Posts of the Week: 6/22 - 6/28

Registering Your Trademark In The US And China On The Cheap at China Law Blog
And commentary at China Hearsay.

China's Anti-Monopoly Law. One Year On at China Law Blog

Google’s China Rift Hints At Challenges Ahead at Epicenter

The Futures Market in China at Managing the Dragon

US & EU File WTO Complaint Vs. China at China Journal

Pace of financial reform will only accelerate in China at Dragonbeat

Posts of the Week: 6/15 - 6/21

Defective Product Recalls In China. What's That? at China Law Blog

Rule of Law: ‘Harmonious’ Result in Deng Yujiao Case at China Hearsay

What’s Your Real Value in China? at All Roads Lead to China

New Tax Rebates: Full List of Commodities at China Sourcing Blog

Familiar Beijing Différance in Managing Large Enterprise Corporate Tax Risks and Compliance

“Deconstruction is not a dismantling of the structure of a text, but a demonstration that it has already dismantled itself. Its apparently-solid ground is no rock, but thin air." - J. Hillis Miller

Crucial to deconstructionism is Jacques Derrida's concept of différance. The essence of différance (if you'll allow me to ignore the paradox) is that the "complete meaning is always postponed in language; there is never a moment when meaning is complete and total" because "words and signs can never fully summon forth what they mean, but can only be defined through appeal to additional words" (shamelessly quoted from the above Wikipedia article). A recent article from the BNA Daily Tax Reports shows that the meaning of words in SAT Circulars, Circular (2009) No. 90 in particular, are always ready for a new interpretation.

Circular (2009) No. 90, "China SAT Guide for Large Enterprises to Manage Tax Risks," makes several recommendations for the internal enterprise establishment of tax control mechanisms. The controls range from the comprehensive, for significant tax risks, to the reasonable. And the circular recommends creating tax departments in various areas of an enterprise to manage these controls. The purpose of this circular is to increase compliance with China's tax code, and presumably increase tax revenues. Increasing tax revenues and combating tax evasion are high on a lot of governments priority lists right now in order fund fiscal stimulus packages.

The BNA Report points out that there are two things in this Circular that require a bit of deconstruction: "Large Enterprises;" and "suggests"/"should."

As for the "Large Enterprises" contained in both the title and body of the Circular, this ostensibly refers to the 45 enterprises overseen by the Large Enterprise Administration Department (LEAD). "Ostensibly" because under Chinese there is no limit on the types of enterprises that this Circular is making suggestions to, which includes "all companies, whether foreign or domestic, public or provate, and regardless of their size or legal structure." Eventhough the Circular might apply to foreign SMEs, if it's only a suggestion, it can't have too big of an impact foreign SMEs, right?

If only it were that simple. BNA reports that LEAD posted a memorandum on the SAT website saying that if LEAD companies don't follow the suggestions in the Circular, they'll probably "attract the attention of regional and local tax authorities." So, you don't need to follow the rules, but if you don't follow the rules you will get audited? I think someone wrote a book about this... Something to do with vague bureaucratic excess...

SMEs probably don't need to worry now, but the complete meaning of this law looks like it will be deferred until the future when even a small enterprise will need to implement internal tax controls or at least, as also provided, seek the qualified advice of China tax professionals.

Posts of the Week: 6/8 - 6/14

Copyright Administrative Punishment Implementation Rules at IP Dragon

Think You Have a Well Known Trademark. Think Again at China Law Blog

China’s Food Safety Law and Tort Reform at China Comment

The Chinese puzzle: why is China growing when other export powerhouses aren’t? by Brad Setser

Is China ready to ‘empty the bird cage’? at Dragonbeat

Form Contracts In China. You've Got To Fight The Powers That Be..... at China Law Blog

Let's Face It - Business Is Not As Usual at China Law Update

Return to Direct, Onshore PRC Investment at China Law Update

Fitch Analysts Sees Risks For China’s Banks Where Most Others Aren’t Looking at China Journal

US House to China: Hands Off Our Climate Technology at China Environmental Law

Which Comes First, The China Trademark Or The China OEM Contract? at China Law Blog

Top IP Firms in China

China Law & Practice published their list of the top IP firms in China in their May 2009 issue (I couldn't find a link to their web version of the article). Here's the breakdown by region for China Law & Practice's top IP firms in China.

International Firms
Baker & McKenzie
Bird & Bird
Lovells
Rouse
Wilkinson & Crist

Beijing
CCPIT Patent & Trademark Law Office
China Patent Agent
Kangxin Partners
King & Wood
Liu Shen & Associates
Zhongzi Law Office

Chongqing
Chongqing Overseas Law Office
Exceedon & Partners
Solton & Partners
Zhonghao Law Firm

Guangzhou
GFE Law Office
Kingson Law Office
Scihead Patent Agent
Wang Jing & Co.

Hangzhou
Capital Equity Legal Group
Grandall Legal Group
High Mark Law Firm
Zhejiang T&C Law Firm

Nanjing
Jiangsu Way-to-Justice Law Firm
Jin Ding Partners

Qingdao
Deheng Law Firm
Qindao Law Firm
Shandong Qingtai Law Firm

Shanghai
Allbright
China Patent Agent
Creatop & Co.
HFG Intellectual Property
Kangxin Partners

Shenzhen
China Commercial Law Co.
Deheng Law Firm
Kingson Law Office
V&T Law Firm

Tianjin
Join & High Law Office
Mingzhou Law Firm

Interestingly, several of these firms are members of the Sino-Global Legal Alliance which was launched by Lovells in 2007.

Posts of the Week: 6/1 - 6/7

China Environmental Law Blog on the Copenhagen Countdown:
China's Climate Change Position
T-6 Months Wrap Up
No Climate Deal Without China?

Survival and Growth of Chinese PEs and VCs at China Law Update

Current Situation and Anticipated Trend of Foreign Investments in China's Real Estate Market at China Law Update

What is Up With the Taxation of SOEs? at Experience Not Logic
Made it here by virtue of the excellent comments.

China Contract Protections And It Ain't Just Scrap at China Law Blog

Foreign Real Estate Development In China. Long Term Leasing As A Way To Go at China Law Blog

Hot Water In China? Don't Get Burned: The Conclusion by Aimee Barnes

Interview with International Lawyer and FCPA Specialist, Richard Cassin by Aimee Barnes

Trade - it's not just the currency at China Financial Markets
And commentary at China Hearsay.

China Contract Law: Going All Clear On Us Now at China Law Blog

New Special Section from Knowldege@Wharton on Manufacturing in China

Knowledge@Wharton has just released a Special Report prepared in conjunction with the Boston Consulting Group which is all the future of manufacturing in China, New Challenges for "Made in China." Here are some very brief summaries of the articles.

Rising Giants: Industrial Clusters Are Changing the Face of Chinese Manufacturing
The thesis of this article is that China's industrial sectors are geared towards clusters, a theoretically strong driver of industrial and economic growth, and foreign investors might just want to take advantage of clusters. But the authors warn that you better do your research on region the cluster is located in, and the specific cluster itself.

China's Growing Talent for Innovation
The thesis of this article is that companies can do their R&D in China, but they face some specific challenges. The main benefit includes a lot of raw and inexpensive engineering talent. Challenges include:

• Research capabilities are still weak compared to other areas.
• Inflationary pressure on wages might exceed growth in productivity.
• IP protection is still to weak.

The challenge analysis could have been longer... Maybe a little to "ra-ra."

Raising the Bar: Can China Meet the Quality Challenge?
The thesis of this article is that the quality "issue" is really just "misplaced assumptions and perceptions on both sides." Dude, the Chinese build iPods. The real issue is that parties on both sides just aren't understanding the quality specifications in the manufacturing contracts. I've only had the pleasure of working on contracts with tight specifications, but the report says that too often MNCs are using the exact same sourcing contracts in China that they use in the rest of the world.

Chinese Manufacturing in an Age of Resource Price Volatility
The thesis of this article is that expected future volatility in the energy market will have a positive effect on competition. As manufacturing becomes more expensive, low-value WILL move inland and abroad, and China's manufacturing sector MUST move up the value chain.

The Dragon Turns Green: China's Manufacturers Adapt to a New Era
The thesis of this article is that China will be promulgating and enforcing tougher environmental regulations, and foreign companies will be scrutinized more early and more often. The article suggests ways to start going about complying.

The Special Report is nice. Maybe a bit too optimistic, shying away from the controversy and negativity. Oh, well, there are still things to learn.

And Asia is Now the #1 Source of Foreign Earned Income for US Taxpayers

Recent report in the BNA Daily Tax Report on the just released Spring 2009 Statistics of Income Bulletin from the IRS announces that Asia eclipsed Europe in 2006 as the continent where US taxpayers had the highest amount of foreign earned income. The $14.7 billion of foreign earned income in Asia represents a 29.1% real dollar growth over 2001. Though the increase in income in Iraq from $0 in 2001 to $1.8 billion 2006 drove a lot of this increase, foreign earned income in China also made a contribution to growth with a real increase of 110.2% to $1.7 billion. With regards to China, this must mean one of five things:

1) US citizens working in China earned 110.2% more in 2006 than in 2001;
2) There were 110.2% more US citizens working in China in 2006 than in 2001;
3) There were less US citizens working in China in 2006 than in 2001, and they earned proportionally more than 110.2% in 2006 than in 2001;
4) There were more US citizens working in China in 2006 than in 2001, and they earned more per capita in 2006 than 2001; or
5) There were more US citizens working in China in 2006 than in 2001, and they earned less per capita in 2006 than 2001.

If we assume that the number of US citizens working in China increased during this time, then we can eliminate 1-3. I'm going to pick number 4 for bubbalicious reasons (as 2001 was a year after one bubble burst and 2006 was the year in which another burst) and because I can't find good data on the number of US citizens living in China in 2006 and 2001 which would give us the correct answer.

It should be noted that foreign earned income refers to income earned by US citizens performing personal services in foreign countries.

What is Up With the Taxation of SOEs?

Have you ever wondered if SOEs get taxed? If they do get taxed, why? I knew that SOEs were owned by the state, but I had never made the leap to think about how the state benefits. If you asked me, I guess I would say through distributions... But how can shareholders, even a government shareholder, compel distribution? Well if these questions have ever taxed your mind, even if a newly promulgated tax on thought, I'd recommend reading Income Taxation of State-Owned Enterprises: Theory and Chinese Evidence by Professor Cui Wei of China University of Political Science and Law. I'm going to briefly summarize Professor Cui's description of the traditional theories on SOE taxation, and then summarize his theory of why SOEs are taxed. But first, some threshold issues.

SOEs in China, and in many countries, are subject to income taxation. In China, they are subject to the same tax as private enterprises under the EIT, though SOEs do tend to be among the most aggressive in seeking favorable tax treatment. Tax on SOEs might be conceptualized as a distribution by the SOE to its shareholder, the government. This carries one major caveat: the shareholder does not pay any tax on its constructive distribution which eliminates considering the important tax planning issue of structuring distributions to best advantage the shareholders' tax liabilities.

The first theory for SOE taxation is that "SOEs are taxed because they have mixed public and private ownership." Professor Cui does not think that this explains SOE income taxation because there is no good reason why an SOE with mixed ownership should be taxed in the same way as a private firm.

The second theory for SOE taxation is that "SOEs are taxed because the government that owns them is not the government that taxes them." In federalist countries such as China, SOEs can be subject to a dual layer of provincial and national taxation. Even though an SOE might be owned at a provincial or municipal level, part of its constructive distribution is withheld in Beijing with the rest distributed to the local governments to cover the SOEs tax liability at and below the provincial level. Professor Cui argues tha this explanation fails because there are much better ways than the income tax system for equitably distributing an SOEs profits.

The third theory for SOE taxation is that "SOEs should be taxed because that is necessary to ensure that they are competitively on an equal footing with private firms." Professor Cui notes that this view may be prevalent in developing countries. Professor Cui concedes that competitive reasons are a fair explanation for other taxes such as VAT, but "the price affected by the corporate income tax is the price of capital, and SOEs and private firms generally do not compete for the same investors, unless the SOEs are being privatized." Thus any income tax is simply a burden borne by the government because different tax rates for SOEs' profits would have no effect on SOEs' ability to attract more government capital.

Instead of relying on these theories, Professor Cui proposes that SOEs are taxed, at least in China, for the sole purpose of ensuring (and forcing) periodic distributions to the government shareholder. Professor Cui argues that for his theory to prevail, SOEs must be averse to the payment of income tax. Despite their tax paying braggadocio, Professor Cui points to substantial evidence that China SOEs are as averse as their private enterprise counterparts to paying tax, thus substantiating his theory.

All in all a fine read, and I look forward to further refinements to Professor Cui's analysis as many of the questions he leaves unanswered for lack of evidence are fielded.