One of our clients is coming to the end of its contract term with the bulk of its China employees. They wrote Steve asking him some questions regarding fixed term employment contracts under Chinese law. Steve's reply is a made to order blog post, so here goes:
Pursuant to Chinese law, you are permitted to enter into two fixed term contracts with an employee. The term of these contracts can be any fixed term that is agreed between the parties. Typically, in China, the term ranges from one to five years. At the end of the second fixed term contract, you have two choices. You can chose not to continue the employment relationship or you can chose to continue the employment relationship under an open term relationship.
An open term relationship requires a written contract. This contract has no term. It terminates only under the following circumstances: 1) the employee voluntarily resigns, 2) the employee reaches retirement age or 3) the employee is terminated for "cause." Termination for cause is complex and difficult in China. There are two basic areas for cause. In the first, the employee has committed a crime like theft or a gross breach of conduct rules, such as arriving to work drunk. In this case, termination is straightforward. In the second, the employee shows up to work on time and follows all the rules, but is simply incompetent. In the current situation in China, it is virtually impossible to terminate an employee who falls into this second category.
Accordingly, you should never enter into an open ended employment relationship with an employee who you suspect will fall into this second category. However, it is often hard to predict. In actual practice, there are various ways companies deal with such employees. However, the fact is that an employee with a "thick face" who is willing to earn minimum wage and engage in dead end tasks is very difficult to terminate under the current Chinese system.
China's labor laws are new, so many of the issues have not yet been fully worked out. However, the trend is towards increased employee protection and not towards more employer freedom. The trend is the same in Europe, so there is nothing unique about the Chinese approach. China follows a European approach and that is the place to look for analogy. The U.S. is NOT the place to look to for guidance; the Chinese system is as different from the U.S. as any system could be.
703 million. (h/t Shanghaiist) Think about that for just a minute. That's about 2.5 times the population of the United States.
More than three years ago (gosh, have we really been here that long??!!) I did a post on how China had hit 410 million cell phone users. In that post, I stated the following:
I love this sort of hard number because to me it is a very accurate way to measure China's growth and increasing wealth, perhaps even more so than a more standard measure like per capita income, which can be easily manipulated and whose impact is heavily dependent on living costs.The way I see, it, if someone can afford a mobile phone, they are a legitimate potential buyer of Western products and a legitimate potential customer for Western retailers.
The comments to that post (and some of our other posts) questioned the validity of the number. I recall someone saying that the number reflected the fact that many users had two phones. One for business and a "black phone" for the mistress. Another comment was along the lines of how many people in China, particularly rural areas, had a phone because it was absolutely necessary for their micro business and so having a phone does not one for one translate into someone being in the middle class.
I agree with all the criticisms of linking China's cell phone numbers to numbers of Chinese middle class, but I persist in believing there is a correlation. And if there is a correlation, then the numbers of China' middle class have risen considerably since 2006.
What do you think?
Read more: China Has 703 Million Cell Phone Users. The Middle Class Is Rising.
The Eileen Eats blog did an excellent, though very disquieting, post on the state of Chinese food. The post is entitled, "Food Safety– Can’t let your guard down," and it has the following money quote:
Hung Huang, chief executive of the China Interactive Media Group in China, said recently in an article in the New York Times that China as a nation of food lovers is going on a diet. “Not because we don’t love to eat anymore,” she said, “but because we just don’t know what is safe to eat.”
CLB's own Steve Dickinson wrote a Wall Street Journal column earlier this year, entitled, "Food Fumble," discussing how China's new food safety laws will do little to solve China's food safety problems.
What will work? When will it work? What do you think?
My wildly unscientific observations tell me that about nine out of ten companies that go into China legally end up succeeding. My wildly unscientific observations also tell me that about eight out of ten companies that go into China illegally end up failing within a couple of years. Of the other two companies that went into China illegally, one usually becomes legal within a few years and ends up suceeding and the other one ends up failing a few years later.
I have no idea on the accuracy of my statistics, but I truly do make an effort to keep up with every company that contacts my law firm. I do this by every six months or so sending an email asking them how things are going in China. These emails go to those companies that chose not to retain my law firm, but instead to do things illegally in China, and to those that did. No science here, but a bit more than a feeling....
I thought of all that today when I read in the highly respected Economic Observer of how China is cracking down big time on China Rep Offices. Let me start out by saying that I am generally (not always) not a big fan of Rep Offices and that for every WFOE my law firm registers for our clients, we probably do around one Rep Office. The biggest problem with Rep Offices is that their utility is limited. Rep Offices are not to make money in China. Rep Offices are mostly to be used to market the home office. The Rep Office is not to engage in sales within China. The last Rep Office we did was for a US company that makes multi-million dollar equipment in the United States. The point of the Rep Office was to market that equipment within China, with the contracts for the sale of that equipment to be with the US company and the payments for that equipment to go to the US company and the manufacturing of that equipment to occur in the US, and the shipment of that equipment to come from the US to China. So far, near as I know, all of the sales have been from our US client to US and other foreign businesses doing business in China. These businesses pay our client in US dollars, all outside China, no problem. That is a legitimate Rep Office.
The problem is that Rep Offices are easier and cheaper to form and register in China than Wholly Foreign Owned Entities (WFOEs). This sometimes leads cash-strapped companies to want to start in China as a Rep Office and then later convert to a WFOE. This is usually a bad idea. It is a bad idea because if your China based business operations in China do not legally entitle you to operate there as a Rep Office, you are operating there illegally. Some may believe that operating in China as a Rep Office is better than operating in China without having registered as anything at all, but I am not so sure. I have absolutely no evidence to back this up, but my sense is that if you are going to operate illegally anywhere, you are probably going to be better off being entirely off the gird, than half on it.
Starting as a Rep Office with plans to convert to a WFOE at some later date is also usually a bad idea because the conversion is not likely to be smooth. It is not as though one can start as a Rep Office and then smoothly file one piece of paper with some governmental office saying "I want to convert to a WFOE now, so here is my 10,0000 RMB conversion fee." No, not at all. The way one "converts" to a WFOE from a Rep Office is more like having to go through all of the rigmarole of shutting down the Rep Office in China (no small task) AND having to go through the whole rigmarole of forming a WFOE from scratch.
I mention all this because I have just learned from the Economic Observer (a highly regarded Chinese publication) that China has stepped up its crackdown on illegally operating foreign Representative Offices. The article is entitled, "China Cracks Down on Foreign Representative Offices," and it makes a whole lotta sense. To grossly summarize, it says that the Chinese government is sick and tired of full fledged businesses operating in China as Rep Offices and it is going after those businesses that are doing so. It is increasing the fines to 500,000 RMB (around USD$75,000) and stepping up enforcement. The article talks about how the government is looking at a shortfall in 2009 tax collection and going after illegally operating Rep Offices is one of the measures it will be taking to increase collections.
No surprise to me....
Read more: Representative Offices In China. Things Just Got More Difficult/Expensive.....
Ernst & Young is out with a very informative online publication on indirect taxes in China (h/t All Roads). The publication is entitled, "Navigating Chinese Indirect Taxes," and it provides a great overview of these taxes and how they can, and almost certainly will, impact your China business. It starts out with the following general comments regarding indirect taxes in China:
Indirect taxes (specifically Value Added Tax, business tax, customs duty and consumption tax) play an important role in China, accounting for almost 60% of the government’s tax revenue. Newly revised regulations are changing how indirect taxes are treated in China. But these are often the forgotten tax on business. Tax directors may overlook these costs as they are above the line and usually not directly visible within the accounts or financial statements.We are often surprised to learn that many companies have yet to grasp the significance of the indirect taxes passing through the organization. More often than not, indirect taxes are viewed as process-oriented throughput costs rather than as a direct charge to the bottom line that should be managed through proactive and concerted efforts. It is not common for companies in China to employ dedicated resources accountable for the risks and costs that arise from processing indirect taxes. This approach creates risks and results in missed savings opportunities.
I am constantly telling our clients that taxes in China are really not all that different from taxes in the United States. China's business tax system is generally (cough, cough) logical and manageable and is not to be ignored. What this means is that if you are a small to mid-sized company doing business in China legally, you need someone either inside or outside your company handling your financial books and you need a good accountant overseeing it all. Because you are a foreign business and your operations may have tax repercussions not only in China, but also in your home country, it almost always will make sense for your accountant to at least be familiar with both China's tax laws and those of your home country. These people are few and far between and cannot be found at all outside China's bigger cities.
What do you think?
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