Demystifying corporate structure, financing expansion and taxation

Do you want to invest in the United States, but you are still helpless in the face of high and complicated taxes? At the China-US Manufacturing Forum, tax expert Zheng Lili taught you how to avoid tax reasonably and plan your investment in the US effectively.

Video Watch: U.S.-China Manufacturing Forum: Demystifying Corporate Structure, Financing Expansion, and Taxation

Imagine this: Saturday afternoon, at a charming beach bar in Hong Kong, a group of Americans are drinking and dining together, and everyone finds that the chicken wings on the plate are larger than normal. They asked the waiter, what kind of bird is this? The waiter murmured impatiently, the Americans really don't know the goods, turned around and replied, it's not a bird, it's a chicken wing.

Although both Americans and Chinese speak English, in the American mind, anything with wings, feathers and beaks is considered a bird; while China has a completely different understanding of birds, so He said it was chicken. It can be seen from this story that if you go to the United States, even if you can speak English, you will not be able to communicate in depth without understanding the local cultural habits. Therefore, you need professional help.

Now let's get back to the point. Money is important to everyone. In the word "crisis" in Chinese, "crisis" means risk, danger, and "machine" means opportunity. At present, the US economy has resumed growth, but the growth rate is slow, and Europe is emerging from the shadow of the economic crisis. At the same time, there are a lot of business opportunities in real estate, manufacturing, especially the highly automated manufacturing, because the current energy prices in the United States are very low. A large number of domestic companies in the United States went bankrupt during the financial crisis, so many Chinese companies took the opportunity to enter the United States to capture business opportunities.

The question is, am I going to the US for M&A? Whether to do greenfield investment requires a specific analysis of specific circumstances. According to the latest data from 2013, the proportion of the two investment methods varies from quarter to quarter, and overall, it is divided into 50 and 50. So, there is no right or wrong way to invest, it should depend on your specific business.

We should look at "money". A lot of investment goes into the US, where is the money? The east and west coasts of the United States have attracted a lot of investment, and there is also a lot of manufacturing investment in the Midwest. In addition, there are places such as California and New York on the east coast. If you are interested in investing in the United States, you can refer to other popular locations chosen by Chinese companies.

So where did the investment come from? Among them, Guangdong accounted for a large proportion, in addition to Shanghai, Beijing, Shandong and Zhejiang are the main sources of investment. It can be seen that investment in the United States comes from many regions in China.

We're back in the US again. Once you come to the United States, you need to develop an investment strategy. Why am I going to America? Is it to sell products that are being made in China? If so, what marketing strategy should be used for the US market? You will use a sales and marketing strategy to sell to the United States. In this case, the investment structure is not the same. First you need to move your manufacturing operations to the U.S., closer to the end consumer, and reduce shipping time. Then you will have to set up a legal entity locally. The cost is also different. The investment structure is also different if you buy IP technology in the US. Once you've decided on an investment strategy, you should consider the following (I won't go into detail here), such as legal, tax and financing, human resources, real estate, management, and intellectual property, to name a few. Now let me talk about tax and financing in detail.

Briefly describe the US tax system. Federal tax 35%, state tax 0-10% or 11%, plus personal income tax. Every state in the US has its own tax system like different small countries. The states marked in green in the picture have no corporate and personal income tax, but you don't necessarily want to choose to open a business in these places. Should you invest without paying taxes? uncertain. States in yellow have no personal income tax, and regions in blue have state and local taxes. Many people may not want to invest in taxed areas, but the statistics of the hottest areas for investment just shown show that some high-tax areas still attract a lot of investment. why? Because there are more local business opportunities, and taxes are manageable.

How many people have been to Vietnam? In the past, buildings in Vietnam were all slender structures, because the local property tax was levied according to the width of the building's street-facing floor. Therefore, the local area mostly adopts the building structure with narrow frontage, deep interior and high building. The tax system does affect individual behavior.

Let's look at a problem: a company makes $100, the Chinese tax rate is 25%, and the US state tax plus federal tax is about 40%. In China, $75 is left after taxes; in the US, $60 is left. You would say that US taxes are high. True if you don't have a good plan. With proper planning, taxes can be effectively reduced. The US government does not allow tax evasion, but reasonable tax avoidance is no problem.

China has a 17% value-added tax, and with corporate income tax, China's tax rate is on par with or even higher than that of the United States. So, don't look at the apparent tax rate, but look at the actual tax. This effective taxation can be managed effectively, which requires proper planning.

Below are some common investing styles. Some Chinese companies set up local offices to collect information and do sales and marketing; some set up wholly-owned subsidiaries to provide more after-sales services; and many Chinese companies invest through intermediary holding companies. According to a report by the China Council for the Promotion of International Trade (CCPIT), 60% of Chinese outbound investment companies use intermediary holding companies in Hong Kong. Is this the best option? uncertain. The reason is explained below.

If you choose an intermediary holding company in Hong Kong and there is no trade agreement between Hong Kong and the United States. You make $100 in the US, pay $40 in local tax, and leave $60 left. If you distribute dividends to a Hong Kong company, there is also a 30% withholding tax. Your total tax is not 70%, but 58%. Does this mean that media companies in Hong Kong should not be chosen? I don't mean that, but that you should understand the business you are in. The amount of your taxes depends entirely on your business model. Another thing to consider is finding a way out for yourself. The thirty-six strategies of Sun Tzu's Art of War are the best strategies. It's not because you don't trust the country you're investing in, but you still have to give yourself a way out. Therefore, these issues should be comprehensively considered when determining the investment method.

Now I want to talk about financing methods. You make equity investments or credit investments and the results can be very different. As we mentioned earlier, you make $100 in equity, pay $40 in taxes, and you have $60 remaining, plus 30% withholding tax. In the same situation, if you make a reasonable credit investment, the income is not subject to tax and there is no withholding tax. Two different ways to invest and how to inject capital can result in a 20% to 30% change in tax. This is one aspect of our planning that needs to be done.

In addition, your business model also affects taxation. In short, your business model, exit strategy and investment strategy are key.

You should be aware that Hong Kong has trade agreements with some other countries, but whether or not to develop an investment strategy based on it depends on the circumstances. In addition, you can also consider the intermediary holding company in Hong Kong, which requires complex planning, and if you do it well in advance, you will benefit a lot; if you don't plan ahead, many laws and regulations in the United States are transparent, but sometimes a single mistake can lead to an eternity. Hate, once the investment is wrong, it is difficult to recover the loss, so the investment needs to be cautious.