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With the opening of the Chinese economy to foreign investments in the past 40 years, China is transforming into a global economic hub. However, with the standardisation of business administration with the International Financial Reporting Standards (IFRS), foreign investors need to be cautious of the differences between the global IFRS and the local Chinese GAAP. In this article, these inconsistencies between IFRS and Chinese GAAP are getting analysed, as well as looking into the optimal preparation for this challenge.
To increase the foreign direct investment (FDI) into the Chinese economy, the Public Republic of China (PRC) implemented special economic zones (SEZs) to further develop towards the biggest global economy. Hence, on the business administration level, this inquires for own accounting rules referred to as the Chinese Accounting Standards (CAS) or the Chinese General Accepted Accounting Principles (Chinese GAAP). While the CAS is implemented to reduce financial fraud or to optimize China’s tax strategy, in an international context the function of IFRS is to streamline international accounting regulations and transparency. Meaning, that the IFRS should be applied on top of the CAS so that the company can both adhere to the international and the local rules. Nowadays, while China starts to converge more with the IFRS principles, the Chinese GAAP still differs from the well-known and familiarized IFRS trademarked by foreign investors.
The organ of the Accounting Regulatory Department of the Ministry of Finance (MoF) is responsible for setting the accounting standards in China. As the previous regulations of the CAS were mainly concerned with sorting a balance sheet of the state-owned industry in the socialist era, the regulations in current years are aimed to reflect the financial status, analyse the operating results, and maintain transparency (for the state). The Chinese GAAP has two subordinate accounting policies:
In 2001, the GAAP initialy included the Accounting Standards for Business enterprises (ASBE01), however, the ASBE01 was in 2006 further transformed into the ASBE06. The ASBE06, which currently is still required for all publicly traded enterprises in China, is the main set of accounting measurements. Luckily, the Chinese GAAP (ASBE06), has key similarities with IFRS. For small-sized business cooperations, there is a special set of accounting measurements called the Accounting Standards for Small-Sized Business Enterprises (ASSBE). This standard can be seen as a merger between IFRS and ASBE06 and has the goal to make it easier for small enterprises to follow the tax regulations and accounting standards.
Differences Chinese Generally Accepted Accounting Principles (Chinese GAAP or CAS) and International Financial Reporting Standards (IFRS)
Knowing that the CAS and IFRS have similarities, it is evident that the foreign investor should be aware of the regulations that differ within these sets of accounting rules. Hereby the differences between the CAS (GAAP) and IFRS:
- Valuating Fixed Assets
Whereas the IFRS has the choice to utilize the preferred method of valuating fixed assets, the CAS does not endorse this flexibility. In IFRS, one can opt for re-evaluating the assets or use the historical-cost valuation method. In CAS, only the latter is agreed upon to be used when valuating fixed assets.
- Implementation Delays
Whenever IFRS updates/changes are released, these new IFRS rules are not immediately, and in some cases never, adopted in the CAS. In short, the Ministry of Finance (MoF) will review the latest release of the IFRS and see if it can be adopted into the China business framework. For foreign investors, this means that 1) the IFRS updates are delayed, 2) the IFRS might never be applied and thus results in 3) the IFRS regulations can be different than in other countries. This can lead to serious problems in companies with an overarching implementation of IFRS changes (e.g. software) in all of the subsidiary ventures.
- Common Services in China
When handling cases of common service in China, the CAS has a more detailed description of the situation. For example, In the case of merging two companies with similar interests and under the control of one entity. The CAS requires a restatement of the figure while IFRS has no specific rules for this situation.
- Uncommon Services in China
Opposite to the previous point, uncommon situations in China are less detailed than the IFRS counterpart. The Italian-Chinese Chamber of Commerce exemplifies this difference by looking at employee benefit plans. The CAS has no specific rules for staff benefits offered by international firms besides payments in the firm’s stock. In the case of using benefits packages for its subsidiaries, the mother company can get into serious problems and should always have contact with the MoF to address and record such transactions accurately.
- Fiscal Year
The fiscal year of the CAS starts from January 1st, while the start of the fiscal year can be decided by the company when applying IFRS. Regarding IFRS, the year must be 12 consecutive years.
How to successfully do business in China regarding the Chinese Accounting Standards?
To minimalize the potential risk of conflicts with the law, it is recommended for foreign investors to notice the differences between CAS and IFRS and apply both of the accounting standards in the right way. In this process of familiarizing with CAS, the differences should be known, and the contact between the firm and the Ministry of Finance should be optimal to resolve challenges and uncertainties. Moreover, be aware that the CAS can only be filed in the China language, and that short-cuts in the Chinese accounting world often result in serious delays and non-compliance: further complicating the international business. Thus, in the case of maintaining an overview of both CAS and IFRS, even while it is about 90-95% similar, it is recommended to have (specialized) agencies on your side. With experts on the topic, it is evident that the venture is assisted by experience. This way, the short straw will not be drawn when dealing in an unknown and new business environment.
For more assistance in the field of IFRS, the newest software by Amelkis can support enterprises to customize and analyse data while preserving an overview of the IFRS regulations.
If interested in personal advice regarding international business advice, tax situations or consolidation (in China), Global Connect Admin B.V. can assist you with these challenges due to the rich experience and framework of connections.
When intrigued by the personal IFRS-software solution, Global Connect Consultancy B.V. offers help with the installation, optimization, and customization of the Amelkis software Solution.
Doing business in Europe means taking into account the many local rules, EU laws and international regulations. It is not unusual to benefit from various tax benefits or to research the best possible tax solutions. However, tax evasion and aggressive tax schemes are highly unwanted and will be fined. Therefore, it is beneficial to look into the DAC6: The EU Mandatory Disclosure Rules for cross-border arrangements. Let’s check if your company is well-prepared for cross-border arrangements.
What is DAC6?
DAC6 is an EU Council Directive that entered into force on 25 June 2018 and is implemented by EU jurisdictions into EU national law. Furthermore, DAC6 amends the cooperation between the EU Member States by focusing on joint actions and audits.
This directive’s primary goal is to harmonize tax rules in Europe by providing tax authorities an early’ warning system’ that notifies potentially aggressive tax planning schemes. Therefore, intermediaries are obligated to disclose potentially aggressive tax planning schemes on cross-border arrangements, otherwise called ‘reportable cross-border arrangements.
Step 1: Check who is required to disclose reportable cross-border arrangements
Intermediaries, and in certain situations, taxpayers, have an obligation to report cross-border arrangements to the authorities. An intermediary may be relieved from its reporting obligation if they can prove that another intermediary has already reported the relevant arrangement. The image below shows an overview of who is required to disclose these arrangements.
Step 2: Check if the arrangement is cross-border and ‘reportable’
For an arrangement to be cross-border, at least one of the participants must be located in more than one EU Member State. There is no reporting obligation if all participants are tax residents in the same jurisdiction or if there is no connection with any EU Member State. However, even an arrangement between two entities from the same EU Member State may be considered cross-border in some cases. A prime example is an EU entity with foreign shareholders. Below is a short overview of examples of non-cross-border and cross-border transactions.
For an arrangement to be reportable, one or more of the DAC6 Hallmarks must be met as set out in Annex IV of the DAC6 Directive. Therefore, a cross-border arrangement will only be reportable if one or more DAC6 Hallmarks are met. These hallmarks are characteristics or features of a cross-border arrangement that may indicate a potentially aggressive tax planning structure. The five categories of the hallmarks set out by the DAC6 directive are:
- Generic hallmarks linked to the main benefit test
- Specific hallmarks linked to the main benefit test
- Specific transactions related to cross-border transactions
- Specific hallmarks concerning automatic exchange of information and beneficial ownership
- Specific hallmarks concerning transfer pricing arrangements
The ‘arrangements’ mentioned in the hallmarks represent undefined terms included in the five hallmark categories.
Step 3: Do the Main Benefit Test
The intermediary or taxpayer may benefit from a tax advantage when they fulfill the ‘main benefit test.’ However, this tax advantage may only be considered under generic hallmarks of categories A, B, and (some parts of) C.
However, it is crucial to keep in mind that due to the broad scope of the hallmarks, DAC6 creates a risk of under-reporting and over-reporting. Furthermore, there is no consistent interpretative guidance agreed between the EU Member States.
Step 4: Act on time and prepare for penalties
You should report reportable cross-border arrangements through a special reporting form. Each Member State has its tax authority, so it is recommended to check out your local tax authority website. Generally, you must report a reportable cross-border arrangement within thirty days of the earliest of:
- the day after the arrangement is made available for implementation;
- the day after the arrangement is ready for implementation; or
- when the first step in the implementation of the arrangement has been made.
In case of non-compliance, such as non-reporting, incomplete or inaccurate information, the relevant intermediary and taxpayer may be subject to penalties. These penalties are up to a maximum of €870,000. In some instances, there will be a criminal prosecution. In other words, it is better to prevent penalties altogether. After all, significant sanctions and reputational risks apply to not only the businesses but also the intermediaries!
As mentioned earlier, there are risks in reporting your cross-border arrangements, such as under- and over-reporting. Meanwhile, many companies either miss out on tax benefits or end up overlooking essential hallmarks. We at Global Connect Admin provide tax advice for many European companies and international companies that have activity in the EU. Do you have any questions regarding the DAC6, (reportable) cross-border arrangements or other vital information to do business successfully? Feel free to send us any questions our way; we would love to assist you.
It has been over ten years since the Great East Japan Earthquake hit Fukushima. Thanks to worldwide support and Fukushima’s rebuilding and cleanup projects in Japan, the prefecture is slowly but surely making an economic recovery. The road to full recovery is not yet finished. However, what if you want to invest or start a business in Fukushima? Is it better to wait another ten years, or are there exciting opportunities for foreign companies? Let’s look at the Japanese prefecture that is mainly known for the earthquake and nuclear disaster.
Restoring the image of Fukushima
In February 2021, the Fukushima Ambassadors of Reconstruction (ふくしま復興大使) published a video explaining the rebuilding of Fukushima and conveying their gratitude to the received support and aid. They are well aware Fukushima is still recovering; however, they want the whole world to know that living and working in Fukushima is not equivalent to nuclear danger. For the prefecture to fully recover and for (foreign) businesses to fully employ, local and national governments need to continue and alter their support.
Fukushima is a prefecture with around 2,8 million inhabitants, with a GDP of 7,399,860 million Yen in 2014¹. From a business perspective, the main challenges are the aftermath of the nuclear disaster and finding the region’s industries and economy’s strengths. However, there are many opportunities if your business or organization is part of the following sectors and industries:
- Ceramic engineering and soil
- Food and agriculture
- Electronic machinery
- Call centers
- Data centers
- Research and development (R&D)
- Advanced technology
- Medical and welfare
- Renewable energy
¹Based on the Prefectural Citizens’ Economic Accounts of 2014 by the Cabinet Office
Incentives, subsidies and tax
Suppose you want to do business in Fukushima Prefecture or Fukushima City. In that case, the Fukushima government provides a subsidy of up to 50% of the designated land acquisition cost to support enterprise establishment. There is a subsidy system for foreign companies as well, for the costs of renting facilities, payment of utilities, management consulting fees, and personnel expenses. Furthermore, the Japanese and prefectural governments offer other subsidy systems and preferential tax systems, such as exempting corporate tax for five years.
You can receive a subsidy worth 50% of the land acquisition cost when you acquire 1.5 ha or more of an industrial park, invest 150 million yen or more in fixed assets, and start operating within three years of acquiring the land (30% for under 1.5). In addition, when you acquire privately-owned land and construct new bases in industrial regions, 5% of the acquisition cost is subsidized. In the case of R&D companies in medical care, medical welfare and/or renewable energy, this will be 10% instead of 5%.
Another subsidy for the promotion of employment is available when a company received a subsidy for land acquisition or was established in the mayor’s area and continuously employs new local employees for more than a year.
Suppose you employ more than five new local employees within a year or more since the start of operating. In that case, a three-year subsidy of 500,000 yen per employer is available if your company has received land acquisition grants. Once again, if your organization is medical and welfare-related and/or focuses on renewable energy R&D, you can enjoy a five-year subsidy instead of a three-year one. Furthermore, 50% of office rents are subsidized for three years as well.
Fukushima Special Zone Taxation for the Promotion of Industry Revival Investment
The manufacturing-related industry can benefit from Preferential Tax Treatment. This Treatment contains the following:
- Newly established businesses receive essential exempting of corporate tax for five years
- Businesses receive special depreciation or tax credit for investments in machinery, devices, and building.
- For the employment of disaster victims, you receive a tax credit of 10% for salaries payment.
- If your company is active in development and research, you will receive instant depreciation and a tax credit of depreciable assets.
- There are local tax exemptions in Fukushima Prefecture, such as enterprise tax, real estate acquisition tax, and fixed asset tax.
There is still much work to be done before Fukushima Prefecture is its old self. If you and your business want to assist Japanese communities and organizations hit by natural disasters, you can do so on the Japanese Red Cross Society website.
If you are looking for a professional to help you find your Fukushima business opportunities, do not hesitate to talk to us. We can either help you with this or help you find someone who can!
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The four sets of accounting standards in Japan are the International Financial Reporting Standards (IFRS), Japanese Generally Accepted Accounting Principles (J-GAAP), Japan’s Modified International Standards (JMIS) and the United States Generally Accepted Accounting Principles (US GAAP). In this article, we explain why IFRS and J-GAAP are the most prominent accounting standards in Japan. Whereas J-GAAP is mostly used for Japanese small-medium enterprises (SMEs), more and more Japanese companies apply to IFRS every year. As a Japanese company, with or without (foreign) subsidiaries, what should you keep in mind when applying these standards? Is it more convenient to use J-GAAP since it is well implemented? Or is it perhaps more desirable to choose IFRS since this method makes comparing per country more convenient?
IFRS in Japan
IFRS is principle-based, emphasizes balance sheets, and has global standards, with a flexible implementation convenient to use and easy to understand. Both Japan and the US implement GAAP but have adopted IFRS as a bylaw principle. This is a set of detailed rules regarding accounting standards, interpretation guidelines, practical guidelines and more. However, the rules are roughly sketched compared to J-GAAP. Many notes need to be taken with efficient substantiation for a sufficient interpretation of details per company and country. Unlike J-GAAP, IFRS includes non-operating income as ‘other operating income’ and ‘other operating expenses.’
In Japan, the income statement is emphasized as information for evaluating the asset value required for investors and creditors and the profit and loss statement for a certain period. Japanese accounting standards implement ‘ordinary’ and ‘extraordinary’ profit and loss. Non-operating income – such as dividends and stock interests, deposits and savings – and operating income – such as main business profit – are included. After deducting non-operating expenses (e.g., loss on sales of interest payments and loans), ordinary income is an essential indicator of corporate profitability under the Japanese accounting standards.
IFRS versus J-GAAP
For companies with a subsidiary or subsidiaries overseas, the implementation of IFRS can unify the accounting indicators: Accounting management becomes convenient by comparing everyone’s performance efficiently. Japanese companies without subsidiaries can apply to IFRS as well if they have a capital of 2 billion yen or more, or are newly registered to the stock market. The application is voluntary, as a de facto national policy. At this moment (March 2021), no conclusion has been reached by the Japanese government regarding compulsory applications.
As stated by the Companies Act, disclosure under J-GAAP is still required, so companies have to prepare multiple reports for both IFRS and the Japanese accounting standards. As IFRS is based on principles, a significant amount of information is necessary, which increases the amount of clerical work involved and the burden on the person in charge.
‘Goodwill’ is the difference between a company’s acquisition price and its book value. Under J-GAAP, a fixed amount is amortized and expensed every year, so profits in the account settlements will inevitably decrease. Goodwill must be amortized within every 20 year acquisition period, but in IFRS, this is not the case. In the IFRS case, goodwill is amortized unless the corporate value drops significantly, resulting in not being recorded as an expense. The value decreases after each period, registered as an impairment loss without amortization.
It will cost a certain amount of money to switch from J-GAAP to IFRS. Changing standards, systems, and audits costs time and money, making companies think twice before switching systems, especially if they choose to do business in Japan only.
Companies that are active in mergers and acquisitions (M&A) can profit in their financial results with IFRS. Since IFRS is a globally used method, many foreign investors understand IFRS better than J-GAAP. Examples of companies applying IFRS that are active in M&A are Rakuten and Softbank.
In December 2018, Japan erased the variances between IFRS and J-GAAP, by bridging the gaps. However, IFRS is different from Japanese conventional accounting standards, which can make application challenging. IFRS is frequently revised, so companies have to consider this as well. As mentioned before, Japanese companies adopting IFRS are increasing but compared to the world, the number of applications is still small, making referred information scarce.
In Japan, J-GAAP still mostly applied standard; however, with global IFRS support and more Japanese companies applying this standard, IFRS is most likely the accounting future for Japan. IFRS is frequently revised and has different rules than J-GAAP, so you need to keep up to-to-date with the latest information and knowledge, which is both rewarding yet time and cost-consuming. This track of data can be quite challenging, so many companies leave this part to an expert. If you are looking for an expert to help you with this, feel free to contact us. Global Connect Admin (GCA) already helps multinationals with subsidiaries with IFRS standards, accounting and financial management, and fiscal reports. While they focus on their core business, we assist them with their financial business. Feel free to ask us questions or read other GCA articles.
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Just as the year before, 2021 is another year with many changes. The European Commission has published new documents on the New Transatlantic Agenda. We are entering a new era with the US re-joining the Paris Agreement and President Joe Biden supporting the World Health Organization (WHO). With the enrollment of European green energy projects and the COVID-19 vaccines, together with global cooperation, the future seems brighter. However, there is still a lot to do before the European Union and the United States can sit back and relax.
Challenge 1: COVID-19 pandemic
Perhaps the biggest challenge for both the US and the Netherlands is the COVID-19 pandemic. Luckily the USA has re-joined the WHO. At the same time, the WHO is making sure vaccines are distributed to the developed world. This distribution is in everyone’s interest because the economy cannot go back to normal until the pandemic is completely vanquished and the world economy is restored.
Challenge 2: Digitalization
Forced by the pandemic, the speed of digitalization has significantly increased. Hopefully, the next time emergencies happen, the world is better prepared and able to act more efficiently with strategic autonomy. Protectionism is not the answer; we need to invest in our strengths and those of other countries. The EU aspires to be the world leader in energy, defense, key technologies and raw materials. The US is an exciting partner for the EU, and vice versa.
Challenge 3: Free Trade Agreements
“America First” became “Build Back Better.” The US economy has to be sufficiently competitive, and there are still actions needed to combat trade issues, but establishing FTAs can support this. Former-president Donald Trump blocked the application for new WHO memberships, which created uncertainty for businesses. If there is one thing businesses do not enjoy, it is uncertainty. President Biden has lifted the application block, which helps rebuild the partnership between the US and the WHO.
Challenge 4: US-China Trade War
China continues to both assist and challenge the world. The US and China have opposite technology and societal systems. In the past years, trade wars occurred between the two nations, affecting the EU. It seems the EU has to choose one of the two eventually, which adds fuel to the fire. The US and the EU have familiar societal systems and dialogue on technology. However, China is the EU’s leading supplier of goods. What will happen in the future is something only time can tell.
Challenge 5: Climate change
Organizations need to align a common strategy to make the best out of online platforms and big tech. With a solid plan, the approach to critical technologist protection, global change program implementation, and continuing the EU-US technology trade council goes sufficiently smoother. A big topic right now is climate change, with the US immediately re-joining the Paris Agreement at the start of President Biden’s inauguration. To reach the 2030 and 2050 climate goals, an ETS system (Emissions Trading System) is necessary. In 2005 the EU established the first large greenhouse to combat climate change by reducing greenhouse gas emissions. The EU ETS is the first global greenhouse gas emission trading-scheme and still the largest. If two immense economic powers (hint: the US and the EU) were to share the same system, we can effectively combat global warming, bringing hope to future generations. Another future investment is hydrogen: the EU is busy setting up hydrogen projects. We have not reached our climate goals. However, with the US back in the Paris Agreement, the future seems promising.
Are you wondering how to establish or expand your business to China or the US? As an experienced global administration office, Global Connect Admin can assist you with all matters of financial management, company administration, accounting and bookkeeping, and much more. Feel free to talk to us.
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Cross-Border positions, also referred to as external positions, are most likely for any organization that goes global. Suppose your organization has its main office in, for example, the United States, with branches in Europe and/or Asia. In that case, you will have asset and liability positions of reporting banking offices outside the US. Cross-border financing helps with international trade by providing a source of funding, enabling businesses to compete globally and beyond their domestic borders. This sometimes requires the lender or provider to act as an agent between companies, suppliers, and end-customers. Examples are cross-border loans, letters of credit, repatriable income, or bankers acceptances (BA).
With the global pandemic forcing organizations to change strategies or even their core business, many have expanded globally or relocated to another country. We have taken a closer look at the changes in cross-border positions worldwide by viewing outstanding claims and liabilities of Q3 2020 in trillions of US dollars.
Between Q3 2019 and Q3 2020, cross-border claims on developed countries increased by 1.75 trillion USD, with the liabilities increasing by 1.46 trillion USD.
Claims in developed countries, otherwise called advanced economies, have declined. Intragroup positions partly drove the movements from one year earlier. The decline is centered on related offices, especially on those in the US, due to the unwinding of central bank dollar swap lines.
Non-bank financial institutions (NBFIs) were involved with the decline; claims on the UK, the Netherlands, Luxembourg, France and Italy declined, with most of them vis-à-vis NBFIs. Another partly offset influence was the increase in Japan and Germany’s claims, notably their NBFIs and resident banks.
During the pandemic, creditor banks in developed countries and offshore centers have reported a large contraction in their cross-border claims on emerging markets and developing economies (EMDE). During Q2 and Q3 of 2020, global cross-border shares on emerging markets and developing economies declined by 95 billion USD. Major developed countries and offshore creditors – such as UK, US, Hong Kong, Singapore and Japan banks – reduced their lending to developing countries by 97 billion USD in these six months.
The Q3 2020 claims have increased by 0.07 trillion USD in the offshore centers, with the Q2 2020 liabilities increasing by 0.15 trillion USD.
Compared to claims on developed countries, claims on offshore centers expanded by 41 billion USD. Especially Hong Kong SAR and the Cayman Islands have been doing well. More than half of Hong Kong’s increase was intragroup claims, with Singapore and Bermuda having the least growth.
Emerging market and developing economies
The Q3 2020 claims increased 0.03 trillion USD compared to Q3 2019. The Q3 2020 liabilities, compared to Q3 2019, have increased as well, with 0.13 trillion USD.
Cross-border claims on emerging markets and developing economies continued to fall, driven again by claims on Latin America and the Caribbean, with the year-on-year growth remaining negative. Just as one year earlier, these movements were partly driven by intragroup positions. Claims on non-financial corporations in major economic regions of Brazil, Mexico, Chile, Colombia and Argentina declined the most.
As mentioned earlier, creditors reported a large contraction in cross-border claims in developing countries. However, simultaneously, creditor banks within these countries reported a modest expansion. In contrast to the reduced lending of 95 billion USD, banks in EMDE booked a 26 billion USD increase in cross-border claims during Q2 and Q3 2020. The banks that led this expansion in emerging Asia-Pacific were mainly China and Chinese Taipei.
Before you expand or start abroad, it is helpful to know what parts of the world are convenient for your business. Having cross-border positions in countries such as the US, the Netherlands, France, Germany, and Japan can be rewarding; however, even though they work well together, each country and/or state has individual rules. Meanwhile, China and Russia have many business opportunities, but you must have high insider knowledge to use and find all the business possibilities. The UK has always played a big part in the global economy; however, much has changed due to Brexit. In case you want a professional to help you with this, feel free to send us a message. As the saying goes: a good beginning is half the work.
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