Canadian entrepreneurs worried about doing business in China should rest easy—for now
It would be an understatement to say that relations between Canada and China have hit an all-time low. For the business community, the rift is causing major uncertainty and trepidation. The question on many a Canadian CEO’s mind: Should we be doing business in China right now?
The short answer is: yes. But more on that in a moment.
For those who may have lost track of the many ongoing developments in this case, the Sino-Canadian fissure emerged when Canada arrested Huawei Technologies CFO Meng Wanzhou—daughter of the company’s founder Ren Zhengfei—as she transited through Vancouver International Airport after the U.S. issued targeted Meng with an arrest warrant and extradition request. Since then, American authorities have charged Meng with financial fraud and for violating U.S.-imposed sanctions based on alleged business dealings with Iran. The charges have not been proven, and the CFO faces an extradition hearing in Canada before she can be transferred south of the border to face prosecution.
Needless to say, Chinese authorities do not take kindly to the detention of one of their elite. In seeming retaliation, they apprehended Canadians Michael Kovrig and Michael Spavor—a former diplomat-turned-analyst, and a consultant with business ties to North Korea, respectively—and are holding them in detention without access to lawyers and only sporadic consular visits. After recently returning from a personal trip to China, I can confirm that the incident is very much on the mind of both Canadians doing business in the Middle Kingdom, as well as local Chinese who wonder which country will blink first, and potentially return relations to their normal, far less contentious state. Others wonder if this state of affairs might be the new reality. On that, only time will tell.
Back to the question of whether it’s time to put the brakes on overseas commerce. In short, it’s very much business as usual for the vast majority of Canadian companies that do business in China. While we have heard of some delays at the border for businesspeople and even goods being processed as they enter or exit the country, these are typically only minor hiccups. The reality is that China is a commercial powerhouse seeking to spread its influence across the globe. Without exports, achieving that objective becomes significantly more difficult.
However, entrepreneurs must be vigilant. As in any heated geopolitical situation, political turmoil can—and often does—cause collateral damage, and in this case there is the very real potential that the conflict could inflict pain on unassuming businesses. Our advice is simple: be proactive, be prepared for anything and have back-up plans in place should relations sour further.
That said, business still comes first. If opportunities arise, pursue them. The odds are that over the short to medium term, the three governments at play will reach a consensus and resolve the issue. That is, of course, assuming rational behaviour at the executive level, which is a far more precarious assumption than in years past.
Canadian entrepreneurs who manufacture products in China, for example, face far less risk than their counterparts who make major capital investments inside the country. The former can, in most cases, relocate a production facility or find another contract manufacturer in an alternate cost-effective production centre such as India. On the flipside, we’ve seen many investors take steps to repatriate capital to Canada due to the uncertainty.
The real concern for investors is transfer pricing—in short, the taxes levied when profits are moved out of a country to avoid or minimize taxation. Think of the number of countries that have established branch offices in Ireland to take advantage of the Emerald Isle’s low 12.5 per cent corporate tax rate, as an example. The Chinese government is still behind the West in building its tax infrastructure, and laws are lax to say the least when it comes to transfer pricing. Even the idea of auditing foreign fund transfers is relatively foreign in China. And that’s why entrepreneurs are worried. We know that the Chinese government will act in its own best interest, which leaves the door open to unpredictable taxation and potential punitive action against foreign entities.
If you’re investing heavily in the country and haven’t gotten your money out, work with a local chartered professional accountant with international reach in their practice to game out potential tax scenarios and understand the implications of major changes as they pertain to your business. Most importantly, be prepared to add lawyers and possibly another accountant to your team of qualified professionals, both in China and in Canada, to ensure effective representation in both countries. Doing so will help you navigate the complexities of international tax law, fund transfers and other important considerations such as Canadian and Chinese immigration policies.
And don’t wait until the Chinese government takes further action. Be ready for any scenario—and in the meantime, let’s all hope that cooler heads prevail in Ottawa, Washington and Beijing.
Jenny Lian, Partner
KRP LLP
Charles Wang, Managing Partner
Shanghai Jialiang CPAS Limited, Shanghai
