Bridging the Gap between FIE Compliance Policies and Local Practices
Foreign invested enterprises (FIEs) often face the challenge of translating corporate compliance policies into local practices in China. Recent research by SBA Stone Forest shows that two thirds of local management of FIEs in China consider it very difficult to explain the gap between corporate compliance requirements and local practices in China to their headquarters. Some local management view it as a potential business and compliance risk in China.
Our research also shows that the gap between corporate compliance and local practices in China mainly arises from four areas:
- Different legal systems between China and country where FIE is headquartered
- Difference between Chinese national laws and local rules and practices
- Difference in legal effect of certain terms
- Different implementation rules for same regulation by same authority in different parts of China
A. Different legal systems between China and country where FIE is headquartered
China’s legal system is very different from foreign legal systems and does not have certain legal terms or remedies.
For example, in the area of intellectual property protection, China law does not have the accumulative compensation clause and applying for injunctions from the court is a difficult process. Given the demanding preconditions for a successful injunction application in a local Chinese court, most companies in China would typically have non-disclosure or trade secret agreements that provide for monetary compensation.
Obviously, the attempt to implement clauses drafted according to foreign law in China would face complications. Furthermore, the differences between the Chinese and foreign legal systems increase the difficulty and complexity of finalising negotiations and agreements between the FIE and local Chinese business partners.
B. Difference between Chinese national laws and local rules and practices
China is a large country where different provinces and cities may have different rules and practices based on their local situations. Although national laws in China apply to all provinces, how these laws are translated into local practices varies depending on the respective regulations of different local authorities.
A major economic city in China and location of the nation’s first Free Trade Zone (“FTZ”), Shanghai has various local regulations based on laws set by the central government. Within the FTZ area, FIEs may enjoy preferential policies that are unavailable outside the FTZ. In light of this, FIEs in China might wish to keep a close eye on local regulatory updates.
C. Difference in legal effect of certain terms
Certain terms with legal effect in the country where the FIE is headquartered may not have such an effect in China. For example, board meeting minutes may have the same legal effect as board resolutions in the FIE’s home country. But these are considered ordinary meeting minutes that do not have the legal effect of board resolutions in China. Therefore, board meeting minutes filed as board resolutions by local management to some Chinese authorities may face complications.
D. Different implementation rules for same regulation by same authority in different parts of China
Some metropolises like Shanghai have different districts with special historical conditions. Consequently, the same regulation by the same authority may have different implementation rules in different areas. For example, although all districts in Shanghai follow the same company registration regulation, different districts are required to implement it according to different rules.
If the overseas and local managements ignore the gap between FIE compliance policies and local practices, the headquarters would be unable to accurately understand the local situation in China. The effectiveness of local decision making and implementation of these decisions would also be negatively affected.
To bridge this gap and minimise the risk arising from it, businesses should take the following steps:
Step 1: Acknowledge the differences giving rise to this gap
It may be difficult for the FIE to acknowledge these differences due to familiarity with its home country’s environment. However, as China is an important market for many businesses, such acknowledgement would provide useful insights on how to improve local operations in the country.
Step 2: Establish a coordination system
The home and China offices should set up a coordination system to discuss solutions to address the gap. Such a system might also be more effective if the FIE engages external law or advisory firms for support in the home and China offices.
Step 3: Establish and monitor effectiveness of internal compliance policies for local office in China
After thorough discussions with internal and external stakeholders, the management should establish internal compliance policies for the local office in China and monitor their effectiveness.
Step 4: Coordinate with local authorities on enforcement of internal compliance policies in China
As internal compliance policies might conflict with some local filing requirements, the local management should discuss with the local authorities to see if such policies may be enforced in the area.
Step 5: Keep updating your internal compliance policies
Due to the constantly changing legal and operational environment, the management should update internal compliance policies regularly to ensure their effectiveness at all times.
Our corporate advisory support to help businesses bridge the gap
SBA Stone Forest has extensive experience in helping our clients meet their corporate advisory needs in China, including:
- Advisory on local government regulations and industry-specific policies
- Structuring of business ventures
- Deal structuring
- Capital structuring
- Corporate structuring
- Routine operational contract and agreement compliance advisory
- Assessment of company’s or other entities’ compliance risks in China
- Participation in important meetings, negotiations with reasonable advance notice
- Implementation advisory for business transactions, plans, and decisions
- Routine ad hoc general compliance advisory to management team
- Project management advisory for significant business decisions, plans, and transactions
China’s New VAT Rates and Rules Released on 23 March 2016
On 23 March 2016, China’s Ministry of Finance (MOF) and State Administration of Taxation (SAT) jointly issued Circular Caishui  36 (Circular 36). Circular 36 contains the Value Added Tax (VAT) rates and rules applicable to the extension of China’s VAT system to several key sectors such as real estate and construction, financial services and lifestyle services, and these will take effect from 1 May 2016.
The respective VAT rates applicable to each of these sectors are shown below:
|Sector||New VAT Rate||Current Business Tax Rate|
|Financial Services & Insurance||6%||5%|
|Lifestyle Services (F&B, hospitality and other services)||6%||Generally 5%, though certain entertainment services are subject to rates ranging from 3–20%|
The government also announced an extension of the due date for all industries to file the first VAT return from 15 to 25 June 2016 to allow taxpayers more time to adjust to the new VAT system. It is mandatory for businesses to be fully compliant with the new VAT system by this date. The tax authority will provide taxpayers with assistance in this area in the form of training and advisory as well as green channels in local tax bureau offices.
From now until 25 June 2016 (latest), businesses should take actions to fully prepare for implementation of the new system such as establishing controls over VAT invoicing, implementing internal processes for managing VAT risks, and conducting staff training in the areas of finance, operations, tax, legal and IT. Several rounds of refinement or amendment to the rules are expected.
Integration of Two Special Licences in F&B Industry
The PRC State Council issued its Decision on the Integration of Sanitary and Food Operation Licences in February 2016 to eliminate the need for a Sanitary Licence (the “Decision”).
Before the Decision was issued, restaurants, cafes, bars and teahouses were required to obtain both the Sanitary Licence issued by Department of Health and the Food Operation Licence issued by China Food and Drug Administration. With the Decision in effect since 3 February 2016, the Sanitary Licence has been integrated into the Food Operation Licence and is no longer required. This has made the process of setting up an F&B company easier and faster.
Promulgation of PRC Charity Law
The PRC Charity Law was promulgated on 16 March 2016 and shall come into force as of 1 September 2016 (the “Charity Law”).
According to the Charity Law, charity organisations that qualify for public fundraising shall regularly disclose the information on fundraising and implementation of charity projects to the public.
It also designates September 5 of each year as China Charity Day.
Work-related Injury Insurance Contribution Rate Adjustment in China
To further reduce the burden of work-related injury insurance premiums on employers, the Chinese government announced new industrial benchmark premium rates and related legislative adjustments for work-related injury insurance that took effect from 1 April 2016. These changes are explained below.
Categorisation of work-related injury insurance premium rates according to industry
The floating premium rates of work-related injury insurance shall be categorised into eight grades and the basic rates are specified by the government according to the relevant industries and enterprises’ service scopes.
Industrial benchmark premium rates for different industries
The industrial benchmark premium rates for employers in the eight categories of industries shall be subject to provisions on the national industrial benchmark premium rates for work-related injury insurance, namely, 0.2%, 0.4%, 0.7%, 0.9%, 1.1%, 1.3%, 1.6% and 1.9%.
Each province in China will establish detailed rules for implementation
In accordance with the principle of “payment-based collection and balance of payment”, the labour bureau of each province will define and adjust the detailed rules of working injury insurance according to each district’s economic situation and changes in industry structure.
Social Insurance Contribution Reduced in China
The Chinese government noted the nation’s high pension contribution capacity during the Central Economic Work Conference. It also said that it would study ways to lower the social insurance contribution and reduce the cost burden on businesses. Certain areas in China, such as Shanghai, Guangdong, Tianjin, Yunnan, Gansu, Hangzhou and Xiamen, have already started to reduce their respective social insurance rates.
With effect from 1 April 2016, Shanghai has reduced local pension, medical and unemployment insurance contribution rates for employers as shown below:
|Old Policy Rates in 2015||New Policy Rates in 2016|
|Work Injury (%)||0.5||0||0.5||0|
In Guangdong, the unemployment insurance contribution rate for employers has decreased from 2% to 1% with effect from 1 March 2016.
Announced in early February 2016, the unemployment insurance contribution rate for employers has been reduced from 2% to 1% in Tianjin, while the local maternity insurance contribution rate has fallen from 0.8% to 0.5%. The minimum and maximum local work injury insurance contribution rates were lowered from 0.5% to 0.2% and from 2% to 1.9% respectively.
Other Chinese cities are expected to announce adjustments to their respective local insurance contribution rates later this year.
SBA Stone Forest (SBASF) is a corporate advisory and public accounting group that focuses on serving foreign enterprises in China since 2001. Headquartered in Shanghai with offices in Beijing, Suzhou, Shenzhen, Chengdu and Hangzhou, we help help foreign investors set up in China smoothly, and thereafter support them in navigating China’s regulatory and business environment.
Our parent company — Stone Forest — is the largest accounting and business advisory group outside the Big 4 in Singapore, with a 30-year history. Discerning international businesses appreciate the advantages of our Singapore heritage, as it epitomises excellence, integrity and trust. We adopt the same systems, international standards, best practices and culture of our Singapore parent. You will work with a dynamic team with the Singapore hallmarks of quality service and delivery.
Together with our partner-owned public accounting practice, we offer quality, one-stop and seamless solutions to our clients. Working with us means you get the best of intimate local knowledge and technical know-how, delivered in the efficient and client-driven culture of international businesses. Our services include business assurance, accounting & advisory, payroll & HR advisory, tax compliance and advisory, risk management, corporate advisory and eDiscovery.
Tan Lee Lee (Ms), Director
T +86 21 6186 7602
Yeo Lee Soon (Mr), Director
T +86 10 8591 1900
Rita Boyle, Director
T +86 21 6186 7692