As an AEC firm, Ive heard rumors that it is difficult
to get money earned in China out of China. Is this true?
The rumors you have heard are true, but if planned
and managed correctly, a non-Chinese based architecture,
engineering or construction firm can make U.S. dollars
and get them out of China in a relatively easy manner.
The problem with getting paid in China is due to numerous
long-standing Chinese policies. But these policies are
quickly changing as China's entrance into the World
Trade Organization (WTO) has forced China to change
many of them, many of which directly effect how foreign
firms get paid. Some of the common issues facing Western
AEC firms are:
Issue 1: Not allowing RMB
(Chinese currency) to leave its borders after performing
services within China, forcing foreign firms to use
Chinese banks and keeping RMB within China.
The WTO entrance guidelines enforce
that China must address and correct its existing policy
of not allowing RMB to leave its borders. This will
begin to happen in a step-by-step process beginning
in 2006. Until now, many foreign AEC firms would open
businesses in places like Hong Kong, open a banking
account in Hong Kong and launder the RMB into Hong Kong
dollars, then exchange the Hong Kong dollars into U.S.
dollars. Hong Kong has been used for this purpose for
years due to its close proximity to China. But due to
exchange rates and this cumbersome process, getting
RMB into usable U.S. dollars was an expensive proposition.
Beginning in 2006, many Western banks will be able to
transfer and exchange RMB to U.S. Dollars within China
and the U.S. Bank's customers will be able to access
this cash from anywhere in the world.
Issue 2: Paying work performed
in China in RMB only.
Getting paid in RMB only is slowly
giving way to getting paid in U.S. dollars, but only
if it is requested in your proposal and then accepted
in the official Memorandum of Understanding (MOU), which
is the Chinese version of a contract. An official MOU
will always have a signature and official Chinese seal,
usually in red ink. Getting your payments in U.S. dollars
will help manage the fluid and risky nature of foreign
Issue 3: Choosing the wrong
Chinese business identifier and being taxed at a higher
rate than is necessary.
When setting up for payment in
China, Western firms must submit forms to the government,
which allows them to invoice their clients. The Western
firms must tick off the closest description of their
services that their company provides. The problem is
that the descriptions are not in a typical SIC code
system, like in the U.S. Rather, the Chinese business
identifier can describe services provided into multiple
businesses, leading to confusion. An example would be
a Western architectural firm that supplies design development
services for a project in China, then hands off the
production of construction documents to their Chinese
partner. The role of "architect" is not easily
described in the business identifier forms, as the Western
architecture firm did not perform "full" architectural
services. If they choose to describe themselves as the
"architect," it puts them into a higher tax
category than if they described themselves as "consultants,"
which is a lower tax category. The rule of thumb is
to always accurately describe what services your firm
is performing in China and if you are performing work
that is "taking jobs" from local Chinese firms,
you will be put into a higher tax category.
Issue 4: Taxing each invoice
submitted in China at least 6% of the invoice total.
A little known process that bites
many Western firms after they agree to payment terms
and conditions in the official MOU is the invoice tax.
Each and every invoice in China must be taxed at rates
that are governed by the business identifier. This tax
is on the average at 6% of the invoice total and must
be paid to the government. This invoice tax, in certain
cases, could be an Western AEC firms profit! It is always
wise to build in the invoice tax into your proposal
and make sure it is part of the official MOU before
signing the contract. This invoice tax has created an
entire sub-industry for banking in China as corner shops
will pay your invoice up front, pay the government invoice
tax, collect the money from your client and take a small
cut for this service. This offshoot of the familiar
"Checks Cashed Here" shops in the U.S. has
blossomed in China into being a standard way of doing
business. The catch for Western firms using these invoice
services is that you get paid only in RMB, you can't
take the RMB out of China, there is a paper trail to
prove you have conducted business in China (thus you
are liable for all Chinese and U.S. taxes) and you still
must put this money into a Chinese bank, at least through
Issue 5: Allowing only
Chinese-authorized businesses to get paid.
In order to conduct business in
China, every Western firm must become an authorized
Chinese business. This is similar to getting a business
license in the U.S., but with some interesting twists.
The first step is to secure a place of business. In
China, a business must first have a physical place of
business, even before applying for a business license.
The same caution that applied for the business identifier
applies for the business license. Be careful about what
services you say your firm provides as you maybe putting
yourself into a higher tax bracket than is necessary.
Once you are given a business license with the business
identifier, it is very difficult to change. It takes
approximately 6-8 weeks to get your business license
in China, with the majority of time being spent on the
Chinese business name of your firm. Direct translations
from Western to Chinese are not common, as the Chinese
prefer you to have a Chinese business name. This process
can take on some very humorous suggestions for names
as Westerners are trying to keep the brand, name and
logos in place, while the Chinese translation of this
new name can have varied meanings in China. Once a Chinese
business license, name and identifier are established,
the Western AEC firm can then open an account with a
Chinese bank, and conduct business as usual.
It is important to note
that some of these described processes will change or
be abandoned once the transition of the Chinese banking
system to WTO standards begins in 2006. It is critical
that a Western AEC firm retain and use an experienced
international accountant who can help guide the firm
through the tax and liability issues involving the U.S.
and Chinese government requirements. Once a Western
AEC firm gets these back office systems and processes
in place in China, it becomes a wonderful place to conduct
business with enormous opportunities for all sectors
of the AEC and real estate industries.
Thanks to Paul Doherty, AIA. He is
the managing director of General Land Corp. (http://www.general-land.com),
a full-service, global real estate development firm
with a focus on the Asia Pacific market. He is an author,
educator, analyst and consultant to Fortune 500 organizations,
global government agencies and prominent institutions
and is on the board of directors of the International
Facility Management Association (IFMA). He can be contacted