Impact of WTO Membership on the Transformation of the Chinese Laws - Essay Example

?To What Extent the Laws on Foreign Invested Enterprises in China Have Transformed in Line With China’s WTO Membership Table of Contents Introduction3 Main Body 4 Historic Background and Development of FIEs 4 Characteristics of Chinese Law Governing FIEs 6 Impact of WTO Membership on the Transformation of the Chinese Laws 11 Conclusion 13 References 14 Bibliography 17 Introduction A Foreign Invested Enterprise (FIE) is fundamentally described as a legal arrangement that facilitates a particular company to set up its business particularly in a foreign nation. In this similar contact, it has been apparently observed that especially in China, there lay a dual tax system which offers dissimilar tax regulations as well as incentive rules for both Chinese business enterprises along with Foreign Invested Enterprises (FIEs). Moreover, the ‘dual tax system’ has led towards imposition of different tax rates that are applicable to FIEs and Chinese enterprises. FIEs in China possess favourable tax treatment in comparison to domestic Chinese enterprises. The FIEs are also facilitated with special tax rates as well as deduction of taxes along with tax holidays 1(LI 2008). The People’s Republic of China (PRC) Enterprise Income Tax Law, from the beginning of the year 2008 has developed a unified tax system that is applicable for both domestic Chinese enterprise and FIEs. In accordance with the revised PRC law, it has been viewed that an income tax charge of 25 percent is applicable for all business enterprises of China2. In December 2001, China acceded towards significant World Trade Organisation (WTO) that deals with trade regulations between different nations, ultimately changed the scenario of the business law environment of China3. In this regard, WTO had devised significant reforms for different FIEs in China that emphasised upon minimising tariff rates as well as opening new sectors for foreign investment. Moreover, WTO has also reformed the legal system which includes protection of intellectual property as well as control of foreign exchange4. The discussion intends to emphasize upon examining the historic background, development and features of Chinese law governing the forms of organisation belonging to FIEs. Moreover, the WTO impact upon the transformation of Chinese business law will also be portrayed in the discussion. Main Body Historic Background and Development of FIEs The historic background and the development of Chinese law governing the forms of organisations of FIEs can be segregated into three phases that have been discussed hereunder. The Initial Stage (1979-1986) In the year 1979, a law on Chinese-Foreign Joint Ventures was approved and it was the first law of the State Council of China that is related to foreign investment consumption. The Chinese State Council from the year 1979 to 1980 had provided favourable as well as flexible policies with regard to foreign investments. In order to develop the Chinese economy as compared to Soviet Union, China developed a legal system based on Soviet Union legal framework. In this similar context, it was viewed that Hong Kong as well as Macao was regarded to be the major foreign investors in China and investments were mainly made in manufacturing units as well as hotels which are mainly labour intensive5. Steady Development Stage (1987-1991) In the year 1986, the State Council instigated a law relating to the development of foreign investments for the motive of minimising issues between domestic Chinese enterprises and FIEs. Moreover, the law helped in eliminating the problem of currency exchange for foreign investors and it also facilitated the foreign investors and export businesses to reap significant benefits. During this stage, foreign investments increased in export enterprises as well as manufacturing industries along with high technology industries and its expansion in many business areas was also been observed 6. Accelerated Development Stage (1992-1999) In the year 1993, it has been observed that the amount of foreign investment was amounted to US$ 110.85 billion in the year 1993 and US$ 58.12 billion in 1992. This increase in foreign investment had developed to a greater extent in the Chinese economy. Furthermore, it has also been viewed that that this rapid increase in foreign investment had expanded the areas of several business operational functions for FIEs. Moreover, different foreign enterprises were engaged with financial as well as legal services, insurance, accountancy, foreign exchange as well as in accountancy sectors7. Characteristics of Chinese Law Governing FIEs The development as well as the promotion of foreign investments in China had been observed from the year 1990. During this period, the investment environment had been favourable due to permissible laws for foreign investors to invest as well as develop FIEs. The major characteristics for the development of FIEs after 1990 was fundamentally identified to be a broad-based multi-level development plan that ultimately assisted the foreign investors to invest in capital intensive industries rather than labour intensive industries so that they can attain considerable long-term financial benefits8. The PRC government has provided numerous rules as well as regulations for governing foreign investments in China. In this regard, the Chinese government intends to deliver substantial investments particularly in needed industrial sectors with the intention of developing the economy of the nation by a greater extent. One of the major national regulations in China regarding foreign investment policies is ‘Regulation for Guiding the Direction of Foreign Investment’ which is also acknowledged as Guiding Regulations. The PRC government categorized industrial sectors into various segments which include encouraged, restricted, prohibited and permitted. The different categories of the industrial sectors have been detailed in the ‘Foreign Investment Industry Guidance Catalogue’. The details of the industrial sectors are updated by the PRC’s authorities at regular interval in the Catalogue. This Catalogue was mainly instigated by the Ministry of Commerce (MOFCOM) and the National Development and Reform Commission (NDRC)9. Types of FIEs Wholly Foreign-Owned Enterprises (WFOE) Wholly Foreign-Owned Enterprises (WFOE) as a form of FIE is regarded to be a limited liability based corporation which is wholly owned by foreign investors. The businesses in WFOE are generally performed without imposing any shareholding restrictions as per the Catalogue or regulations set out by PRC. A foreign investor is required to conduct a research of the catalogue as well as PRC regulations for determining the permits which are required for investing in such industries. This type of companies is mainly concerned with manufacturing activities which include export as well as advanced technology among others. Being a member of WTO, the activities of WFOE has increased to a wider scope which includes management as well as consulting services and software development10. Equity Joint Ventures (EJV) and Cooperative Joint Venture (CJV) Equity Joint Ventures (EJV) and Cooperative Joint Venture (CJV) are regarded as the industries that are not wholly owned FIEs. Moreover, foreign investors are required to be dependent on the resources as well as knowledge of Chinese partners belonging to such industries. There lies a significant difference between EJVs as well as CJVs with regard to profit as well as loss sharing management11. An EJV is a limited liability based corporation where profits as well as losses are determined on the basis of capital contributed by partners engaged in joint venture. This type of company is quite common for FIE particularly in the manufacturing segment. Conversely, a CJV is also viewed to be a limited liability concern in which the partners are offered with more flexibility with regard to the allocation of profits as well as losses rather on the basis of capital contributed by them12. Foreign-invested Companies Limited by Shares (FICLS) Foreign investors can set up a ‘company limited by shares’ only when they possess at least two initial shareholders with a single foreign investor. The foreign investor is required to provide Renminbi (RMB) 30 million as a minimum registered capital for starting up a ‘company limited by shares’. Foreign-invested Companies Limited by Shares (FICLS) is rarely established as a foreign investor that is required to provide huge capital as well as follow vast statutory regulations for setting up of such company. A foreign investor can expand EJV and can also transform it to be FICLS13. Foreign-invested Partnership Foreign investors can enter into partnership but they require an approval from NDRC as well as industry-specific endorsement. It has been viewed that Administration of Industry and Commerce (AIC) is entitled with the task of assessing foreign investments made as well as verifying the documents that are submitted for setting up such business14. Approval or Registration Procedures for Establishing an FIE The approval or registration process for the establishment of FIEs has been provided hereunder. Firstly, the investors are required to obtain approval for setting up the project from NDRC and an environment impact assessment examination is performed by environmental authority. Moreover, if FIEs intend to commence a more deeply regulated business then a preliminary approval is required for them which are to be obtained from applicable regulatory bodies15. Secondly, the investors are required to obtain approval application from MOFCOM for ascertaining a FIE. In this similar context, the level of MOFCOM is determined on the basis of capital investments as well as the industry classifications that are prescribed on the Foreign Investment Industry Guidance Catalogue (Catalogue). The time length for the approval of FIE establishment generally consumes much time depending on the classification of industries on the Catalogue16. Thirdly, the investors are required to submit the approval letter as well as certificate along with other requisite documents in a local branch of AIC for incorporating FIE as well as to acquire business licence. Moreover, FIE commence business activities under PRC law on acquiring the business licence from AIC17. Lastly, FIE is required to conduct certain other registration procedures with varied government departments which include tax bureau, finance bureau, foreign exchange authority, custom authority and labour bureau18. Corporate Governance A WFOE or EJV is mainly governed by its respective Board of Directors and other board representatives while performing their operational functions. The Chinese law states that corporate actions relating to modification of Article of Association, company’s dissolution as well as reduction or enhance of registered capital among others are required to be approved by the board and minority investors. Board meetings are required to be conducted periodically and a minimum of two-thirds of the Board of Directors must remain present for performing a quorum19. Limited liability Corporation under PRC Law is required to possess Board of Supervisors in addition to Board of Directors or Joint Management Committee. The Board of Supervisors consists of representatives of shareholders as well as employees. Conversely, the Board of Directors are entrusted with the task of limiting the power of Directors as well as the Senior Officers and also possess a legal authority to terminate them performing such activities that violates the principles of an effective corporate governance structure20. Impact of WTO Membership on the Transformation of the Chinese Laws China joined WTO in December 2001that ultimately supported the Chinese economy to establish significant reforms relating to elimination of varied restrictions on foreign direct investment (FDI) as well as reduction of tariff as well as non-tariff barriers. Moreover, the legal structure for businesses as well as investments is made transparent. On acquiring WTO membership, certain agreements in relation to the safeguard of intellectual property, trade associated investment course as well as anti-dumping mechanisms have been formulated. Furthermore, the membership also supported the country in settling trade disputes21. Chinese government has eliminated or minimised constraint of foreign investment in many industrial segments. Moreover, the Chinese government planned for opening different industry as well as service sectors relating to the development of FIEs. It has been viewed that inn many economic sectors, foreign investors are authorized for establishing WFOEs without any Chinese partners22. In addition, Chinese government also minimised several non-tariff barriers for better and enhanced trade practices engaging with WTO membership. In this regard, the non-tariff barriers are mainly related to health measures, import licensing requirements, technical standards as well as certification requirements. Moreover, on various imports, the Chinese government minimised import tariffs in order to enhance economic conditions at large. The Chinese government made the legal environment more transparent for conducting free trade as well as foreign investment by involving with the WTO membership23. The Chinese government with the accession to the WTO modified as well as reissued the Catalogue Guiding Foreign Investment in Industry and Regulations on Foreign Investment Guidelines. Moreover, the industries listed on this Catalogue are encouraged for making foreign investment. In the year 2002, limitations on certain industries have been withdrawn for enhancement of trade as well as in accordance with the commitment made to WTO24. Conclusion In relation to the Chinese law on the organisation of FIEs, it has been viewed that there prevails a dual tax system that provided the Chinese enterprises and various FIEs to comply with different tax laws. In this similar context, in the year 2008, a unified tax system has been developed for both Chinese enterprises as well as FIEs. There are five types of FIEs developed in China which are WFOE, EJV, CJV, foreign-invested partnership as well as FICLS. The main characteristics for the development of FIEs include diversified investments made in various industrial segments and the development of a revised favourable tax structure in order to encourage more foreign investment. China joined WTO in the year 2001 that ultimately supported the company to improve its economy. Being a member of WTO, China is quite successful in reducing tariff as well as non tariff barriers by a considerable level. Moreover, the legal structure for businesses is made transparent as well as planned for eliminating or reducing limits on foreign investment in China by having membership with WTO. The FIEs are generally required to follow procedures for approval or registration required for their establishment. It can be concluded that WTO membership impose significant impact upon the transformation of Chinese law governing the forms of organisations of FIEs by a significant level. References ANT-SINOVA (Hong Kong) Limited, “Four Main Types of Foreign Investment in China” (2012), http://www.sinova.com/_files/6FS-CN01-1101.pdf, accessed 28 November 2012. Bath, V, “Changes to China's foreign investment regime following China's accession to the World Trade Organisation and the implications for Australian investors” (2012), http://www.ag.gov.au/Documents/BBVivienne%20Bath%201_1.pdf, accessed 28 November 2012. Chow, Gregory C, “The Impact of Joining WTO on China’s Economic, Legal and Political Institutions” (2012), http://www.princeton.edu/~gchow/WTO.pdf, accessed 28 November 2012. Chen, Jianfu, Chinese Law: Context and Transformation, United States: Martinus Nijhoff Publishers, 2008. DECHERT LLP 2010, “The 2010 Dechert Guide to Foreign Investment in China”, DECHERT (November), 1-28. HUI YE LAW FIRM 2011, “Legal Guide To Doing Business In China”, M&A Law Firm (November), 1-18. LI, Qun, 2008, “Tax Incentive Policies for Foreign-Invested Enterprises in China and their Influence on Foreign Investment”, Revenue Law Journal 18, 1 (November), 1-41. Minter Ellison, “Alert – Update on China's Foreign Investment Industrial Guidance Catalogue (2011 Revision)” (2012), http://www.minterellison.com/Pub/NA/20120110_ForeignInvestment/, accessed 28 November 2012. Norton Rose LLP 2010, “Establishing a foreign invested enterprise in China”, Norton Rose (November), 6-19. Qin, Li Mei 2000, “Attracting Foreign Investment into the PRC the Enactment of Foreign Investment Laws”, Singapore Journal of International & Comparative Law 4 (November), 159-193. SBA Stone Forest, “Establishing a Foreign Invested Enterprise in China” (2012), http://www.sbasf.com/index.php/resources1/articles/item/145-establishing-a-foreign-invested-enterprise-in-china, accessed 28 November 2012. The US-China Business Council, “China Business Review” (2012), https://www.chinabusinessreview.com/public/1009/ross.html, accessed 28 November 2012. Tien, Xiaowen, & Lo, Vai Lo, Law and Investment in China: the Legal and Business Environments after WTO accession, United Kingdom: Routledge, 2005. Bibliography Bledsoe, David J, & Prosterman, Roy L 2000, “Policy, the Rule of Law, and Rural Land Reform in China”, RDI Reports on Foreign Aid and Development (November), 1-16. Central Intelligence Agency, “The World FactBook” (2012), https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html, accessed 28 November 2012. Huang, Yasheng 2003, “Selling China: Foreign Direct Investment During Reform Era”, Carnegie Endowment of International Peace (November), 1-18. Read More