Last week’s webinar It's Your Money: Cash Repatriation Best Practices encouraged a lot of discussion. There were several interesting questions from attendees for HSP's advisory services expert Arden Ng; here are some of the highlights, and answers:
In most cases, local tax authorities will want the loan to come from the parent only, to avoid complex intercompany transaction models where you have loans from other entities. However, this could be permissible based on specific circumstances.
It’s best to have the loan come from the parent entity, as when you want to repatriate interest payments, you will then have a much easier process. Authorities could approve the loan itself faster, and this helps remove one potential “gray area”, where tax directives do not provide exact rules. Where there is any “gray area” ,tax authorities must use their own judgment, extending the process. Furthermore, even if you receive approval in one situation, you may not obtain approval when you try to do the same thing again.
In China, you need to follow local GAAP in calculating the profits of your entity. A required audit by a local CPA firm will determine if you have properly set aside profits in accordance with local rules. Once the position of the company is recorded, you can determine what amount to repatriate, net of local tax. Every jurisdiction differs, but the overall approach is that the authorities want to make sure your accounts are appropriate according to local rules, including taxes.
The critical thing to understand is how profit is going to be taxed in the U.K. vs. the U.S. Both nations have different tax rates and rules which are important to consider in the planning process. Also important to consider are different revenue models. Though often, foreign entities will operate under a cost-plus model. If other structures are used, the tax implications will differ.
In most cases, repatriation in China takes, at minimum, one to two weeks; depending on the kind of repatriation you are considering employing. For example, if you have an already approved royalty agreement in place, repatriation should be a straightforward process, provided the required documents are available. However, using the dividend/profit method may require an audit or tax clearance, potentially increasing the time frame to two to three months. You would need to budget time to complete the related processes, such as completion of an audit, and obtaining a tax clearance. These processes take time, and usually cannot proceed concurrently. Whatever method of repatriation you choose, the timeframe can often be shortened by having a defined process in place and the right documentation prepared.
This is a possible scenario in China and other parts of Asia, as well as Latin America. It is a very relevant question which has serious implications. A good way to avoid these situations is to use a local agent to help you with process. If your local accounting firm/tax consultant is part of a reputable global organization with good credentials and a solid reputation at stake, they will likely have stringent Foreign Corrupt Practices Act compliance rules and guidelines in place, as well as a strong business ethics policy. Local providers will also likely know how to avoid giving in to these requests. Remember, if you know your agent/consultant is using gifts as a means to get business done in country, it is unlawful; you can be implicated as well.
The official version of China regulations are in Chinese, although is it relatively common to find English translations. However, be cautious when using translated copies, as the context and meaning of provisions may sometimes be lost in translation. For major policy or business decisions, I recommend that you speak with your local consultants to get an accurate interpretation of rules.
Regarding dividends, this sounds generally correct. The timing is related to the need for audit and tax clearance so that authorities can know your final tax position. Then, they can give you the green light to repatriate your excess profit/dividends.
From a planning perspective, you should be planning at least a quarter out. There are a lot of nuances involved in the process, including tax considerations for the entity and the parent, the actual mechanics of repatriation, what local authorities need to notified, etc.
Banks can also cause a hold up, as they play a critical role to process, and may need to get approvals depending on the stringency of the country’s foreign currency controls. A recent example was where a U.S. entity’s WFOE in China needed funds for operating expenses. The U.S. parent sent money, but since a proper intercompany service agreement wasn’t in place, the Chinese bank held the cash and refused to disperse it to the local entity. When the U.S. parent finally asked to have the money sent back, it took two months and several bank service charges later to actually have the funds get back to the States. Although this example is related to cash “infusion”, the same could happen with cash repatriation if inadequate planning is performed.
It is very important. Loans between group companies (especially those involving off-shore entities) usually would be scrutinized by the authorities for presence of arm’s length standard. Additionally, in regimes where there are thin capitalization rules, inter-company loans need to be maintained within a pre-set debt/equity ratio in order for such expenses to be tax deductible. This in turn, impacts the amount of cash available for repatriation.