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How Overseas Companies Can Capitalize on CEPA Opportunities? David Cho Partner 29 October 2003

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How Overseas Companies Can Capitalize on CEPA Opportunities? David Cho Partner 29 October 2003. What is CEPA? CEPA stands for Closer Economic Partnership Arrangement between the Mainland and Hong Kong. What does it say? It covers three areas namely: Trade in Goods Trade in Services

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Presentation Transcript
slide2
What is CEPA?

CEPA stands for Closer Economic Partnership Arrangement between the Mainland and Hong Kong

slide3
What does it say?

It covers three areas namely:

Trade in Goods

Trade in Services

Trade and Investment Facilitation

slide4
Trade in Goods

Zero import tariff for certain goods from Hong Kong to the Mainland meeting the rules of origin

slide5
What are they?
  • Electrical and electronics products
  • Plastic articles
  • Paper articles
  • Textiles and clothing
  • Chemical products
  • Pharmaceutical products
  • Clock & watches
  • Jewelry
  • Cosmetics
  • Metal product
slide7
Further product types will benefit upon application by Hong Kong manufacturers.
  • The Hong Kong Trade and Industry Department to inform the Ministry of Commerce before 1 June each year for mutual consultation in order to gain zero import tariff benefit on 1 January of the following year.
slide8
However

Import – Stage VAT will still be levied by Customs authorities on Hong Kong goods entering into the Mainland

VAT payable = Tax rate x (CIF value + customs duty + consumption tax *)

CIF = Invoice price plus packing, freight, insurance, and other service fees incurred before unloading at the port of

discharge.

* Only applies to certain types of luxury goods such as cosmetics and jewelry.

slide9
More competitive to export goods to Mainland than other countries

Encourage investors to set up manufacturing plants in Hong Kong for goods targeting at Mainland market

slide10
Hong Kong profits tax implications for local manufacturing operations
  • Territorial concept
  • Broad guiding principle: one looks to see what the taxpayer has done to earn the profit
  • All manufacturing activities performed in Hong Kong
  • Subject to profits tax at 17.5% of assessable profits for 2003/04
trade in services
Trade in services

CEPA provides for liberalisation in market access in 18 sectors, namely:-

  • Management consulting services;
  • Convention and exhibition services;
  • Advertising services;
  • Accounting services;
  • Real estate and construction services;
  • Medical and dental services;
  • Distribution services;
  • Logistics services;
  • Freight forwarding agency services;
trade in services1
Trade in services

CEPA provides for liberalisation in market access in 18 sectors, namely (Continued) :-

  • Storage and warehousing services;
  • Transport services;
  • Tourism services;
  • Audiovisual services;
  • Legal services;
  • Banking services;
  • Securities services;
  • Insurance services; and
  • Telecommunications services.
slide13
Generally speaking, CEPA
  • Allows earlier access by Hong Kong enterprises to the Mainland market ahead of the Mainland’s WTO timetable.
  • Lowers the thresholds for setting up domestic enterprises in the Mainland
slide14
For example

Advertising services

Under CEPA, Hong Kong companies are permitted to establish wholly-owned advertising firm in the Mainland 2 years ahead of the China’s WTO timetable.

slide15
Another example
  • The entry requirements for Hong Kong companies to set up wholly foreign owned retail commercial enterprise in the Mainland (excluding tobacco) are lowered.
  • Minimum average annual sales value of the enterprise in the previous 3 years is lowered from US$2 billion to US$100 million.
  • Minimum asset in the last year prior to application is lowered from US$200 million to US$10 million.
  • Minimum registered capital of the Mainland enterprise is lowered from RMB50 million to RMB10 million.
slide16
Business Models for Foreign Investments in the Mainland and Overview of the Mainland Taxation System
slide17

Types of Foreign Investments

  • Basically 3 categories:-
    • Foreign Investment Enterprise;
    • Foreign Enterprise with Establishment in the Mainland; and
    • Representative Office
slide18

Foreign Investment Enterprise (“FIE”)

    • Equity Joint Venture (“EJV”)
    • Co-operative Joint Venture (“CJV”)
    • Wholly Foreign Owned Enterprise (“WFOE”)
slide19

Foreign Investment Enterprise (“FIE”)

    • Separate legal entities as distinct from their investors (CJV has a choice to elect)
    • Approval from Ministry of Commerce
    • Minimum foreign interest is 25%
    • Subject to Mainland income tax on worldwide basis
slide20

Foreign Enterprise with Establishment in the Mainland (“FE”)

    • Not separate legal person
    • Subject to Mainland income tax on Mainland income as attributable to the Establishment
slide21

Foreign Enterprise with Establishment in the Mainland (“FE”)

    • Definition of establishment
      • place of management or administration
      • place of business or branch
      • representative office
slide22

Establishments also include

  • building site, construction project
  • places where personal services are provided
  • business agent
slide23

Representative Office

    • Most preliminary form of establishment
    • Cannot conduct business in terms of manufacturing or production activities, or engaging in sale or marketing
    • Can perform customer liaison and market research or ancillary activities for foreign enterprise
    • In most cases, subject to Mainland tax on the cost-plus method
slide24

Overview of major types of Taxes in the Mainland

    • Foreign Enterprise Income Tax
    • Individual Income Tax
    • Value Added Tax
    • Business Tax
slide25

Foreign Enterprise Income Tax

    • Taxable income less allowable deductions = taxable profit
    • Standard tax rate is 33% (30% national tax plus 3% local surcharge)
    • Could be reduced to 24% (open coastal cities) or 15% (special economic zones)
slide26

Foreign Enterprise Income Tax

    • Taxable Income
      • Means all income arising from “production, business operations and other sources”
slide27

Foreign Enterprise Income Tax

    • Deductions:-
      • Management fees paid by an FE to its overseas headquarters (not management fees paid by FIE to associated enterprise)
      • Interest expenses
      • Entertainment expenses
      • Wages and salaries
slide28

Foreign Enterprise Income Tax

    • Deductions:-
      • Bad debts
      • Donations
      • Depreciation charges
      • Losses (carried forward to next 5 years)
slide29

Foreign Enterprise Income Tax Incentives and Exemptions

    • Reduced tax rates (24% or 15% depending on location);
    • Tax exemption and reduction periods; and
    • Refunds of tax on reinvested profit
slide30

Individual Income Tax

  • Individual Income Tax - Tax liability flowchart

Taxpayer’s Status

Tax Liability

Yes

Domiciled in the Mainland?

Subject to tax on worldwide income

No

Expatriate living in the Mainland for more than five years?

Yes

Subject to tax on worldwide income

No

Subject to tax on the Mainland sourced income as well as foreign-sourced income paid by individuals or enterprises in the Mainland

Yes

Expatriate living in the Mainland for one year or more?

No

slide31

Individual Income Tax

No

Expatriate living in the Mainland for more than 90 days (183 days if tax treaty is applicable)?

Yes

Subject to tax on the Mainland-sourced income

No

Subject to tax on employment income paid or borne by the Mainland establishment

Temporary visitor and employment remuneration paid or borne by the Mainland establishment?

Yes

No

Temporary visitor and employment remuneration paid or borne by overseas establishment

Exempt from individual

income tax

Yes

slide32

Individual Income Tax

    • Employment income includes:-
      • wages and salaries
      • bonuses
      • Cash allowances (exceptions: housing allowance, meal allowance, relocation allowance and laundry expense)
slide33

Individual Income Tax

    • Deductions to Employment Income:-
      • monthly deduction RMB 800
      • additional deduction of RMB 3,200 for expatriates
    • Wages and salaries are subject to tax at progressive rates ranging from 5% (monthly taxable income ≤ RMB 500) to 45% (monthly taxable income > RMB 100,000)
slide34

Value Added Tax (“VAT”)

    • A kind of turnover tax that is levied on sale of goods, the provision of processing or repair services within the PRC, or the importation of goods into the PRC
    • Levy rate : 17% for most commodities
    • VAT payable : Output VAT - Input VAT
slide35

Business Tax (“BT”)

    • Another kind of turnover tax that is levied on provision of taxable labour services, the assignment of intangible assets, or the sale of immovable properties, within the PRC
    • Calculated on the gross turnover
    • Tax rates are 3%, 5% or 20%
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