As Canadians Michael Spavor and Michael Kovrig linger in detention in China, Canadian entrepreneurs would be excused for being more than a little anxious about doing business in the Middle Kingdom due to the current geopolitical tensions between our two countries.
You’ll recall that the Sino-Canadian clash first emerged with the detention of Huawei Technologies Inc. CFO Meng Wanzhou, who is wanted by the U.S. government on various charges relating to the company’s business practices, including allegedly violating sanctions prohibiting commerce with Iran. She is currently awaiting an extradition hearing in Vancouver. The arrest of Spavor and Kovrig—both notable business people, and in the case of Kovrig, a former diplomat who has since been accused of spying—is widely seen as retaliation for Meng’s detention. But as I pointed out in my last piece on this issue, for the average Canadian, it’s business as usual in China.
Greater scrutiny of foreign businesspeople
We have heard anecdotes about foreigners—including at least one Canadian—being stopped by Chinese authorities during street checks and asked to produce identification. In the case of the Canadian, who spends a great deal of time in the country, he had papers on hand, presented them to police and was allowed to carry on with his day. Was this incident an anomaly? We’re hearing that street checks such as these, although once rare, are becoming increasingly frequent, with foreigners being a prime target. That said, it is still safe for Canadians to do business in China.
A best practice is to ensure that you carry ID at all times when travelling in China either for business or leisure, while making sure that any necessary business visas are valid before and during your visit to the country. If you had thoughts of carrying on business without applicable visas, now is the time to reconsider. It’s clear that the Chinese government is taking the current tensions to heart and won’t tolerate pleas of ignorance from foreigners who might claim that they ‘didn’t know’ they needed a visa to do business there.
Enhanced tax law enforcement
A more pressing issue for Canadians doing business in China revolves around personal income tax filings. It used to be the case that a foreign-born person working and living in China for 183 days or less per calendar year could live there for six years on a continuous basis without needing to disclose their income outside China, nor would that individual have to pay income taxes to the Chinese government. Under the new rule, a disclosure report must be filed with the local tax authority in order to receive the tax exemption status on worldwide income.
If a foreigner lives and works in China for a full six years, on the seventh year they’ll be required to report their worldwide income to the Chinese government. Any less than seven years and they will only be required to pay tax on income earned inside the country. In addition, if that individual travels outside of China for a period of 30 days or more at any point during those six years, the clock effectively resets and they will not be obliged to file an income tax return with the Chinese government that states their worldwide income.
Chinese citizens who maintain permanent residency in Canada or the U.S. must always report their worldwide income to the Chinese government. In fact, Chinese who maintain their birth citizenship are always exposed to Chinese filing requirements on worldwide income, no matter where they reside.
Canadian entrepreneurs need to focus on Chinese tax law compliance
Of course, these income tax rules aren’t new. They’ve existed for decades, but have rarely been enforced. As the Chinese government has become more sophisticated and diligent in its tax collection methods, and seeks out new sources of revenue, authorities there are becoming more dogged in their enforcement tactics.
The bottom line for Canadians doing business in China is that old income tax rules that were once overlooked may now be enforced to the letter of the law.
The best advice is to engage the services of both a Chinese and Canadian accountant—preferably an individual or firm with expertise in tax law on both sides of the Pacific—to navigate Chinese tax filing requirements and make sure your organization (and your personal affairs) are in full compliance with tax remittance obligations. Gone are the days when personal relationships could help a foreign business person bypass the Chinese tax authorities and evade questioning, tax enforcement or even prosecution.
The Chinese government is serious about enforcing its tax laws, and now more than ever, the business community needs to pay attention.
Jenny Lian, Partner
Contact us now for more information on doing business in China and abroad.