption rates. They can establish upper and lower unit consumption rates.
All of the above poses difficulties for processing trade operators. Furthermore, under certain circumstances, the enterprise might be subject to penalties by the customs in-charge. Negotiation with the customs authorities should be arranged where appropriate.
3. Disposal of Scraps
According to the prevailing regulations, if the scraps arising from processing trade are sold domestically without obtaining any prior approval from the competent authorities, the enterprises may be penalized with back payment of import duties. Enterprises should be aware that the dutiable value of scraps can vary in different zones such as Export Processing Zones and Free Trade Zones. Enterprises should pay attention to the proper compliance and consequences for disposal of scraps.
4. The discrepancy of inventory quantities amongst records
The possible discrepancy amongst the quantities of physical inventory in the warehouses, the inventory records stated in customs handbooks and the accounting ledgers is often a headache to processing trade operators. If an enterprise fails to explain the reasons for the discrepancy, and in cases where the customs in-charge deems the missing bonded inventory as having been sold by the enterprise to domestic customers instead of exports, it may encounter barriers in performing verification and cancellation of the production contracts and be required to pay for the imported custom duty and VAT for the missing bonded inventory.
The latest amendments to Processing Trade regulations
In order to cope with the stern situation of import and export trade caused by the global financial crisis, the Chinese government has adopted a series of measures to maintain the growth of import and export trade. At the same time, Chinese Customs also adopted different measures to enforce the administration on processing trade and the collection of customs duty and import VAT.
1. Frequent Update of Export VAT Refund Rates
The Chinese government increased the export refund rates for the fourth time in 2008. According to Caishui [2008] No.144, the fourth round of increases focuses on certain high value-added products, labour intensive products and high-tech products such as plastic, forestry, mould and glass products, sea food or river food, bags, shoes, hats, umbrellas, furniture, bedding products, lights, watches and bells, certain chemical products, stone products, non-ferrous metal products and certain electrical machinery. The updated tax refund rates for these products now range from 9% to 14%. For details, please refer to Caishui [2008] No.144.
With constantly changing export VAT refund rates, it can be a challenge for processing trade operators to comply with the latest regulations.
2. New Tariff Scheme
In order to promote the steady increase and structural optimization of imports and exports, China has announced its new tariff scheme, which became effective from 1 January 2009. The Customs Tariff Commission promulgated Shuiwaihui [2008] No.40, which defines the new customs tariff implementation scheme.
Under Circular 40, the Chinese government has adjusted its tariff scheme, including changes to the:
• Most Favored Nation rate
• Interim duty rate
• Preferential tariff rate
• Special preferential tariff rate
• Other tariff items
It is recommended that enterprises review the tariff codes of their raw materials and finished goods so as to ensure compliance with the latest development.
3. New Administration for Country of Origin
The PRC General Administration of Customs (GAC) issued Customs Order No.181 on 8 January 2009. This sets out the administrative measures and operational guidelines for country of origin (COO). Order No. 181 will become effective from 1 March 2009. Enterprises should be aware of the new requirements for COO certificates and COO declarations. Requisite documents should be submitted to the customs authorities. Any inconsistency between documents or missing documents may be regarded as an inaccurate declaration and may result in penalties.
4. Customs Deposits
In 2007, MOFCOM and the GAC jointly issued Circular GAC [2007] No.44, which officially took effect from 23 August 2007. According to Circular No. 44, all Categories A and B processing trade enterprises in Eastern China will have to pay deposits equal to 50% of customs duties and import VAT when they either import or export commodities which fall into the restricted category under processing trade. Categories C processing trade enterprises will have to pay deposits equal to 100%.
In effect, this measure forces the majority of processing trade enterprises to pay some form of deposit, and which in turn can place a heavy strain on an enterprise's cash flow.
In this context, Eastern China includes Beijing, Tianjin, Shanghai, Liaoning, Hebei, Shandong, Jiangsu, Zhejiang, Fujian and Guangdong.
In order to alleviate the financial difficulties faced by enterprises under the current economic crisis, MOFCOM and the GAC jointly issued Order No.97 [2008] (Order 97), which became effective from 1 December 2008. Under Order 97, the customs authorities temporarily suspended the 'actual payment' of custom deposits for 1,853 tariff items under the restricted exports category and 272 tariff items under the restricted import category for textile products for Categories A and B processing trade enterprises. Keeping track of the frequent changes in the classification of restricted and prohibited categories under processing trade is challenging for operators and non-compliance may result in penalties.
5. VAT Reform
Effective from 1 January 2009, China implemented a VAT reform.
Prior to the VAT reform, enterprises are not allowed to claim the creditable input VAT for purchasing machinery and equipments. FIEs which fall within the 'Encouraged Category' can import machinery and equipments free of custom duty and import VAT whilst processors under contract processing arrangement can import machinery and equipments free of custom duty and import VAT.
However, under this VAT reform, enterprises are allowed to claim the creditable input VAT for purchasing machinery and equipments. Enterprises cannot however enjoy the VAT exemption for the importation of machinery and equipments and cannot enjoy the VAT refund for the purchase of domestically manufactured machinery and equipments from 1 January 2009 (or from 1 July 2009 if certain conditions can be fulfilled).
Processors under contract processing arrangement are also required to pay import duties for the importation of equipment.
VAT reforms will have an impact on most processing trade operators. Enterprises should evaluate the potential impacts on their business model, tax burden and cash flow.
Conclusion
It is envisaged that in the near future, the Chinese authorities will further strengthen the administration of the processing trade and will expect processing trade enterprises to improve their compliance status. As the Chinese government is determined to tackle environment problems arising from manufacturing activities, measures to eliminate high polluting industries or products are to be expected.
Enterprises must consider upgrading their production process and equipment in order to reduce pollution, whilst considering the use of more environmently-friendly materials during manufacturing.
In order to improve compliance with processing trade regulations and to ensure good preparation for potential inspection by the customs authorities, it is recommended that processing trade enterprises engage professionals and conduct a health check on their processing trade operations. A thorough and comprehensive customs and VAT health check is helpful in identifying an enterprise's existing non-compliance issues, to quantify the potential non-compliance exposures and to devise possible solutions where appropriate.
Sunday 22 February 2009
New transfer pricing regulations and their impact on foreign businesses in China
China has finally unveiled a set of highly comprehensive rules and regulations governing Related Party Transactions under the newly unified legislations for Corporate Income Tax.
On January the 8th 2009, the State Administration of Taxation published the 'Implementation Regulations for Special Tax Adjustments - abbreviated to the 'Implementation Regulations'. The Implementation Regulations establish a basis for the tax authority to make tax adjustments in relation to areas such as thin capitalisation, controlled foreign corporations and transfer pricing. It also provides detailed guidance for Chinese enterprises on entering Cost Sharing Agreements (CAS) and Advanced Pricing Arrangements (APA). In addition, the long awaited Contemporaneous Transfer Pricing Documentation requirement is also set out in the Implementation Regulations.
Apart from the new contents, the Implementation Regulations also supersedes previous major tax circulars governing the administration of Transfer Pricing. With the Implementation Regulations now established, those tax circulars have been revoked.
The Implementation Regulations set the milestone in the development of Transfer Pricing regulations in China. It demonstrates that the Chinese tax authority is strengthening governance of anti-avoidance. The Chinese tax authorities are increasingly capable and competent in dealing with sophisticated Transfer Pricing issues and are moving towards an international standard.
In the following, we highlight some of the key contents of the Implementation Regulations, which could have significant impacts on foreign investors.
Contemporaneous Transfer Pricing Documentation Compliance
The requirement to prepare Contemporaneous Transfer Pricing Documentation is for the first time being formally introduced into China's Transfer Pricing legislation. Currently, such requirement is only imposed on entities with a significant amount of cross-border Related Party Transactions. The previous regulations though did include the criteria for documentations that should be kept by companies and the Transfer Pricing basis relative to companies Transfer Pricing practices.
The criteria for which is defined as below:
* Annual amount of Related Party purchase and sales is not less than RMB 200 million; OR
* Annual amount of other Related Party transactions is not less than RMB 40 million.
The Contemporaneous Transfer Pricing Documentation shall include:
* An Organisational Structure of the Group
* A Summary of Business Operations
* Information on the Related Party Transactions
* A Comparability Analysis
* A Selection and Application of Transfer Pricing Methods
Each obligated entity shall prepare the documents on an independent basis. Each entity within the same group shall submit its own set of contemporaneous documents, no consolidated documentation on the group level shall be accepted. Entities shall submit the documentation for the current fiscal year by May 31 of the following year. The deadline for 2008 has been extended to Dec 31st 2009. Refusal or failure to submit the Transfer Pricing documentation within the time limit could be lead to a fine of RMB50,000. In addition, a penalty interest of 5% per annum could be imposed on the tax payment due from the special adjustments, however this penalty may be waived where if the Contemporaneous Transfer Pricing Documentation is available.
Transfer Pricing Audit
Detailed selection criteria for the targets of Transfer Pricing audits are set out in the Implementation Regulations. The tax authority tends to focus on enterprises with the following features:
* Enterprises with Related Party Transactions of large amounts and multiple types;
* Enterprises with long-term loss, slight profit or fluctuating profit;
* Enterprises with profit lower than the industry level;
* Enterprises with profit mismatching the function and risk assumed;
* Enterprises which have transactions with Related Parties based in tax havens;
* Enterprises which fail to declare Related Party Transactions or which fail to prepare contemporaneous documentations;
* Enterprises which obviously violate the arm's length principle.
The Implementation Regulations permit tax authorities to use public as well as non-public information when carrying out a Transfer Pricing assessment. The tax authority will present a formal conclusion on whether the Transfer Pricing of the enterprise is reasonable or if tax adjustment is necessary. If an enterprise is required to carry out a tax adjustment, it will enter a 5-year tracking period, during which it should submit annual contemporaneous information and documents to the tax authority.
Enterprises with single function of processing activities
The Implementation Regulations reiterate the position that a contract manufacturer, which takes orders solely from Related Parties and which manufactures products for Related Parties, and which does not take on any other functions should not be taking losses resulted from management issues, such as the insufficient capacity, product obsolescence etc. A steady level of profits is expected for such type of entity if the related transactions are conducted on the arm's length basis.
Thin Capitalisation Rule
Prior to 2008, there was no thin capitalisation rule imposed on foreign invested enterprises. Since the unification of the Corporate Income Tax legislation however, foreign invested enterprises are also subject to the thin capitalization requirement. A safe-harbor debt-to-equity ratio of 5:1 for financial enterprises and 2:1 for all other enterprises has been announced. Interests attributable to the excessive leverage portion shall not be deductible for Corporate Income Tax.
The Implementation Regulations further provide detailed guidance on determining whether an enterprise is thinly capitalised. The Related Party debt-to-equity ratio is defined as the sum of the average monthly Related Party debt divided by the sum of the average monthly equity. The back-to-back loans through unrelated parties (e.g. entrusted loans) and debt with third parties that have been guaranteed or supported by a Related Party is also included in the scope of "Related Party Debt". In determining the equity component of the equation, the book value of equity is used rather than the fair market value of equity.
On January the 8th 2009, the State Administration of Taxation published the 'Implementation Regulations for Special Tax Adjustments - abbreviated to the 'Implementation Regulations'. The Implementation Regulations establish a basis for the tax authority to make tax adjustments in relation to areas such as thin capitalisation, controlled foreign corporations and transfer pricing. It also provides detailed guidance for Chinese enterprises on entering Cost Sharing Agreements (CAS) and Advanced Pricing Arrangements (APA). In addition, the long awaited Contemporaneous Transfer Pricing Documentation requirement is also set out in the Implementation Regulations.
Apart from the new contents, the Implementation Regulations also supersedes previous major tax circulars governing the administration of Transfer Pricing. With the Implementation Regulations now established, those tax circulars have been revoked.
The Implementation Regulations set the milestone in the development of Transfer Pricing regulations in China. It demonstrates that the Chinese tax authority is strengthening governance of anti-avoidance. The Chinese tax authorities are increasingly capable and competent in dealing with sophisticated Transfer Pricing issues and are moving towards an international standard.
In the following, we highlight some of the key contents of the Implementation Regulations, which could have significant impacts on foreign investors.
Contemporaneous Transfer Pricing Documentation Compliance
The requirement to prepare Contemporaneous Transfer Pricing Documentation is for the first time being formally introduced into China's Transfer Pricing legislation. Currently, such requirement is only imposed on entities with a significant amount of cross-border Related Party Transactions. The previous regulations though did include the criteria for documentations that should be kept by companies and the Transfer Pricing basis relative to companies Transfer Pricing practices.
The criteria for which is defined as below:
* Annual amount of Related Party purchase and sales is not less than RMB 200 million; OR
* Annual amount of other Related Party transactions is not less than RMB 40 million.
The Contemporaneous Transfer Pricing Documentation shall include:
* An Organisational Structure of the Group
* A Summary of Business Operations
* Information on the Related Party Transactions
* A Comparability Analysis
* A Selection and Application of Transfer Pricing Methods
Each obligated entity shall prepare the documents on an independent basis. Each entity within the same group shall submit its own set of contemporaneous documents, no consolidated documentation on the group level shall be accepted. Entities shall submit the documentation for the current fiscal year by May 31 of the following year. The deadline for 2008 has been extended to Dec 31st 2009. Refusal or failure to submit the Transfer Pricing documentation within the time limit could be lead to a fine of RMB50,000. In addition, a penalty interest of 5% per annum could be imposed on the tax payment due from the special adjustments, however this penalty may be waived where if the Contemporaneous Transfer Pricing Documentation is available.
Transfer Pricing Audit
Detailed selection criteria for the targets of Transfer Pricing audits are set out in the Implementation Regulations. The tax authority tends to focus on enterprises with the following features:
* Enterprises with Related Party Transactions of large amounts and multiple types;
* Enterprises with long-term loss, slight profit or fluctuating profit;
* Enterprises with profit lower than the industry level;
* Enterprises with profit mismatching the function and risk assumed;
* Enterprises which have transactions with Related Parties based in tax havens;
* Enterprises which fail to declare Related Party Transactions or which fail to prepare contemporaneous documentations;
* Enterprises which obviously violate the arm's length principle.
The Implementation Regulations permit tax authorities to use public as well as non-public information when carrying out a Transfer Pricing assessment. The tax authority will present a formal conclusion on whether the Transfer Pricing of the enterprise is reasonable or if tax adjustment is necessary. If an enterprise is required to carry out a tax adjustment, it will enter a 5-year tracking period, during which it should submit annual contemporaneous information and documents to the tax authority.
Enterprises with single function of processing activities
The Implementation Regulations reiterate the position that a contract manufacturer, which takes orders solely from Related Parties and which manufactures products for Related Parties, and which does not take on any other functions should not be taking losses resulted from management issues, such as the insufficient capacity, product obsolescence etc. A steady level of profits is expected for such type of entity if the related transactions are conducted on the arm's length basis.
Thin Capitalisation Rule
Prior to 2008, there was no thin capitalisation rule imposed on foreign invested enterprises. Since the unification of the Corporate Income Tax legislation however, foreign invested enterprises are also subject to the thin capitalization requirement. A safe-harbor debt-to-equity ratio of 5:1 for financial enterprises and 2:1 for all other enterprises has been announced. Interests attributable to the excessive leverage portion shall not be deductible for Corporate Income Tax.
The Implementation Regulations further provide detailed guidance on determining whether an enterprise is thinly capitalised. The Related Party debt-to-equity ratio is defined as the sum of the average monthly Related Party debt divided by the sum of the average monthly equity. The back-to-back loans through unrelated parties (e.g. entrusted loans) and debt with third parties that have been guaranteed or supported by a Related Party is also included in the scope of "Related Party Debt". In determining the equity component of the equation, the book value of equity is used rather than the fair market value of equity.
Wednesday 21 January 2009
More anti-monopoly guidelines published
The Ministry of Commerce (Mofcom) has published four draft documents clarifying the handling of concentrations and suspected concentrations.
The documents listed below appeared on Mofcom’s website on January 19 and 20, and had previously been circulated to a small group of stakeholders for comment.
Tentative Measures for the Investigation and Handling of Concentrations of Business Operators that have not been Reported in accordance with the Law (Draft);
Tentative Measures for the Collection of Evidence for Suspected Monopolies of Concentrations of Business Operators that have not reached the Reporting Threshold (Draft);
Tentative Measures for the Reporting of Concentrations of Business Operators (Draft for Comments); and
Tentative Measures on Reviews for Concentrations of Business Operators (Draft for Comments)
Specialists reviewing the draft Measures say they should help settle various contentious issues. One involves the factors that Mofcom will take into account when deciding whether one business has acquired control over another.
For the first time, an exact share ratio has been specified. If an acquiring party exceeds this ratio, they can be said to have acquired control. The new documents also seem to confirm that joint ventures will qualify as concentrations (although the position with so-called greenfield ventures is unsure), and explain how to calculate business turnover. This will help companies to apply the long-debated threshold tests contained in the 2008 Anti-monopoly Law, including one which sets a threshold of Rmb10 billion for the aggregate global turnover of all parties involved
For Francois Renard, competition specialist with Allen & Overy, the draft covering “Suspected Monopolies of Concentrations of Business Operators that have not reached the Reporting Threshold” is intriguing.
“Mofcom seems to give a lot of weight to the review of concentration below thresholds,” he says.
This could be interpreted in two ways: as an indication that Mofcom intends to review many below-threshold operations, or simply as a response to previous concerns over the Ministry’s scrutiny of such deals.
Since the promulgation of the Anti-monopoly Law in 2008, many lawyers have commented that supporting guidelines would benefit from external input. It seems the Ministry has been listening, as it has opened the new draft Measures for public comment until February 16.
Although the latest drafts have been generally welcomed, they leave some existing uncertainties unresolved and raise further uncertainties themselves. One lawyer has reported some “very bizarre drafting” in some of the Measures. There is certain to be considerable debate in the weeks ahead.
The documents listed below appeared on Mofcom’s website on January 19 and 20, and had previously been circulated to a small group of stakeholders for comment.
Tentative Measures for the Investigation and Handling of Concentrations of Business Operators that have not been Reported in accordance with the Law (Draft);
Tentative Measures for the Collection of Evidence for Suspected Monopolies of Concentrations of Business Operators that have not reached the Reporting Threshold (Draft);
Tentative Measures for the Reporting of Concentrations of Business Operators (Draft for Comments); and
Tentative Measures on Reviews for Concentrations of Business Operators (Draft for Comments)
Specialists reviewing the draft Measures say they should help settle various contentious issues. One involves the factors that Mofcom will take into account when deciding whether one business has acquired control over another.
For the first time, an exact share ratio has been specified. If an acquiring party exceeds this ratio, they can be said to have acquired control. The new documents also seem to confirm that joint ventures will qualify as concentrations (although the position with so-called greenfield ventures is unsure), and explain how to calculate business turnover. This will help companies to apply the long-debated threshold tests contained in the 2008 Anti-monopoly Law, including one which sets a threshold of Rmb10 billion for the aggregate global turnover of all parties involved
For Francois Renard, competition specialist with Allen & Overy, the draft covering “Suspected Monopolies of Concentrations of Business Operators that have not reached the Reporting Threshold” is intriguing.
“Mofcom seems to give a lot of weight to the review of concentration below thresholds,” he says.
This could be interpreted in two ways: as an indication that Mofcom intends to review many below-threshold operations, or simply as a response to previous concerns over the Ministry’s scrutiny of such deals.
Since the promulgation of the Anti-monopoly Law in 2008, many lawyers have commented that supporting guidelines would benefit from external input. It seems the Ministry has been listening, as it has opened the new draft Measures for public comment until February 16.
Although the latest drafts have been generally welcomed, they leave some existing uncertainties unresolved and raise further uncertainties themselves. One lawyer has reported some “very bizarre drafting” in some of the Measures. There is certain to be considerable debate in the weeks ahead.
Chinese New Year - Spring Festival
Chinese New Year (Chinese: 春節, 春节, Chūnjíe; 農曆新年, 农历新年, Nónglì Xīnnián; or 過年, 过年, Guònián), also known as the Lunar New Year or the Spring Festival is the most important of the traditional Chinese holidays. It consists of a period of celebrations, starting on New Year's Day, celebrated on the first day of the first month of the Chinese calendar, i.e. the day of the second new moon after the day on which the winter solstice occurs, unless there is an intercalary eleventh or twelfth month in the lead-up to the New Year—in such a case, the New Year falls on the day of the third new moon after the solstice. (The next time this occurs is in 2033.) The Chinese New Year period ends with the Lantern Festival, the fifteenth day of the month.
Some Chinese believe that Nian ("Nyehn") was a reptilian predator that could infiltrate houses silently like the infamous man-eating leopards of India. The Chinese soon learned that Nian was sensitive to loud noises, and they scared it away with explosions and fireworks.
Origin
The origin of the Lunar New Year Festival can be traced back thousands of years, involving a series of colorful legends and traditions. One of the most famous legends is Nian, an extremely cruel and ferocious beast that the ancients believed would devour people on New Year's Eve. To keep Nian away, red-paper couplets are pasted on doors, torches are lit, and firecrackers are set off throughout the night, because Nian is said to fear the color red, the light of fire, and loud noises. Early the next morning, as feelings of triumph and renewal fill the air at successfully keeping Nian away for another year, the most popular greeting heard is "gong xi fa cai", or "congratulations."
To ensure good luck in the coming year, the Taiwanese always give every dish a special name. This dish is called the "Five Blessings for the New Year" and represents longevity, wealth, peace, wisdom, and righteousness. (Photo by Su-ching Chang) Even though Lunar New Year celebrations generally last for only several days, starting on New Year's Eve, the festival itself is actually about three weeks long. It begins on the twenty-fourth day of the twelfth lunar month, the day, it is believed, when various gods ascend to heaven to pay their respects and report on household affairs to the Jade Emperor, the supreme Taoist deity. According to tradition, households busily honor these gods by burning ritualistic paper money to provide for their traveling expenses. Another ritual is to smear malt sugar on the lips of the Kitchen God, one of the traveling deities, to ensure that he either submits a favorable report to the Jade Emperor or keeps silent.
Celebration
The Chinese New Year starts with the New Moon on the first day of the new year and ends on the full moon 15 days later. The 15th day of the new year is called the Lantern Festival, which is celebrated at night with lantern displays and children carrying lanterns in a parade.
10 Days before the New Year Day - Sweeping of the Grounds
Preparations for the Chinese New Year in old China started well in advance of the New Year's Day. The 20th of the Twelfth Moon was set aside for the annual housecleaning, or the "sweeping of the grounds". Every corner of the house must be swept and cleaned in preparation for the new year. SpringCouplets, written in black ink on large vertical scrolls of red paper, were put on the walls or on the sides of the gate-ways. These couplets, short poems written in Classical Chinese, were expressions of good wishes for the family in the coming year. In addition, symbolic flowers and fruits were used to decorate the house, and colorful new year pictures (NIAN HUA) were placed on the walls (for more descriptions of the symbolism of the flowers and fruits.
New Year Paintings - During the Spring Festival (Chinese New Year), it is traditional to decorate the homes with new year paintings. The most popular paintings are Door Gods pasted on the front doors to keep ghosts and monsters away.
Spring Couplets - Spring couplets are traditionally written with black ink on red paper. They are hung in storefronts in the month before the New Year’s Day, and often stay up for two months. They express best wishes and fortune for the coming year. There is a great variety in the writing of these poetic couplets to fit the situation. A store would generally use couplets hat make references to their line of trade. Couplets that say "Happy New Year" and " Continuing Advancement in Education" are apprpriate for a school.
The New Year's Eve - Reunion DinnerA reunion dinner is held on New Year's Eve where members of the family, near and far, get together for celebration. The New Year's Eve dinner is very large and traditionally includes chicken. Fish is included, but not eaten up completely (and the remaining stored overnight), as the Chinese phrase "nian nian you yu", or "every year there is fish/leftover", is a homophone for phrases which could mean "be blessed every year" or "have profit every year", since "yu" is also the pronunciation for "profit".
The New Year's Eve celebration was traditionally highlighted with a religious ceremony given in honor of Heaven and Earth, the gods of the household and the family ancestors.
First Day of the New Year
New Year's day is also celebrated within the family. Usually family members gather on the morning of New Year's Day. It is at this gathering that red packets are given to unmarried members of the family. The age of the recipient is not material to receiving the packets. Married couples usually give out two red packets on the first new year after being married. This is because the wife presents one and the husband presents one. In subsequent years they may give one as a couple.
Red packets traditionally consisted of amounts which were considered multiples. Amounts like $2 (two piece of $1), or $20 were acceptable. Similarly "multiples" such as $1.10 and $2.20 were also acceptable. However, this is not strictly adhered to. The gift was originally a token amount but these days it is not uncommon to receive large sums in affluent families. In some families this tradition has evolved into the practice to substituting money-like instruments (stocks, bonds, unit trust) in place of large sums of cash.
Red packets are also given to unmarried visitors but the sums are often smaller than the packets given to family members or close friends.
Second Day of the New Year
The second day of the new year is usually for visiting the family of the wife if a couple is married. A large feast is also typically held on the second day of the new year.
Seventh Day of the New YearThe seventh day traditionally is known as the common man's birthday, the day when everyone grows one year older. It is also the day when tossed fish salad, yusheng, is eaten. People get together to toss the colourful salad and make wishes for continued wealth and prosperity. This is only celebrated amongst the Chinese in Southeast Asia, such as Malaysia and Singapore.
15th Day of the New Year - Lantern Festival
The New Year celebrations ended on the 15th of the First Moon with the Lantern Festival. On the evening of that day, people carried lanterns into the streets to take part in a great parade. Young men would highlight the parade with a dragon dance. The dragon was made of bamboo, silk, and paper, and might stretch for more than hundred feet in length. The bobbing and weaving of the dragon was an impressive sight, and formed a fitting finish to the New Year festival.
Food
There are many foods in Chinese culture associated with the Chinese New Year. Although preferences vary from region to region, some examples include the following:
Niangao (粘糕) The Chinese word 粘, meaning "sticky", is identical in sound to 年, meaning "year", and the word 糕, meaning "cake" is identical in sound to 高, meaning "high". As such, eating niangao has the symbolism of raising oneself higher in each coming year (年年高升 niánnián gāoshēng). Chinese families who practice Chinese traditional religion also offer niangao to the kitchen god, Zao Jun. It is believed that all the household gods go off to heaven to report on a family during the new year. Serving niangao to the kitchen god is believed to help him provide a sweet report on the family because he will be satisfied and not inclined to deliver criticism — or that his lips are so sticky from the cakes that he is unable to make too much of a report.
Fagao Literally translated as "Prosperity Cake", fagao is made with wheat flour, water, sugar and leavened with either yeast or baking powder. Fagao batter is steamed until it rises and splits open at the top. The sound "fa" means either "to raise/generate" or "be prosperous", hence its well intending secondary meaning.
Jiaozi Dumplings, are small or large mounds of dough that are usually dropped into a liquid mixture (such as soup or stew) and cooked until done, some are stuffed with meat and/or vegetables.
Yusheng, a salad of raw fish and shredded crunchy vegetables (such as carrots, jicama, pickled ginger and pomelo) in a plum sauce dressing. Although commonly served in China throughout the year, it was popularised as a Chinese New Year dish in Singapore and Malaysia, a practise which has since spread to other Chinese communities. Originally served only on the seventh day of the new year, it is now eaten on any day, sometimes as early as two weeks prior to the commencement of the new year.
Mandarin oranges (a symbol of wealth and good fortune). The Cantonese word for these oranges is a homonym for gold.
Red Jujubes symbolizes the gaining of prosperity
Whole steamed fish (a symbol of long life and good fortune). This can be seen in wall decorations of fish themes. The word 魚 (yú), meaning "fish", shares the same pronunciation with the word 餘, meaning "surplus" (e.g. having money left over from covering expenses). The common greeting for the new year "niannian you yu" can mean to enjoy a surplus, i.e. financial security, year after year.
Some Chinese believe that Nian ("Nyehn") was a reptilian predator that could infiltrate houses silently like the infamous man-eating leopards of India. The Chinese soon learned that Nian was sensitive to loud noises, and they scared it away with explosions and fireworks.Origin
The origin of the Lunar New Year Festival can be traced back thousands of years, involving a series of colorful legends and traditions. One of the most famous legends is Nian, an extremely cruel and ferocious beast that the ancients believed would devour people on New Year's Eve. To keep Nian away, red-paper couplets are pasted on doors, torches are lit, and firecrackers are set off throughout the night, because Nian is said to fear the color red, the light of fire, and loud noises. Early the next morning, as feelings of triumph and renewal fill the air at successfully keeping Nian away for another year, the most popular greeting heard is "gong xi fa cai", or "congratulations."
To ensure good luck in the coming year, the Taiwanese always give every dish a special name. This dish is called the "Five Blessings for the New Year" and represents longevity, wealth, peace, wisdom, and righteousness. (Photo by Su-ching Chang) Even though Lunar New Year celebrations generally last for only several days, starting on New Year's Eve, the festival itself is actually about three weeks long. It begins on the twenty-fourth day of the twelfth lunar month, the day, it is believed, when various gods ascend to heaven to pay their respects and report on household affairs to the Jade Emperor, the supreme Taoist deity. According to tradition, households busily honor these gods by burning ritualistic paper money to provide for their traveling expenses. Another ritual is to smear malt sugar on the lips of the Kitchen God, one of the traveling deities, to ensure that he either submits a favorable report to the Jade Emperor or keeps silent.Celebration
The Chinese New Year starts with the New Moon on the first day of the new year and ends on the full moon 15 days later. The 15th day of the new year is called the Lantern Festival, which is celebrated at night with lantern displays and children carrying lanterns in a parade.
10 Days before the New Year Day - Sweeping of the GroundsPreparations for the Chinese New Year in old China started well in advance of the New Year's Day. The 20th of the Twelfth Moon was set aside for the annual housecleaning, or the "sweeping of the grounds". Every corner of the house must be swept and cleaned in preparation for the new year. SpringCouplets, written in black ink on large vertical scrolls of red paper, were put on the walls or on the sides of the gate-ways. These couplets, short poems written in Classical Chinese, were expressions of good wishes for the family in the coming year. In addition, symbolic flowers and fruits were used to decorate the house, and colorful new year pictures (NIAN HUA) were placed on the walls (for more descriptions of the symbolism of the flowers and fruits.
New Year Paintings - During the Spring Festival (Chinese New Year), it is traditional to decorate the homes with new year paintings. The most popular paintings are Door Gods pasted on the front doors to keep ghosts and monsters away.
Spring Couplets - Spring couplets are traditionally written with black ink on red paper. They are hung in storefronts in the month before the New Year’s Day, and often stay up for two months. They express best wishes and fortune for the coming year. There is a great variety in the writing of these poetic couplets to fit the situation. A store would generally use couplets hat make references to their line of trade. Couplets that say "Happy New Year" and " Continuing Advancement in Education" are apprpriate for a school.The New Year's Eve - Reunion DinnerA reunion dinner is held on New Year's Eve where members of the family, near and far, get together for celebration. The New Year's Eve dinner is very large and traditionally includes chicken. Fish is included, but not eaten up completely (and the remaining stored overnight), as the Chinese phrase "nian nian you yu", or "every year there is fish/leftover", is a homophone for phrases which could mean "be blessed every year" or "have profit every year", since "yu" is also the pronunciation for "profit".
The New Year's Eve celebration was traditionally highlighted with a religious ceremony given in honor of Heaven and Earth, the gods of the household and the family ancestors.
First Day of the New Year
New Year's day is also celebrated within the family. Usually family members gather on the morning of New Year's Day. It is at this gathering that red packets are given to unmarried members of the family. The age of the recipient is not material to receiving the packets. Married couples usually give out two red packets on the first new year after being married. This is because the wife presents one and the husband presents one. In subsequent years they may give one as a couple.Red packets traditionally consisted of amounts which were considered multiples. Amounts like $2 (two piece of $1), or $20 were acceptable. Similarly "multiples" such as $1.10 and $2.20 were also acceptable. However, this is not strictly adhered to. The gift was originally a token amount but these days it is not uncommon to receive large sums in affluent families. In some families this tradition has evolved into the practice to substituting money-like instruments (stocks, bonds, unit trust) in place of large sums of cash.
Red packets are also given to unmarried visitors but the sums are often smaller than the packets given to family members or close friends.
Second Day of the New YearThe second day of the new year is usually for visiting the family of the wife if a couple is married. A large feast is also typically held on the second day of the new year.
Seventh Day of the New YearThe seventh day traditionally is known as the common man's birthday, the day when everyone grows one year older. It is also the day when tossed fish salad, yusheng, is eaten. People get together to toss the colourful salad and make wishes for continued wealth and prosperity. This is only celebrated amongst the Chinese in Southeast Asia, such as Malaysia and Singapore.
15th Day of the New Year - Lantern Festival
The New Year celebrations ended on the 15th of the First Moon with the Lantern Festival. On the evening of that day, people carried lanterns into the streets to take part in a great parade. Young men would highlight the parade with a dragon dance. The dragon was made of bamboo, silk, and paper, and might stretch for more than hundred feet in length. The bobbing and weaving of the dragon was an impressive sight, and formed a fitting finish to the New Year festival.
Food
There are many foods in Chinese culture associated with the Chinese New Year. Although preferences vary from region to region, some examples include the following:
Niangao (粘糕) The Chinese word 粘, meaning "sticky", is identical in sound to 年, meaning "year", and the word 糕, meaning "cake" is identical in sound to 高, meaning "high". As such, eating niangao has the symbolism of raising oneself higher in each coming year (年年高升 niánnián gāoshēng). Chinese families who practice Chinese traditional religion also offer niangao to the kitchen god, Zao Jun. It is believed that all the household gods go off to heaven to report on a family during the new year. Serving niangao to the kitchen god is believed to help him provide a sweet report on the family because he will be satisfied and not inclined to deliver criticism — or that his lips are so sticky from the cakes that he is unable to make too much of a report.
Fagao Literally translated as "Prosperity Cake", fagao is made with wheat flour, water, sugar and leavened with either yeast or baking powder. Fagao batter is steamed until it rises and splits open at the top. The sound "fa" means either "to raise/generate" or "be prosperous", hence its well intending secondary meaning.
Jiaozi Dumplings, are small or large mounds of dough that are usually dropped into a liquid mixture (such as soup or stew) and cooked until done, some are stuffed with meat and/or vegetables.
Yusheng, a salad of raw fish and shredded crunchy vegetables (such as carrots, jicama, pickled ginger and pomelo) in a plum sauce dressing. Although commonly served in China throughout the year, it was popularised as a Chinese New Year dish in Singapore and Malaysia, a practise which has since spread to other Chinese communities. Originally served only on the seventh day of the new year, it is now eaten on any day, sometimes as early as two weeks prior to the commencement of the new year.
Mandarin oranges (a symbol of wealth and good fortune). The Cantonese word for these oranges is a homonym for gold.
Red Jujubes symbolizes the gaining of prosperity
Whole steamed fish (a symbol of long life and good fortune). This can be seen in wall decorations of fish themes. The word 魚 (yú), meaning "fish", shares the same pronunciation with the word 餘, meaning "surplus" (e.g. having money left over from covering expenses). The common greeting for the new year "niannian you yu" can mean to enjoy a surplus, i.e. financial security, year after year.
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