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Q: As an AEC firm, I’ve heard rumors that it is difficult to get money earned in China out of China. Is this true?

A: 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 exchange rates.

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 2006.

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 at pdoherty@general-land.com.

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