Why investing in China

Exports and strong domestic demand growth and public investment: these are the drivers of the development of GDL (GDP - Gross Domestic Product) of China. China is an important trading partner for many countries around the world, representing a market of supply and outlet really important.

China in the group of the member countries of the BRIC (Brazil, Russia, India and China), despite the slowdown in recent years in the growth of GDL-GDP is the "Country" who best responds to the international crisis. In 2010, as it had been predicted correctly by the World Bank, the GDL- Chinese GDP returned to grow exceeding 10 percentage points. The pace of development have been reported to pre-crisis level so that the Chinese authorities have taken steps to reduce the intensity of fiscal stimulus measures and of support to bank lending that were adopted during the crisis period.

According to a study by City Private Bank and Knight Frank, presently in China there are about 500 thousand people who hold assets of over $ 1 million. It is estimated on the other hand that wealthy people (with incomes above $ 50,000 a year) are about 200 million (as reported in February 2014).

THE FIGURES OF CHINA

• Territory:9.598.100 sq.km.
• GDP (as in 2013): 9.169 billion dollars.
• GDP - per-capite (as in 2013): $ 10.329.
• Foreign exchange reserves (as in 2013):3.31 trillion dollars.
• Payoff Balance of Payments (as in 2013): 182,8 billion dollars.
• Export (as in 2013): 2.21 trillion dollars.
• Inflation (as in 2013): 3%.
• Foreign direct investment (as in 2013): 117,5 billion dollars.
• Population (as in 2013): 1,361 billion.
• Annual Demographic trends: 0,481%.

The Competitiveness Report of the World Economic Forum ranks China at the top in the world ranking. Among the various parameters that contribute to determine the index, China gets the best scores with reference to:

• Width of the market.
• Primary education and higher education.
• Macroeconomic environment.
• Efficiency of the labour market.
• Efficiency of the goods market.
• Institutions.
• Infrastructure.

Anything weighted by some critical factors such as the inefficiency of bureaucracy,lack of access to finance, inflation.

In December 2001, with the accession to the World Trade Organization (WTO), the "Country" has extended its opening abroad and its own participation in globalization, in addition to perfecting the socialist market economic system and to initiate deep legal reforms in various commercial sectors.

These introduced reforms and necessary to perform the assets of the Country creating new spaces of investment for foreign entrepreneurs were the condition that China would have to undergo in order to become part of the great global economic community. The commitment to carry forward the reform of the law to protect the interests of foreign investors has been maintained.

The foreign politics of the Republic of China is on four main areas:

• Increase and improve relationships with neighbouring countries in order to create a regional environment suitable to trade and new developments in the economy.
• Access to natural resources in developing Countries.
• Opposition to American hegemony and development of strategic partnerships with other economic medium and large powers.
• Continuation of the process of reunification with Taiwan and repression of all forms of separatism at the borders, especially in the autonomous regions of Tibet and Xinjiang bordering Minor Asia.

In the past the central government restricted the entry of foreign investors to the industrial sector, since it emerged as the most important the problem of reconciling the local setting and the foreign one of the services, and, secondly, because many service activities involved in a direct way very sensitive social and political spheres.

Despite this address had partially changed over the 90s, witnessing a gradual entry of foreign firms in some service sectors through partnerships with Chinese companies, with totally foreign capital companies (Wholly Foreign Owned Enterprise - WFOE) any possibility to work independently in these areas was still precluded. Only with the entry of China into the WTO, and then in 2001, was initiated a process of progressive liberalization of foreign companies in the Chinese domestic market. The tools that have permitted the launch of such a process have been the access protocol to the WTO, the General Agreement on Trade in Services (GATS), the contents of which provide for a gradual entry of foreign investors, also through WFOE companies. The entry of China into the WTO has forced the revision of the rules governing the forms of exercise of business activities and their incentives and/or limitations. Therefore, the Regulations were introduced on Guiding the Direction of Foreign Investment. These Laws, dated February 11, 2002, have been completed by the Catalogue for the Guidance of Foreign Investment Industries. They represent the fundamental sources for understanding whether a particular corporate form has been accepted or not into the Chinese system.

The continuation of the work of revision and integration of commercial and tax law of China, with particular attention to foreign capital companies, has come to standardize the regulation of commercial involvement in foreign-owned companies to the existing one at the domestic level. According to the Chinese Ministry of Commerce, in recent years, foreign direct investment in China reached a record of about 105.7 billion U.S. dollars, with an average growth of 17%. This figure includes funds invested in factories, real estate and other assets except shares and financial instruments.

In the 12th Five-Year Plan (2011-2016) is planned a large development of the transport sector and infrastructure in China. Investments to strengthen the line of rail transport in urban and rural areas, will grow by about 16% over the next five years. In the Country freight has increased dramatically, with a growth of rail and road transport and a significant increase in air transport. It has also increased the volume of trade goods in the ports of the coastal area. All this helps to look to the future of China as regards infrastructure investments.

Despite the spectacular acceleration of the market, it should be noted that the central government still plays a vital role in the economic development of the Country. The central government has an active role in the restructuring of key sectors and foreign investment. With the approval of the 12th Five-Year Plan (2011-2016), the Central Government has set new targets annual growth of GDP (GDP - Gross Domestic Product) to 7% for the next five years (2011-2016). The new plan marks a turning point in the past. The rapid development of the Country brought out millions of people out of poverty but has also raised a number of challenges related to sustainability (pollution, energy-intensive and resource depletion) and equity (social inequality, reduced domestic consumption) of this growth.

The frantic race for the growth of recent years must be accompanied to the achievement of sustainability goals:

• Improving the quality of life of the population (healthcare, education), mitigate social inequalities and redistribute wealth.
• Increasing the purchasing power of workers.
• Continuing the transition to an economy driven by domestic consumption rather than by exports.
• Promoting the development of the western regions of the Country.
• Protecting the environment, resourced and promoting energy efficiency.
• Developing priority areas.
• Energy saving and environmental protection,new energy sources (nuclear, wind, solar), clean energy vehicles.
• Biotechnology (Pharmaceuticals and Medical Devices), new materials (semiconductors for high-level and rare metals), IT (broadband networks, security of infrastructure), production of high-level equipment.

The 12th Five-Year Plan (2011-2016) includes targeted tax changes aimed at facilitating the achievement of the main economic and social objectives. The rise in disposable income, helped by a lower taxation of individual incomes, will lead to a widening of the Chinese middle classes, with new opportunities related to consumption.

To sum up, considering the increases in wages and the objectives of the plan and the growth of the affluent class, China, from the "factory of the world", promises to be the largest export market overall in the next thirty years.

TAX SYSTEM

The Chinese tax administration has at the top the Chinese Ministry of Finance and the S.A.T. (State Administration of Taxation):

1. Central.
2. Local.
3. Customs Duties.

Taxes are themselves identified in two large groups:

• STATE TAX: taxes that generate revenue for the central government that collects them.
• LOCAL TAX: taxes that generate revenue for the local government that collects them.

With its transition to a market economy, China has acquired market-based approaches.

Into force since 1 January 2008 Enterprise Income Tax Law (CIT): a law that combines two schemes of tax on business income, namely that for companies based on domestic capital - Domestic Invested Enterprises (DIE) - and that for companies based on foreign capital - foreign Invested enterprises (FIE)

At the moment there are about 20 different types of taxes divided into:

• Income taxes, or the EIT (Enterprise Income Tax and Individual Income Tax).
• Tax on business turnover, or IVA (VAT), BT and CT (respectively the Value Added Tax, the Business Tax e Consumption Tax).
• Other taxes, fees (among which the most significant are the Stamp Duty, Deed Tax, Land VAT, Urban Real Estate Tax, Resource Tax).
• Customs duties on imports and exports that are determined on the basis of the goods category.

To ensure the competitiveness and survival of a company in the market, it becomes necessary then a process of continuous "Tax Planning" in order to properly include the tax burden, both in the "Business Plan" for the new initiative and in the perspectives useful for the management of business, large or big it may be. The first step for the investor who wants to enter the Chinese market is whether the tax burden, incident on its products or services and its activities in general, make the investment cost-effective or not. While tax planning, you will need to choose which tax regime you should opt. The choice will not be final, as it can be modified at the beginning of each year.

In China, the system of taxation for business and commerce is based on three alternative systems:

1. ACTUAL INCOME: tax based on the actual income. This system applies to those authorized to conduct direct business and, in particular, to those who provide legal, accounting, tax, auditing, as well as representative offices of banks and insurance companies.
2. GROSSING UP OF EXPENDITURES: tax based on the imputed income calculated on the basis of the costs incurred by the company. Normally applied to the trading companies, the ones providing services in the tourism sector and the transport company.
3. PROFIT BASIS: tax based on the imputed income calculated as a percentage of the revenues earned by the parent company in China. In practice, the imputed income is made from commissions that a representative office may obtain on the contracts concluded by the parent company in China.

To determine the taxable amount, the companies are divided into three categories:

• Production companies.
• Trading companies.
• Service companies.

It is important to note that it is always allowed to deduct losses made in the previous five tax years. The corporate income tax is calculated by reference to tax periods lasting one year and is paid with quarterly instalments.