Cash management in Latin America and China: Difference between pages

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  |above        = Cash management
  |above        = KEY COUNTRY FACTS
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  |image        = [[File:Treasurers_handbook_image.png|285px|alt=Treasurers Handbook]]
  |image        = [[File:Flag_china.png|border|160px|alt=Flag_china.png]]
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  |header1 = Authors
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  | label1 = System of government:
  |  data1 =  
  |  data1 = one party state
  |header2 =  
  |header2 =  
  | label2 = Gustavo Casanovas
  | label2 = Population:
|  data2 = 1.36 billion
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| label3 = Currency:
|  data3 = renminbi/yuan (CNY)
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| label4 = FX regime:
|  data4 = managed float
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| label5 = GDP:
|  data5 = US$9.33 trillion (2014)
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| label6 = IGTA member:
|  data6 = yes
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| label7 = FATF member:
|  data7 = yes
|header8 =
| label8 = Treasury association:
|  data8 = [http://www.igta.org/member-detail.php?id=31 International Association of CFOs and Corporate Treasurers (China)]
|header9 =
| label9 = Other professional financial/banking associations:
|  data9 = [http://www.sbacn.org Shanghai Banking Association]
[http://www.china-cba.net China Banking Association]


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Odette Izquierdo


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==Financial regulatory framework==
Latin America Region Head for Payments, Receivables and Commercial Cards, Citi
===Bank supervision===
The PBC was responsible for banking supervision until 2003. As part of a package of reforms designed to improve the stability of the Chinese banking system, the China Banking Regulatory Commission (CBRC) was set up to supervise banks and other financial institutions.
Alongside the CBRC are separate commissions regulating China’s securities market (China Securities Regulatory Commission) and insurance industry (China Insurance Regulatory Commission).
The State Administration of Foreign Exchange (SAFE), operating under the auspices of the PBC, manages China’s external debt and oversees the country’s exchange controls.


Latin America Region Head for Liquidity Management Solutions, Citi
===Exchange controls===
The currency in China is the renminbi (RMB) and the currency unit is the yuan.
China continues to apply exchange controls, although there has been some relaxation in recent years. Companies are now permitted to keep foreign currency receipts and retain them in their current account according to their operational needs rather than within a quota.
Outward direct investment is permitted and there are no limits on the amount of foreign exchange that can be purchased for overseas investment. Companies are now permitted to pay initial expense costs with foreign currency, in advance of any direct outward foreign investment.
The restrictions on the number of banks permitted to provide RMB forward foreign exchange and non-RMB foreign exchange transactions have been relaxed.
Non-residents are permitted to establish entities in China, subject to approval from the Ministry of Commerce or the relevant local agency.
Any company in China is permitted to invest forward foreign exchange earnings in overseas branches, subject to approval from SAFE. This approval process is also being simplified in order to encourage greater overseas investment by domestic firms.


==Taxation framework==
===Corporate income tax===
The Enterprise Income Tax Law (EITL) governs both foreign investment and domestic-funded enterprises under a single unified tax system.
The EITL taxes both domestic and foreign enterprises at a flat rate of 25%, with the same expense deduction criteria and available tax incentives.
The principal incentives include a 15% preferential tax rate applicable to new/high-technology enterprises and a 50% super deduction for qualifying R&D expenditure. There is a geographically based incentive focused on new/high-technology enterprises established as from 2008. The incentive (in addition to the 15% rate that applies to all new high-technology enterprises) is a two-year tax holiday followed by three years at a 12.5% rate. The 15% preferential tax rate also is granted to qualified high-tech service enterprises in 21 specified cities between 1 July 2010 and 31 December 2018. Encouraged industries in certain regions (e.g. western China, Hengqin (Guangdong), Pingtan (Fujian) and Qianhi (Shenzhen)) can enjoy a reduced 15% enterprise income tax rate until 31 December 2020. Tax exemptions and other preferences apply to the agriculture, forestry, animal husbandry and fishery sectors, software and integrated circuit industries, major infrastructure projects, certain environmental projects and certain transfers of technology.


===Taxation of dividends and interest===
Although the EITL provides for a 20% withholding tax, the rate is reduced to 10% under the implementation rules.
Chinese-sourced income (including dividends, interest, royalties and other payments derived by foreign enterprises without a permanent establishment in China or where the income generated is not effectively connected to the foreign enterprise’s establishment in China) is subject to withholding tax.
Dividends paid to a foreign investor or a foreign investment enterprise were formerly exempt from withholding tax, but the situation has changed under the EITL, with a 10% withholding income tax introduced. Specific guidance (Caishui [2008] No 1) further clarifies that the retained earnings of a foreign-invested enterprise accumulated up to 1 January 2008 that are distributed to its foreign investors in or after 2008 are still exempt from withholding tax. Profits newly created in 2008 and later years that are distributed to non-resident corporate investors are subject to a 10% withholding income tax unless a preferential treaty rate is available under a tax treaty (or a tax arrangement).


===Transfer pricing===
China has transfer pricing rules. China has adopted a broad definition of associated enterprises with a strong emphasis on control. An entity with significant control over the taxpayer’s senior management, purchases, sales, production and the intangibles and technologies required for the business is defined as a related party. Accepted methodologies are the comparable uncontrolled price, resale price, cost plus, transactional net margin, profit split and other methods in compliance with the arm’s length principle. Contemporaneous documentation is required (with certain exemptions) and cost sharing agreements may be used for developing intangible property or for shared services arrangements.


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===Thin capitalisation===
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China imposes mandatory debt-to-equity ratios for foreign-invested enterprises, and the equity of a foreign-invested enterprise should be paid up within a stipulated time period.
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The EITL has a thin capitalisation rule, which is further specified in specific rules (Caishui [2008] No 121): a debt-to-equity ratio of 2:1 for general enterprises and of 5:1 for financial enterprises. A deduction is not allowed for interest expenses incurred on any related-party debt investments exceeding these debt-to-equity ratios, unless the underlying transactions are in compliance with the arm’s length principle (demonstrated through contemporaneous documentation), or the interest expenses are payable to domestic-related parties subject to higher effective tax rates. The implementation rules of the EITL clarify that “debt investments” refers to arrangements where an enterprise has directly or indirectly acquired financing from related parties, and where the enterprise is required to repay the principal and make interest payments to the lending party (or any other form of compensation which is of an interest payment nature).


==Introduction==
===Controlled foreign companies===
Latin America is currently facing a challenging economic and political outlook, with growth forecasts expected to be cut and downgraded throughout most of the countries, including the largest markets. For example, Brazil’s GDP is expected to contract this year by 1.4% after four consecutive quarters of decline. Even though the region has grown in the past decade and has established itself as an important global economic force, Latin America is in the midst of a labyrinth and must navigate several global and domestic obstacles, including lower commodity prices and new types of financial risks, to ensure strong and sustainable growth. The region’s dependence on commodity exports and the recent decline in trade dictate that countries must make fiscal adjustments to avoid higher debt without compromising gains of past years.
Under the CFC rule in the EITL, where an enterprise is “controlled” by enterprises resident in China or jointly “controlled” by Chinese resident enterprises and individual Chinese residents, is established in a country or region where the effective tax rate is lower than 12.5% (the new tax rate under the EITL) and the CFC either does not distribute profits or distributes less profit than it should (without justification), then a portion of the CFC’s profits will be attributed to the Chinese resident enterprise and included in the latter’s taxable income in the current period.  
The implementation rules further clarify that the term “significantly lower” than the effective tax rate of 25% means that the effective tax rate is less than half of the 25% tax rate. In addition, the term “controlled”, as cited above, includes: a resident enterprise or an individual resident of China directly or indirectly holding 10% or more of the total voting shares, and such resident enterprise(s) or individual resident(s) jointly holding more than 50% of the total shares of the foreign enterprise; and cases where the shareholding percentage of the resident enterprise(s) and individual resident(s) of China does not meet the percentage standard as stipulated above, but substantial control is formed over the foreign enterprise in respect of shareholding, financing, business, purchase and sales, etc.


The sub-regions have notable growth differences mainly due to Central American trade relations with North America and South Americas’ previously mentioned dependence on commodity exports. Local macroeconomic trends in South America have contributed to the slowdown, including modest growth in Argentina led by public spending but hampered by double-digit inflation and weak soy prices. Brazil has been impacted by China’s slowdown, political turmoil, inflation and low export prices. Venezuela is living through declining oil prices, inflation and currency and price controls. On the other hand, Mexico and Central America are growing by 2.4% supported by high demand from the US and record-level tourism in Dominican Republic and other Caribbean economies. In financial markets we have seen international banks not willing to lend due to the balance sheet restructuring of recent years. During 2015 attractive pricing and terms for borrowers have made cross-border lending gain ground. Having the lowest rates in the last ten years in 2014, equity issuance is likely to remain low as uncertainty in the region persists. Regional currencies have depreciated against the dollar in nominal terms, particularly in Argentina, Brazil and Peru. However, high rates of inflation caused them to appreciate in real terms in 2014.
===Capital gains tax===
For resident companies with foreign investments, capital gains are taxed as part of a company’s taxable profits at the applicable corporation tax rate. Capital gains derived from the transfer of equity interest are calculated as the difference between the sale proceeds and the original cost of the investment. Specific guidance (Guoshuihan [2010] No 79) further clarifies that undistributed profits and other reserves of shareholders are included in the computation of capital gains.
Chinese-sourced gains derived by foreign companies from property transfer are generally subject to a 10% withholding income tax under the implementation rules of the EITL.
Specific guidance released by the SAT (Guoshuihan [2009] No 698) addresses the transfer of an equity interest by non-resident companies. It outlines reporting requirements and taxation guidelines for non-residents’ direct and indirect transfers of Chinese resident companies’ equity interests. A 10% withholding income tax will generally be imposed on the gains from the transfer of a Chinese resident company by a non-resident company unless an exemption is available under a tax treaty. Subject to the SAT’s approval, the tax authorities may disregard the existence of an offshore intermediary holding company and tax the transfer of its shares in China where the parties to the transaction are considered to have abused the legal form and conducted the transaction with a view to avoiding Chinese tax, without bona fide commercial purposes.  


==Treasurers’ priorities==
===Indirect taxes===
Latin America’s potential has attracted many multinational corporations to the region and prompted those already operating – as well as multi-Latinas – to expand their operations. Treasuries must cope with the challenges of supporting the business in an environment of uneven growth and increasing complexity. Efficient funding is an important priority for treasurers in Latin America. If a corporate operates in multiple markets across the region, it is essential to take decisions in a timely manner in order to optimise working capital and liquidity. Increased visibility over cash balances and accurate, frequent cash flow forecasting are essential to fulfil these objectives and enable the business to achieve its strategic goals. Better visibility and control of cash also reduce the need for external funding and enable idle cash to be deployed, resulting in increased balance sheet efficiency.
VAT is generally levied on the sale of goods, the provision of repair and replacement services, and the importation of goods into China. The taxpayer will be responsible for output VAT based on taxable income, while the input VAT paid on the purchase of goods or services should be available as a credit to offset against output VAT. The standard VAT rate is 17%, but there is a reduced rate of 13% (for food grains, tap water, heating, natural gas, books, feeds, fertilisers). Generally export goods attract a zero rate of VAT.
The VAT reform programme, which was launched in Shanghai on 1 January 2012 and expanded nationwide on 1 August 2013. The aim is to transition service industries from liability to Business Tax to liability to VAT. The reform applies to the transportation industry, certain modern service sectors (e.g. R&D and technology services, leasing of moveable and tangible goods, etc.), postal services and telecommunication services.
The standard VAT rate is 17%, with a lower rate of 13% applying to certain foods, goods, books and utilities. A 3% rate applies under the small-scale taxpayer scheme. Lower rates apply to certain transactions involving used goods. Exports generally are zero-rated. The rates under the VAT reform program are as follows:
• 17% for the leasing of movable and tangible goods;
• 11% for the transportation sector, postal and basic telecommunication services; and
• 6% for value-added telecommunication services and other modern services. s.


A second priority for treasurers in Latin America is managing market changes. These include the migration from paper-based to electronic processes as well as staying well informed of regulatory changes. There has been a huge range of new global regulations since the financial crisis of 2008, such as Know Your Customer (KYC) and Basel III requirements. Also, domestic regulations continue to evolve. For example, in Mexico a fiscal law requires tax deductions of $150 or above to be made directly to the beneficiary rather than to a third party. Corporates must comply with relevant regulations wherever they operate.
''Tax information provided by Deloitte Touche Tohmatsu and Deloitte Highlight 2015'' ([http://www.deloitte.com www.deloitte.com]).


Corporate treasurers’ third major priority in the region is treasury transformation, including intelligent centralisation and the changing role of the treasury. Increasingly, multinationals are using Shared Service Centres (SSCs): Costa Rica is a favoured location while Brazil and Colombia are also gaining in popularity. By centralising payment processes in a single location, for example, using a single Enterprise Resource Planning (ERP) tool, costs can be dramatically reduced through automation and decisions can be made faster and better informed.
==Accounting framework==
===Key principles===
Chinese accounting standards are set by the China Accounting Standards Committee (CASC), which operates under the direction of the Ministry of Finance.
Chinese accounting standards follow the accrual basis of accounting.
In February 2006, China adopted a new basic accounting standard and 38 new Chinese Accounting Standards. The new Chinese accounting standards are broadly similar to International Financial Reporting Standards, although some differences remain.
These new standards become compulsory for listed enterprises from 1 January 2007. Other enterprises are encouraged to adopt them.
From the end of 2009, large and mid-scale companies operating in China, along with central level State-Owned Enterprises have had to adopt accounting standards that are in line with International Financial Reporting Standards (IFRS). These companies only make up around 1% of all business operating in China.


A fourth priority for treasurers in Latin America is the desire to leverage technology, by using data and analytics to improve decision-making (for example, for liquidity management,) or convenience. The use of mobile technology makes it easier for treasury personnel to authorise transactions remotely, helping to increase productivity and efficiency. Corporates also want to use technology to enhance their ability to service their customers by accepting mobile payments. For example, Citi is working with a local consumer bank in the Dominican Republic and has built an eco-system to facilitate mobile collections for small grocery stores and other retail businesses to replace cash payments to their providers with mobile transactions. A similar initiative is set to go live in 2015 in Guatemala in partnership with a microfinance institution in order to extend credit lines to retailers and facilitate mobile payments to corporates.  
'''Accounting for financial instruments (derivatives and capital instruments)'''
The Chinese approach to accounting for financial instruments is broadly similar to International Financial Reporting Standards. Unlike IAS39, the new Chinese Accounting Standards do not use the concept of embedded derivatives.


==Banking service provision==
Commercial banks operate according to the terms of the 1995 Commercial Bank Act.
China’s four largest banks are state-owned commercial banks. The Industrial and Commercial Bank of China, the Agricultural Bank of China, the China Construction Bank and the Bank of China operate nationwide. Management in these banks is decentralised and each branch is responsible for pursuing its own commercial activities, which can create difficulties for companies seeking to manage cash across branches.
There are 12 joint-stock commercial banks operating in China. These are also state-owned banks offering a full range of banking services. On a regional level, there are 145 city commercial banks operating in distinct geographical areas and providing retail and corporate banking services. There are also 468 rural commercial banks and 122 rural cooperative banks.
In 1994, the Agriculture Development Bank, Export and Import Bank of China and State Development Bank were established to provide specialist banking services.
Foreign banks have a growing presence in China. The banks have been permitted to offer foreign currency services since 2002, and since December 2006 they have been able to provide a full range of banking services to Chinese customers if they were locally incorporated. There are currently 41 locally incorporated foreign banks and 95 branches of foreign banks that had received approval to conduct RMB business in China.
Individual foreign investors are permitted to take a maximum 20% strategic stake in local banks, whereas the combined foreign shareholding limit is 25%.


==The cash management environment==
==Clearing and payment systems==
The chief characteristic of Latin America in terms of cash management is its diversity. Unlike in Europe, for example, each country has unique rules and regulations. While it is possible to manage some processes centrally, the requirements of every individual market must be addressed. Some markets in Latin America offer important opportunities. Brazil, for example, uses a unique automated receivables instrument called Boleto for the vast majority of collections. Each bill has a bar code containing reconciliation information. Payments can be made at any bank and are sent electronically to a clearing house, which distributes the funds to the beneficiary’s bank. By facilitating the electronic reconciliation of payments with outstanding receivables, efficiency is increased. In other markets, corporates must be aware of local requirements.  
===Clearing systems===
China has five domestic currency clearing systems:
* The central bank-operated China National Advanced Payment System (CNAPS), which has two modules – the LVPS (a real-time gross settlement [RTGS] system for high-value and urgent payments), and the BEPS (a bulk payment system for low-value payments).  
** China National Advanced Payment Systems – Large Value Payment System (CNAPS-LVPS): CNAPS-LVPS is a real-time gross settlement system operated by the People’s Bank of China (PBC). It is used for all electronic transfers with a minimum value of RMB 50,000 and for all electronic payments with a value above RMB 1m. At present, CNAPS covers over 800 cities in China. To have access to CNAPS, a bank must have a settlement account at a branch of the PBC.
** China National Advanced Payment Systems – Bulk Entry Payment System (CNAPS-BEPS): CNAPS-BEPS is used for electronic credit transfers with a value of less than RMB 50,000, and for pre-authorised collections and dated debits.
* The Local Clearing Houses which process and settle paper-based credit and debit payments. China has a network of local clearing houses, most of which are owned and operated by the PBC. The remainder are owned by the participant banks. Local clearing houses clear all paper-based credit and debit items, the overwhelming majority of which are cheques. There is no limit to the value of items processed in LCHs. Payment data can be submitted via electronic banking systems; although to be processed it must be supplied in a simplified Chinese format.
* The Cheque Imaging System (CIS) for the nationwide clearing of RMB-denominated cheques. It truncates paper-based cheques into electronic items for improved processing.
* The Internet Banking Payment System, also known as the Online payment interbank settlement system. This allows real-time interbank transfers and account enquiries by linking up most commercial banks’ online banking systems. During 2012 the system was rolled out nationally. Previously, interbank transfers made online via these institutions took between one and two days to clear.


Mexico’s real-time gross settlement Sistema de Pagos Electronicos Interbancarios (SPEI) operates in a similar way to many other high value payments systems, such as the US Federal Wire. However, it has multiple payment types that can make the process more complex. Another Mexican peculiarity is the requirement for tax payments to be made via a government website. Nevertheless, this functionality is incorporated directly into electronic banking platforms using an Application Programming Interface (API), which enables different pieces of software to work together. In some countries, significant challenges exist to efficient cash management.
The China Domestic Foreign Currency Payment System (CDFCPS) settles currency payments in eight international currencies (AUD, CAD, CHF, EUR, GBP, HKD, JPY and USD).
The central bank is developing a new payment system to process cross-border RMB payments. The China International Payment System (CIPS) is due to be launched in late 2015.


In Argentina, restrictions on foreign exchange mean that every transaction requires explicit permission from the central bank. Moreover, the approval process is manual and time-consuming. One unusual feature of the payment environment in Argentina is the widespread use of standardised post-dated cheques for payments. These cheques are often discounted by banks for early payment. In many countries within Latin America, it is becoming easier for companies to achieve their cash management objectives.  
===Payments===
* '''''Cash''''' – is the most important payment instrument in the retail sector in China. In terms of non-cash payments, electronic credit transfers have become the most popular method of making payments in China by value. Electronic credit transfers and bank drafts are the main methods of making intercity payments. There has been a rapid increase in the use of cards as a means of payment, which now account for the vast majority of non-cash payments by volume.  
* '''''Credit transfers (electronic payments)''''' – electronic credit transfers are an important method of making payments, especially in the large financial centres. Because of the difficulties with making inter-city cheques, electronic credit transfers are important for inter-city payments.
*  '''''Direct debits''''' – direct debits are becoming available in China, although their use remains low. Direct debits are usually used for paying utility bills and making insurance payments.
* '''''Card payments''''' – at the end of 2014 there were approximately 4.5 billion debit cards and 455 million credit cards in circulation. The vast majority of bank card holders are based in China’s major cities; the 2014 national average of 0.34 cards per person in China rises to 1.7 cards per person in Shanghai and 1.33 cards per person in Beijing. Since 2011 the PBC has been promoting the issuing and use of IC-based bank cards in China. These are chip-embedded smart cards, which as well as being used for normal payment card services, can be loaded with applications to receive government services such as social insurance. China UnionPay (CUP), launched in 2002 by the government and co-owned by card issuers, is a single nationwide acceptance and settlement system for all credit and debit cards in China. In 2014, the Chinese government announced it will permit foreign card providers to clear domestic card payments.
* '''''Cheques''''' – in 2014, 552 million cheques with a value of RMB 242.6 trillion were processed in China, a decrease of 17.2% in volume and 6.5% in value on the previous year. Company cheques must be signed by hand and stamped with the official company mark to be valid. Cheques are only valid for ten days. Cheques have been primarily used for intra-city payments because of the absence of a national cheque clearing system. However, the introduction of the National Cheque Image Exchange System (CIS) in 2007 has reduced clearing times to as little as three days.
* '''''Electronic money''''' – there has been a limited adoption of electronic money schemes in China. Pre-paid cards are used for high-volume, low-value transactions. To date, electronic money is available in the larger cities to pay for specific items, such as public transport in Shanghai.
* '''''Cross border''''' – cross-border transactions are settled via correspondent bank networks. The major banks have direct SWIFT connections. Some banks also issue foreign currency bank drafts.


In Peru, the payments system has advanced significantly in recent years, with Automated Clearing House (ACH) payments and transfers now reaching much more of the country than in the past, helping to reduce costs and risks. Ecuador has recently released a country-wide mandate for electronic currency, forcing banks of a certain size to participate in the system by opening a wallet account and disbursing remittances. Meanwhile, Costa Rica’s low cost, high skill labour base, robust communications and power infrastructure and political stability have made it an increasingly popular location for SSCs.
==Cash and bank account management==
===Account availability===
Residents are permitted to open and maintain domestic (RMB) bank accounts. Subject to regulatory approval, resident legal entities may maintain foreign currency accounts in China. Residents may also open foreign currency accounts abroad, but must first gain approval from SAFE.  
Non-resident companies are permitted to hold currency accounts in China, denominated in domestic (RMB) and foreign currency.


==Shared service centres==
===Money laundering===
The experience of implementing an SSC depends on the type of company. Multinationals tend to have internal experience, dedicated resources and a clear corporate mandate for SSCs — Latin America is simply another region for them to roll out. In contrast, many Latin American companies will be centralising functions for the first time; it is unlikely that there will be internal understanding of SSCs or dedicated personnel (instead treasury staff are used); implementation may take two or three times longer than for multinationals as knowledge and experience are gained. The SSC “Buy In” process has to be made at Corporate level first and then on a country by country basis. The mandate within the company’s organisation is not that strong and extended at all levels as it is in the case of European and American Multinationals.  
China has implemented anti-money laundering legislation (Articles 191, 312 and 349 of the Criminal Code of 1997; Rules for Anti-Money Laundering by Financial Institutions of 2003; Regulations on Anti-Money Laundering for Financial Institutions of 2003; Law of the People’s Republic of China on Anti-Money Laundering of 2006; Regulations on Real Name System for Individual Savings Accounts of 2006; Rules for Anti-Money Laundering by Financial Institutions of 2006; Administrative Rules for Reporting of Large-Value and Suspicious Transactions [entered into force March 2007]; Rules on Reporting Suspicious Transactions for Terrorist Financing by Financial Institutions 2007 and Administrative Rules for Financial Institutions on Customer Identity Verification and Record Keeping of Customer Identity and Transaction Information and Decision of the Standing Committee of the National People’s Congress on Strengthening Counter-Terrorism Work 2011. Further AML Rules were issued in December 2012).
China is a member of the Eurasian Regional Group on Combating Money Laundering and Financing of Terrorism (EAG), the Asia-Pacific Group on Money Laundering (APG) and is a member of the Financial Action Task Force (FATF).  
China has established a financial intelligence unit (FIU), which is housed within the People’s Bank of China (PBC). The FIU is split into two operational units namely, the Chinese Anti-Money Laundering Monitoring and Analysis Centre (CAMLMAC) and the Anti-Money Laundering Bureau (AMLB).


Companies implementing an SSC in Latin America typically adopt one of two models depending on their scale and regional footprint. Some choose to take a horizontal-treasury process approach where a specific function, such as payments, is implemented for all countries in the region before additional functions are added. Others take a vertical-geographic approach and consolidate multiple functions for a single country before moving to additional countries. Regardless of the type of company implementing an SSC or whether they adopt a horizontal or vertical model, the drivers underpinning the decision to adopt an SSC model are broadly the same.
''Supplied by BCL Burton Copeland (www.bcl.com). Data as at January 2015.''


==Mobile money==
===Cash concentration===
While worldwide mobile payment transaction values reached approximately $325B in 2014, there is still room for growth in Latin America, particularly for the unbanked. In a region where 50% of adults are unserved by the formal financial system, according to GSMA, there are currently 37 live mobile money implementations across 19 markets. Adoption is very promising. Of those implementations five have over 1 million registered accounts. There are 14.9 million registered mobile money accounts, of which 6.2 million are active on a 90-day basis.  
Cash concentration is a liquidity management capability whereby account balances are physically transferred to/from a single account (known as a master, header or concentration account) for liquidity management purposes. Cash concentration can take these forms:
* '''''Zero balancing (ZBA)''''' – sometimes referred to as sweeping, zero balancing is a cash concentration capability whereby the total of all account balances is physically transferred into a nominated account.
* '''''Target balancing''''' – also known as sweeping, target balancing is a cash concentration capability similar to ZBA, whereby all account balances are physically transferred into a nominated account leaving a predetermined amount in the sub-accounts.
* '''''Threshold balancing''''' – a cash concentration capability similar to ZBA, whereby the balances of the sub-accounts are physically transferred in their totality into a nominated account each time the sub-account balances reach a predetermined threshold.


On the regulatory front, in 2015 there are six markets with enabling regulation including Brazil, Peru, Paraguay, Nicaragua, Bolivia and Guyana. Additionally there are three countries in the region that are in the top 15 in the world in terms of adults using mobile money – El Salvador, Honduras and Paraguay – which highlights the successful evolution of the technology in the region.
Direct inter-company loans are not permitted in China and transactions between group entities can only occur if there is an underlying transaction between the entities. The restrictions on the free flow of foreign exchange into and out of China and between the capital and settlement accounts make cash concentration difficult, particularly for multiple entities. To allow domestic currency cash concentration to take place, companies can use an entrustment loan (EL) agreement. Under such an agreement, a domestic bank or China-registered group financial company acts as an intermediary by transferring funds between the participating entities. The EL structure requires SAFE approval. Because it is not a standard structure, care must be taken when establishing the structure.
For non-residents, qualified multinational companies have also been permitted to concentrate foreign currency cash via the entrustment loan structure under the terms of the 2005 Pudong measures. Foreign currency funds and domestic currency funds (approved by SAFE) can also be concentrated to offshore banking units.  


The network support for mobile money is also prevalent, with nearly 63,000 registered agents, a 129% growth, and 74% of services are integrated into existing ATM networks. This all adds up to a robust groundwork for mobile money in the region.
===Cross border cash concentration===
For residents, cross-border payments are only normally permitted for trade-related transactions with supporting documentation. However, some banks now offer automated cross-border sweeping of physical cash pools. Under the terms of the Pudong measures, non-residents qualified as multinational companies are able to manage payments to and from an overseas parent company, as long as this is explicitly authorised by the Chinese-based entities. Funds can also be concentrated to offshore banking units.
==Payments==
Since 2012, the PBC and SAFE have started to permit some entities based in Beijing and Shanghai to automate cross-border sweeping and inter-company lending. This is subject to prior approval and strict transaction limits.
Although considered a relatively mature market, Payments’ business environment, processes and best practices continue being one of the areas of increased dynamism.  From a Treasury and Payments trends perspective, there are six major areas driving change, creating opportunities, as well as bringing challenges:
*Standardisation and convergence of payment rules and formats
*Modernisation of Payment Systems and Infrastructure
*Increased development and importance of currencies and new markets, as trade and commerce flows evolve
*Digitisation and surge of new alternative payment channels and currencies
*Big Data and Analytics
*Regulations, Taxes and focus on Risks/Controls


Several markets are experiencing diverse set of initiatives towards further development of Payments infrastructure towards increase usage of Direct Debits origination, development of online/faster payments, further support of different type of Tax Payments/Social security flows, and increased use of XML and SWIFT agnostic formats.
===Notional pooling===
 
Notional pooling is offered in local currency (RMB) and foreign currency by domestic and foreign banks in China, although it is subject to various SAFE and PBC restrictions. Notional pooling is not offered between multiple entities.
We also see clear focus from major global Multinationals, Multi-Latinas and top local companies towards deepening the development of Shared Service Centre models and centralised Payment Factories, increase the integration and automation of ERP/Account Payables processes, evolve into better and more sophisticated connectivity and electronic banking integration, as well as to improvements to security, entitlements, risk management and controls.


At Citi, we strive to continue very engaged in leading the evolution of the payments space in the region, supporting recent ACH developments in Costa Rica, Paraguay and Uruguay, as well as providing end to end Payments and Connectivity Solutions oriented to support the needs of our global, regional and local clients in terms of Domestic Payments to vendors/suppliers, International FX and X-Border Payments, Payroll and Taxes.
===Electronic and internet banking===
The use of electronic banking and internet banking is growing rapidly in China. At present, use is concentrated in the larger cities, although the PBC is encouraging local banks to invest in electronic banking capability. There is no nationwide electronic banking standard, but some banks allow their customers to submit bulk electronic payment files through ERP systems.
==Collections==
There has been a growth in the availability of internet banking as the PBC authorises more banks to offer it. Both domestic and approved foreign banks are now permitted to offer internet banking in China. China has the world’s highest number of internet users with around 642 million users in mid 2014. However, this represents less than half the population, at around 47.3%. An estimated 35.6% of the population used online banking facilities at the beginning of 2014. The China Financial Certification Authority has developed a certificate system, which banks use to demonstrate their site’s encryption.
Collections in Latin America are more challenging to centralize than payments, although efforts by corporates to rationalize their banking relationships are accelerating and some activities are being moved to SSCs. While the shift from paper to electronic payment and collection channels continues, there are less than fifteen countries where ACH debit is available. Even in those countries where it is present, market practice is against debiting payers’ accounts, mostly in B2B scenarios. Consequently, automated collections remain problematic and therefore limited in volume. In addition, ACHs usually truncate the remittance information that banks receive for incoming payments, making it challenging to find the minimum required details for reconciliation. Moreover, a large proportion of Latin Americans remain unbanked. Thus, in many instances collections remain cash based, which is costly, prone to fraud, high risk and requires companies to work with banks that have a large footprint. The search is on for a way to reach the large numbers of people not covered by existing banking infrastructure so that collections can be made more efficient and Days Sales Outstanding – a key element in working capital optimization – can be improved. However, so far efforts by mobile companies to partner with financial institutions have produced limited results. Other collections trends include increased concerns related to risk management associated with corporates’ clients and bank counterparty risk. Companies’ expectations regarding collections are increasing. Comprehensive coverage and generic information are no longer enough. Instead, corporates want a bank provider that has a deep understanding of the end-to-end collection process from Purchasing Order (PO) receipt to cash application. By taking a holistic view of the collections process, banks can uncover new efficiencies and identify processes that can be streamlined. There’s no "one size fits all". As result, the best approach to Accounts Receivable requires companies to work hand in hand with banks to find the best solution to collect from each of their different client segments. This could involve either over the counter deposits for cash and checks, remote check deposits - where permitted by regulation, electronic payment methods and digital solutions like eIPP - Electronic Invoice Presentment and Payment - to aggregate collections information and channels in order raise STR (straight through reconciliation) and streamline reconciliation through the integration with each company's ERP.


==Liquidity management==
==Liquidity management==
Perception regarding liquidity in Latin America has changed over time. Transforming from a fragmented regulated economy to a diverse, challenging and profitable region has created greater emphasis on clients regarding liquidity. The financial crisis post 2008 and the weakness of many banks in the years that followed placed a greater emphasis on liquidity and capital preservation over yield in many companies. More generally, liquidity management has become critical given periods of scarce or expensive credit and treasury is focusing on rationalising the banks that they work with. As a result, corporates have sought to optimise their liquidity by reassessing the focus on the credit quality of their partner banks, generally using a main regional bank and some local banks to support their operations.
===Short-term investments===
 
Short-term investments include:
Corporates operating in Latin America face several challenges in employing efficient liquidity structures. While the regulatory environment in Latin America is diverse, it is generally more restrictive than in some other regions. For example, regulations in Argentina and Venezuela mean cash is trapped in-country while companies active in Brazil or Colombia are not able to move money automatically, making liquidity management more cumbersome. Notional pooling and intercompany lending are not widely used as they are perceived as costly or not traditionally regulated, which makes liquidity efficiency more complex. However, trends have evolved and companies are searching to create regional clusters where regulations, liquidity and tax treatments are similar. Treasury centres that serve a cluster of markets, such as Peru, Chile and Uruguay that have common characteristics or the necessary tax treaties to facilitate effective liquidity management are common. Similarly, economies with high levels of regulation can be clustered, with flexible investment policies implemented to overcome high inflation risks. This approach to liquidity management takes into account the challenges and restrictions that exist in the region but still enables companies to achieve their broader regional treasury objectives and to optimise efficiency. It also leaves open the possibility for further regional consolidation of treasury activities as regulations change.
* '''''Treasury bills''''' – these may only be purchased by Qualified Foreign Institutional Investors.
* '''''Repurchase agreements (repos)''''' – available using corporate and government bonds as security. Repos are not available to foreign-invested enterprises.
* '''''Demand deposits''''' – available in local and foreign currency. The PBC sets a maximum interest rate for RMB-denominated deposits and for USD-denominated deposits with a value of less than US$3m. USD-denominated deposits with a value in excess of US$3m are not subject to any PBC-set interest rate ceiling.
* '''''Term deposits''''' - As with demand deposits, the PBC sets a maximum interest rate for RMB-denominated deposits and for USD-denominated deposits with a value of less than US$3m. Maximum rates are set for RMB deposits for one week, one, three and six months, and one year. Maximum rates are set for relevant USD deposits for three and six months, and one and two years.
* '''''Commercial paper''''' - Rates are often higher than the ceilings imposed on deposits by the PBC, making commercial paper an attractive short-term investment instrument. Commercial paper cannot be purchased by foreign-invested enterprises.


Due to the high volatility of FX and interest rates in the region, companies traditionally maintain physical pooling in USD, typically in the US. Investment decisions are usually made and managed centrally from corporations’ head offices, even if local investment instruments are used. Typically, funds that companies plan to use for strategic investment will be kept out of country until they are required. However, companies have been finding local hedging structures, natural hedges or cluster synergies to improve risk management.
Money market funds are available in China.


==Risk management==
===Short-term borrowing===
Latin America’s diversity means that risk management for corporates requires great attention to detail. Each country presents different risks that must be understood, monitored and mitigated where necessary. FX risk is also a clear concern in these markets, given restrictions on movements of funds and a history of devaluations. More generally, while US dollars are the main trading currency within the region, corporates operating across Latin America will need to use local currencies and will therefore require advice and solutions for FX hedging.  
Borrowing instruments include:
Macro trends in 2015 that may represent risks in the region include:
* Bank funding. Overdrafts, temporary advances (for up to three months) and revolving lines of credit (for up to one year) are available from local banks. Chinese banks issue loans subject to the General Rules on Loans issued by the PBC. This applies to loans offered to both local and foreign-invested enterprises. Interest rates are set by the PBC reference rates. Foreign banks do not have to comply with the same lending rules as domestic banks. Many companies prefer to arrange bank funding through Hong Kong as it is subject to fewer restrictions and the rates are typically lower.
*Insufficient macroeconomic adjustment in the regions’ largest economies
* Discounted trade bills. Bills of exchange are discounted by local and foreign banks.
*Financial volatility due to the regions’ dependence on the US dollar
* Commercial paper can be issued, although the lack of a secondary market reduces its attractiveness to investors. Commercial paper issued in China is not available to foreign-invested entities.  
*Lower commodity prices for oil exporters and other commodity exporters
*Slower-than expected recovery in the Euro-zone
*Hard landing in China
Other risks that need to be considered and addressed by corporates include:
*Credit and counterparty risk: buyers may not pay their debts
*Financial crime: employees or others may embezzle funds or commit fraud
*Interest rate risk: changes in interest rates can affect companies’ balance sheets and their ability to repay outstanding debt
*Liquidity risk: assets, including investment instruments, may become untradeable during times of financial stress
*Market risk: investments held as part of a liquidity management strategy (or strategic stakes in other companies) may change in value because of market volatility
*Operational risk: breakdowns may occur in internal procedures, people and systems
*Regulatory risk: the Foreign Account Tax Compliance Act will affect most multinationals. It imposes new registration, reporting and other obligations


==A bright future==
==Corporate finance==
The outlook for Latin America is extremely positive. The changes taking place in China’s economy, which is shifting from being manufacturing led to being consumption led, will have an impact on demand for Latin American commodities. Many countries within the region have used the opportunities created by the natural resources boom in the past wisely. Sizeable foreign exchange reserves have been built up – Mexico’s hit a record high in April, 2015 – and many countries have implemented sound economic policies that withstood the formidable test of the financial crisis.
===Capital markets===
Mainland China’s two stock markets are the Shanghai and Shenzhen exchanges. A-shares (denominated in RMB) can be sold to local investors and Qualified Foreign Institutional Investors. B-shares (denominated in USD in Shanghai and HKD in Shenzhen) can be sold to foreigners and local investors with foreign currency accounts.
Securities transactions are regulated by the China Securities Regulatory Commission.


Far-sighted social policies that will produce benefits for decades to come have also been introduced in many countries. As a result, access to education has dramatically increased. The growing number of people that are moving out of poverty creates huge opportunities, as consumption of a wide variety of products and services will significantly increase. This makes Latin America more attractive to investors from around the world.
===Risk management instruments===
Foreign exchange risk management instruments are subject to exchange controls applied by SAFE. The use of non-delivery forwards is the most common method of hedging foreign exchange risk. Swaps are only permitted for non-local currency pairs. Bond forwards can be traded to hedge interest rate risk.  


Latin America remains a diverse region with some significant operating and regulatory challenges. For companies to achieve their strategic goals in Latin America – and harness its growth and dynamism – they need to work with a bank with solid experience and deep knowledge of local and regional conditions. However, regional knowledge is not enough. It should be combined with a global perspective and class-leading solutions, so that multinationals – and Multi-Latinas – can ensure their treasury is as efficient as possible and can be integrated into their global structures where required.


===References===
==Websites==
# El Economista México (The Economist), International Exchange Reserves, 2015
'''Government website'''
# World Bank, Global Economic Prospects, June 2015
* [http://www.china.org.cn/english http://www.china.org.cn/english]
# Inter-American Development Bank (IDB), The Labyrinth - How can Latin America and the Caribbean Navigate the Global Economy, 2015
'''People’s Bank of China'''
# Gartner, Worldwide Mobile Commerce, PYMNTS, December 2014
* [http://www.pbc.gov.cn/english http://www.pbc.gov.cn/english]
# GSMA – Mobile Money for the Unbanked, May 2015
'''China Banking Regulatory Commission'''
* [http://www.eng.ceca.es/ http://www.eng.ceca.es/]
'''China Securities Regulatory Commission'''
* [http://www.csrc.gov.cn http://www.csrc.gov.cn]
'''State Administration of Foreign Exchange'''
* [http://www.safe.gov.cn http://www.safe.gov.cn]
'''State Administration of Taxation'''
* [http://www.chinatax.gov.cn http://www.chinatax.gov.cn (Chinese language)]
'''Ministry of Finance'''
* [http://www.mof.gov.cn http://www.mof.gov.cn]
'''Ministry of Commerce of the People’s Republic of China'''
* [http://english.mofcom.gov.cn/ http://english.mofcom.gov.cn/]
'''International Chamber of Commerce'''
* [http://www.china.com http://www.china.com]
'''China Council for the Promotion of International Trade'''
* [http://www.ccpit.org http://www.ccpit.org]
'''Shanghai stock exchange'''
* [http://www.sse.com.cn http://www.sse.com.cn]
'''Shenzhen stock exchange'''
* [http://www.szse.cn/main/en http://www.szse.cn/main/en]


[[Category:Book_Export]]
[[Category:Book_Export]]

Revision as of 19:07, 27 May 2017


KEY COUNTRY FACTS
Flag_china.png
System of government: one party state
Population: 1.36 billion
Currency: renminbi/yuan (CNY)
FX regime: managed float
GDP: US$9.33 trillion (2014)
IGTA member: yes
FATF member: yes
Treasury association: International Association of CFOs and Corporate Treasurers (China)
Other professional financial/banking associations:

Shanghai Banking Association

China Banking Association


Financial regulatory framework

Bank supervision

The PBC was responsible for banking supervision until 2003. As part of a package of reforms designed to improve the stability of the Chinese banking system, the China Banking Regulatory Commission (CBRC) was set up to supervise banks and other financial institutions. Alongside the CBRC are separate commissions regulating China’s securities market (China Securities Regulatory Commission) and insurance industry (China Insurance Regulatory Commission). The State Administration of Foreign Exchange (SAFE), operating under the auspices of the PBC, manages China’s external debt and oversees the country’s exchange controls.

Exchange controls

The currency in China is the renminbi (RMB) and the currency unit is the yuan. China continues to apply exchange controls, although there has been some relaxation in recent years. Companies are now permitted to keep foreign currency receipts and retain them in their current account according to their operational needs rather than within a quota. Outward direct investment is permitted and there are no limits on the amount of foreign exchange that can be purchased for overseas investment. Companies are now permitted to pay initial expense costs with foreign currency, in advance of any direct outward foreign investment. The restrictions on the number of banks permitted to provide RMB forward foreign exchange and non-RMB foreign exchange transactions have been relaxed. Non-residents are permitted to establish entities in China, subject to approval from the Ministry of Commerce or the relevant local agency. Any company in China is permitted to invest forward foreign exchange earnings in overseas branches, subject to approval from SAFE. This approval process is also being simplified in order to encourage greater overseas investment by domestic firms.

Taxation framework

Corporate income tax

The Enterprise Income Tax Law (EITL) governs both foreign investment and domestic-funded enterprises under a single unified tax system. The EITL taxes both domestic and foreign enterprises at a flat rate of 25%, with the same expense deduction criteria and available tax incentives. The principal incentives include a 15% preferential tax rate applicable to new/high-technology enterprises and a 50% super deduction for qualifying R&D expenditure. There is a geographically based incentive focused on new/high-technology enterprises established as from 2008. The incentive (in addition to the 15% rate that applies to all new high-technology enterprises) is a two-year tax holiday followed by three years at a 12.5% rate. The 15% preferential tax rate also is granted to qualified high-tech service enterprises in 21 specified cities between 1 July 2010 and 31 December 2018. Encouraged industries in certain regions (e.g. western China, Hengqin (Guangdong), Pingtan (Fujian) and Qianhi (Shenzhen)) can enjoy a reduced 15% enterprise income tax rate until 31 December 2020. Tax exemptions and other preferences apply to the agriculture, forestry, animal husbandry and fishery sectors, software and integrated circuit industries, major infrastructure projects, certain environmental projects and certain transfers of technology.

Taxation of dividends and interest

Although the EITL provides for a 20% withholding tax, the rate is reduced to 10% under the implementation rules. Chinese-sourced income (including dividends, interest, royalties and other payments derived by foreign enterprises without a permanent establishment in China or where the income generated is not effectively connected to the foreign enterprise’s establishment in China) is subject to withholding tax. Dividends paid to a foreign investor or a foreign investment enterprise were formerly exempt from withholding tax, but the situation has changed under the EITL, with a 10% withholding income tax introduced. Specific guidance (Caishui [2008] No 1) further clarifies that the retained earnings of a foreign-invested enterprise accumulated up to 1 January 2008 that are distributed to its foreign investors in or after 2008 are still exempt from withholding tax. Profits newly created in 2008 and later years that are distributed to non-resident corporate investors are subject to a 10% withholding income tax unless a preferential treaty rate is available under a tax treaty (or a tax arrangement).

Transfer pricing

China has transfer pricing rules. China has adopted a broad definition of associated enterprises with a strong emphasis on control. An entity with significant control over the taxpayer’s senior management, purchases, sales, production and the intangibles and technologies required for the business is defined as a related party. Accepted methodologies are the comparable uncontrolled price, resale price, cost plus, transactional net margin, profit split and other methods in compliance with the arm’s length principle. Contemporaneous documentation is required (with certain exemptions) and cost sharing agreements may be used for developing intangible property or for shared services arrangements.

Thin capitalisation

China imposes mandatory debt-to-equity ratios for foreign-invested enterprises, and the equity of a foreign-invested enterprise should be paid up within a stipulated time period. The EITL has a thin capitalisation rule, which is further specified in specific rules (Caishui [2008] No 121): a debt-to-equity ratio of 2:1 for general enterprises and of 5:1 for financial enterprises. A deduction is not allowed for interest expenses incurred on any related-party debt investments exceeding these debt-to-equity ratios, unless the underlying transactions are in compliance with the arm’s length principle (demonstrated through contemporaneous documentation), or the interest expenses are payable to domestic-related parties subject to higher effective tax rates. The implementation rules of the EITL clarify that “debt investments” refers to arrangements where an enterprise has directly or indirectly acquired financing from related parties, and where the enterprise is required to repay the principal and make interest payments to the lending party (or any other form of compensation which is of an interest payment nature).

Controlled foreign companies

Under the CFC rule in the EITL, where an enterprise is “controlled” by enterprises resident in China or jointly “controlled” by Chinese resident enterprises and individual Chinese residents, is established in a country or region where the effective tax rate is lower than 12.5% (the new tax rate under the EITL) and the CFC either does not distribute profits or distributes less profit than it should (without justification), then a portion of the CFC’s profits will be attributed to the Chinese resident enterprise and included in the latter’s taxable income in the current period. The implementation rules further clarify that the term “significantly lower” than the effective tax rate of 25% means that the effective tax rate is less than half of the 25% tax rate. In addition, the term “controlled”, as cited above, includes: a resident enterprise or an individual resident of China directly or indirectly holding 10% or more of the total voting shares, and such resident enterprise(s) or individual resident(s) jointly holding more than 50% of the total shares of the foreign enterprise; and cases where the shareholding percentage of the resident enterprise(s) and individual resident(s) of China does not meet the percentage standard as stipulated above, but substantial control is formed over the foreign enterprise in respect of shareholding, financing, business, purchase and sales, etc.

Capital gains tax

For resident companies with foreign investments, capital gains are taxed as part of a company’s taxable profits at the applicable corporation tax rate. Capital gains derived from the transfer of equity interest are calculated as the difference between the sale proceeds and the original cost of the investment. Specific guidance (Guoshuihan [2010] No 79) further clarifies that undistributed profits and other reserves of shareholders are included in the computation of capital gains. Chinese-sourced gains derived by foreign companies from property transfer are generally subject to a 10% withholding income tax under the implementation rules of the EITL. Specific guidance released by the SAT (Guoshuihan [2009] No 698) addresses the transfer of an equity interest by non-resident companies. It outlines reporting requirements and taxation guidelines for non-residents’ direct and indirect transfers of Chinese resident companies’ equity interests. A 10% withholding income tax will generally be imposed on the gains from the transfer of a Chinese resident company by a non-resident company unless an exemption is available under a tax treaty. Subject to the SAT’s approval, the tax authorities may disregard the existence of an offshore intermediary holding company and tax the transfer of its shares in China where the parties to the transaction are considered to have abused the legal form and conducted the transaction with a view to avoiding Chinese tax, without bona fide commercial purposes.

Indirect taxes

VAT is generally levied on the sale of goods, the provision of repair and replacement services, and the importation of goods into China. The taxpayer will be responsible for output VAT based on taxable income, while the input VAT paid on the purchase of goods or services should be available as a credit to offset against output VAT. The standard VAT rate is 17%, but there is a reduced rate of 13% (for food grains, tap water, heating, natural gas, books, feeds, fertilisers). Generally export goods attract a zero rate of VAT. The VAT reform programme, which was launched in Shanghai on 1 January 2012 and expanded nationwide on 1 August 2013. The aim is to transition service industries from liability to Business Tax to liability to VAT. The reform applies to the transportation industry, certain modern service sectors (e.g. R&D and technology services, leasing of moveable and tangible goods, etc.), postal services and telecommunication services. The standard VAT rate is 17%, with a lower rate of 13% applying to certain foods, goods, books and utilities. A 3% rate applies under the small-scale taxpayer scheme. Lower rates apply to certain transactions involving used goods. Exports generally are zero-rated. The rates under the VAT reform program are as follows: • 17% for the leasing of movable and tangible goods; • 11% for the transportation sector, postal and basic telecommunication services; and • 6% for value-added telecommunication services and other modern services. s.

Tax information provided by Deloitte Touche Tohmatsu and Deloitte Highlight 2015 (www.deloitte.com).

Accounting framework

Key principles

Chinese accounting standards are set by the China Accounting Standards Committee (CASC), which operates under the direction of the Ministry of Finance. Chinese accounting standards follow the accrual basis of accounting. In February 2006, China adopted a new basic accounting standard and 38 new Chinese Accounting Standards. The new Chinese accounting standards are broadly similar to International Financial Reporting Standards, although some differences remain. These new standards become compulsory for listed enterprises from 1 January 2007. Other enterprises are encouraged to adopt them. From the end of 2009, large and mid-scale companies operating in China, along with central level State-Owned Enterprises have had to adopt accounting standards that are in line with International Financial Reporting Standards (IFRS). These companies only make up around 1% of all business operating in China.

Accounting for financial instruments (derivatives and capital instruments) The Chinese approach to accounting for financial instruments is broadly similar to International Financial Reporting Standards. Unlike IAS39, the new Chinese Accounting Standards do not use the concept of embedded derivatives.

Banking service provision

Commercial banks operate according to the terms of the 1995 Commercial Bank Act. China’s four largest banks are state-owned commercial banks. The Industrial and Commercial Bank of China, the Agricultural Bank of China, the China Construction Bank and the Bank of China operate nationwide. Management in these banks is decentralised and each branch is responsible for pursuing its own commercial activities, which can create difficulties for companies seeking to manage cash across branches. There are 12 joint-stock commercial banks operating in China. These are also state-owned banks offering a full range of banking services. On a regional level, there are 145 city commercial banks operating in distinct geographical areas and providing retail and corporate banking services. There are also 468 rural commercial banks and 122 rural cooperative banks. In 1994, the Agriculture Development Bank, Export and Import Bank of China and State Development Bank were established to provide specialist banking services. Foreign banks have a growing presence in China. The banks have been permitted to offer foreign currency services since 2002, and since December 2006 they have been able to provide a full range of banking services to Chinese customers if they were locally incorporated. There are currently 41 locally incorporated foreign banks and 95 branches of foreign banks that had received approval to conduct RMB business in China. Individual foreign investors are permitted to take a maximum 20% strategic stake in local banks, whereas the combined foreign shareholding limit is 25%.

Clearing and payment systems

Clearing systems

China has five domestic currency clearing systems:

  • The central bank-operated China National Advanced Payment System (CNAPS), which has two modules – the LVPS (a real-time gross settlement [RTGS] system for high-value and urgent payments), and the BEPS (a bulk payment system for low-value payments).
    • China National Advanced Payment Systems – Large Value Payment System (CNAPS-LVPS): CNAPS-LVPS is a real-time gross settlement system operated by the People’s Bank of China (PBC). It is used for all electronic transfers with a minimum value of RMB 50,000 and for all electronic payments with a value above RMB 1m. At present, CNAPS covers over 800 cities in China. To have access to CNAPS, a bank must have a settlement account at a branch of the PBC.
    • China National Advanced Payment Systems – Bulk Entry Payment System (CNAPS-BEPS): CNAPS-BEPS is used for electronic credit transfers with a value of less than RMB 50,000, and for pre-authorised collections and dated debits.
  • The Local Clearing Houses which process and settle paper-based credit and debit payments. China has a network of local clearing houses, most of which are owned and operated by the PBC. The remainder are owned by the participant banks. Local clearing houses clear all paper-based credit and debit items, the overwhelming majority of which are cheques. There is no limit to the value of items processed in LCHs. Payment data can be submitted via electronic banking systems; although to be processed it must be supplied in a simplified Chinese format.
  • The Cheque Imaging System (CIS) for the nationwide clearing of RMB-denominated cheques. It truncates paper-based cheques into electronic items for improved processing.
  • The Internet Banking Payment System, also known as the Online payment interbank settlement system. This allows real-time interbank transfers and account enquiries by linking up most commercial banks’ online banking systems. During 2012 the system was rolled out nationally. Previously, interbank transfers made online via these institutions took between one and two days to clear.

The China Domestic Foreign Currency Payment System (CDFCPS) settles currency payments in eight international currencies (AUD, CAD, CHF, EUR, GBP, HKD, JPY and USD). The central bank is developing a new payment system to process cross-border RMB payments. The China International Payment System (CIPS) is due to be launched in late 2015.

Payments

  • Cash – is the most important payment instrument in the retail sector in China. In terms of non-cash payments, electronic credit transfers have become the most popular method of making payments in China by value. Electronic credit transfers and bank drafts are the main methods of making intercity payments. There has been a rapid increase in the use of cards as a means of payment, which now account for the vast majority of non-cash payments by volume.
  • Credit transfers (electronic payments) – electronic credit transfers are an important method of making payments, especially in the large financial centres. Because of the difficulties with making inter-city cheques, electronic credit transfers are important for inter-city payments.
  • Direct debits – direct debits are becoming available in China, although their use remains low. Direct debits are usually used for paying utility bills and making insurance payments.
  • Card payments – at the end of 2014 there were approximately 4.5 billion debit cards and 455 million credit cards in circulation. The vast majority of bank card holders are based in China’s major cities; the 2014 national average of 0.34 cards per person in China rises to 1.7 cards per person in Shanghai and 1.33 cards per person in Beijing. Since 2011 the PBC has been promoting the issuing and use of IC-based bank cards in China. These are chip-embedded smart cards, which as well as being used for normal payment card services, can be loaded with applications to receive government services such as social insurance. China UnionPay (CUP), launched in 2002 by the government and co-owned by card issuers, is a single nationwide acceptance and settlement system for all credit and debit cards in China. In 2014, the Chinese government announced it will permit foreign card providers to clear domestic card payments.
  • Cheques – in 2014, 552 million cheques with a value of RMB 242.6 trillion were processed in China, a decrease of 17.2% in volume and 6.5% in value on the previous year. Company cheques must be signed by hand and stamped with the official company mark to be valid. Cheques are only valid for ten days. Cheques have been primarily used for intra-city payments because of the absence of a national cheque clearing system. However, the introduction of the National Cheque Image Exchange System (CIS) in 2007 has reduced clearing times to as little as three days.
  • Electronic money – there has been a limited adoption of electronic money schemes in China. Pre-paid cards are used for high-volume, low-value transactions. To date, electronic money is available in the larger cities to pay for specific items, such as public transport in Shanghai.
  • Cross border – cross-border transactions are settled via correspondent bank networks. The major banks have direct SWIFT connections. Some banks also issue foreign currency bank drafts.

Cash and bank account management

Account availability

Residents are permitted to open and maintain domestic (RMB) bank accounts. Subject to regulatory approval, resident legal entities may maintain foreign currency accounts in China. Residents may also open foreign currency accounts abroad, but must first gain approval from SAFE. Non-resident companies are permitted to hold currency accounts in China, denominated in domestic (RMB) and foreign currency.

Money laundering

China has implemented anti-money laundering legislation (Articles 191, 312 and 349 of the Criminal Code of 1997; Rules for Anti-Money Laundering by Financial Institutions of 2003; Regulations on Anti-Money Laundering for Financial Institutions of 2003; Law of the People’s Republic of China on Anti-Money Laundering of 2006; Regulations on Real Name System for Individual Savings Accounts of 2006; Rules for Anti-Money Laundering by Financial Institutions of 2006; Administrative Rules for Reporting of Large-Value and Suspicious Transactions [entered into force March 2007]; Rules on Reporting Suspicious Transactions for Terrorist Financing by Financial Institutions 2007 and Administrative Rules for Financial Institutions on Customer Identity Verification and Record Keeping of Customer Identity and Transaction Information and Decision of the Standing Committee of the National People’s Congress on Strengthening Counter-Terrorism Work 2011. Further AML Rules were issued in December 2012). China is a member of the Eurasian Regional Group on Combating Money Laundering and Financing of Terrorism (EAG), the Asia-Pacific Group on Money Laundering (APG) and is a member of the Financial Action Task Force (FATF). China has established a financial intelligence unit (FIU), which is housed within the People’s Bank of China (PBC). The FIU is split into two operational units namely, the Chinese Anti-Money Laundering Monitoring and Analysis Centre (CAMLMAC) and the Anti-Money Laundering Bureau (AMLB).

Supplied by BCL Burton Copeland (www.bcl.com). Data as at January 2015.

Cash concentration

Cash concentration is a liquidity management capability whereby account balances are physically transferred to/from a single account (known as a master, header or concentration account) for liquidity management purposes. Cash concentration can take these forms:

  • Zero balancing (ZBA) – sometimes referred to as sweeping, zero balancing is a cash concentration capability whereby the total of all account balances is physically transferred into a nominated account.
  • Target balancing – also known as sweeping, target balancing is a cash concentration capability similar to ZBA, whereby all account balances are physically transferred into a nominated account leaving a predetermined amount in the sub-accounts.
  • Threshold balancing – a cash concentration capability similar to ZBA, whereby the balances of the sub-accounts are physically transferred in their totality into a nominated account each time the sub-account balances reach a predetermined threshold.

Direct inter-company loans are not permitted in China and transactions between group entities can only occur if there is an underlying transaction between the entities. The restrictions on the free flow of foreign exchange into and out of China and between the capital and settlement accounts make cash concentration difficult, particularly for multiple entities. To allow domestic currency cash concentration to take place, companies can use an entrustment loan (EL) agreement. Under such an agreement, a domestic bank or China-registered group financial company acts as an intermediary by transferring funds between the participating entities. The EL structure requires SAFE approval. Because it is not a standard structure, care must be taken when establishing the structure. For non-residents, qualified multinational companies have also been permitted to concentrate foreign currency cash via the entrustment loan structure under the terms of the 2005 Pudong measures. Foreign currency funds and domestic currency funds (approved by SAFE) can also be concentrated to offshore banking units.

Cross border cash concentration

For residents, cross-border payments are only normally permitted for trade-related transactions with supporting documentation. However, some banks now offer automated cross-border sweeping of physical cash pools. Under the terms of the Pudong measures, non-residents qualified as multinational companies are able to manage payments to and from an overseas parent company, as long as this is explicitly authorised by the Chinese-based entities. Funds can also be concentrated to offshore banking units. Since 2012, the PBC and SAFE have started to permit some entities based in Beijing and Shanghai to automate cross-border sweeping and inter-company lending. This is subject to prior approval and strict transaction limits.

Notional pooling

Notional pooling is offered in local currency (RMB) and foreign currency by domestic and foreign banks in China, although it is subject to various SAFE and PBC restrictions. Notional pooling is not offered between multiple entities.

Electronic and internet banking

The use of electronic banking and internet banking is growing rapidly in China. At present, use is concentrated in the larger cities, although the PBC is encouraging local banks to invest in electronic banking capability. There is no nationwide electronic banking standard, but some banks allow their customers to submit bulk electronic payment files through ERP systems. There has been a growth in the availability of internet banking as the PBC authorises more banks to offer it. Both domestic and approved foreign banks are now permitted to offer internet banking in China. China has the world’s highest number of internet users with around 642 million users in mid 2014. However, this represents less than half the population, at around 47.3%. An estimated 35.6% of the population used online banking facilities at the beginning of 2014. The China Financial Certification Authority has developed a certificate system, which banks use to demonstrate their site’s encryption.

Liquidity management

Short-term investments

Short-term investments include:

  • Treasury bills – these may only be purchased by Qualified Foreign Institutional Investors.
  • Repurchase agreements (repos) – available using corporate and government bonds as security. Repos are not available to foreign-invested enterprises.
  • Demand deposits – available in local and foreign currency. The PBC sets a maximum interest rate for RMB-denominated deposits and for USD-denominated deposits with a value of less than US$3m. USD-denominated deposits with a value in excess of US$3m are not subject to any PBC-set interest rate ceiling.
  • Term deposits - As with demand deposits, the PBC sets a maximum interest rate for RMB-denominated deposits and for USD-denominated deposits with a value of less than US$3m. Maximum rates are set for RMB deposits for one week, one, three and six months, and one year. Maximum rates are set for relevant USD deposits for three and six months, and one and two years.
  • Commercial paper - Rates are often higher than the ceilings imposed on deposits by the PBC, making commercial paper an attractive short-term investment instrument. Commercial paper cannot be purchased by foreign-invested enterprises.

Money market funds are available in China.

Short-term borrowing

Borrowing instruments include:

  • Bank funding. Overdrafts, temporary advances (for up to three months) and revolving lines of credit (for up to one year) are available from local banks. Chinese banks issue loans subject to the General Rules on Loans issued by the PBC. This applies to loans offered to both local and foreign-invested enterprises. Interest rates are set by the PBC reference rates. Foreign banks do not have to comply with the same lending rules as domestic banks. Many companies prefer to arrange bank funding through Hong Kong as it is subject to fewer restrictions and the rates are typically lower.
  • Discounted trade bills. Bills of exchange are discounted by local and foreign banks.
  • Commercial paper can be issued, although the lack of a secondary market reduces its attractiveness to investors. Commercial paper issued in China is not available to foreign-invested entities.

Corporate finance

Capital markets

Mainland China’s two stock markets are the Shanghai and Shenzhen exchanges. A-shares (denominated in RMB) can be sold to local investors and Qualified Foreign Institutional Investors. B-shares (denominated in USD in Shanghai and HKD in Shenzhen) can be sold to foreigners and local investors with foreign currency accounts. Securities transactions are regulated by the China Securities Regulatory Commission.

Risk management instruments

Foreign exchange risk management instruments are subject to exchange controls applied by SAFE. The use of non-delivery forwards is the most common method of hedging foreign exchange risk. Swaps are only permitted for non-local currency pairs. Bond forwards can be traded to hedge interest rate risk.


Websites

Government website

People’s Bank of China

China Banking Regulatory Commission

China Securities Regulatory Commission

State Administration of Foreign Exchange

State Administration of Taxation

Ministry of Finance

Ministry of Commerce of the People’s Republic of China

International Chamber of Commerce

China Council for the Promotion of International Trade

Shanghai stock exchange

Shenzhen stock exchange

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