April 2nd, 2012
01:05 PM GMT
Hong Kong (CNN) – American businessman Scott Huff has a tough juggling act. His business spans three countries: China, Cambodia and the United States. That means keeping his eye on many things, including three separate corporate tax codes. "My advice about corporate taxes is to stay on your toes. It's always changing. It's part of the total burden," he says.
Huff's company, Innovate International, is a design engineering firm based in Shenzhen, China that manufactures everything from hand tools to pet toys. Corporate tax in China is a flat rate of 25%. Cambodia has none if you get can "qualified investor status." Most international companies easily obtain this status because the Cambodian government is trying to attract more business to the country. The U.S. corporate tax rate can be as high as 35% but will likely change since the Republican candidates and President Obama have all proposed to lower the tax rate in order to stimulate the U.S. economy.
China is no longer the ideal manufacturing base it was 10 years ago. "In China, the perfect storm there has a lot of people concerned. The cost of labor is going in one direction [up]. It's driving the demand for higher costs all around and it has actually brought competition with the U.S. closer together again," Huff says. Wage inflation, higher rents, food inflation have all put pressure on companies with operations in China. As a result, Huff recently started to move some of his automated production back to the U.S. where he won't have to pay as many salaries and can eliminate a good chunk of overseas shipping costs to U.S. clients. The recent political talk of lowering corporate taxes in the U.S. is also another incentive. "We found it's cheaper to make things like plastic cups, water bottles and some kitchen products in the U.S. now," he adds.
Lapine, Inc. is a U.S. distributor and representative for multinational companies like Pepsi, Kraft, Altria and Bed, Bath and Beyond. President Noah Lapine says he has seen a swing of manufacturing back to the U.S. "At the end of the day, it's going to come down to manufacturing efficiencies. Suddenly, there are pretty good efficiencies that are closing the gap. For example with injection molding, energy efficient equipment is an advantage. Energy consumption is a consideration. The cost of labor in China is causing a difference. Suddenly a 30% differential in savings may now be in the single digits."
At the same time, China is evolving and trying to move from low-skilled manufacturing to high-skilled labor and innovation. If you're a high-tech business in China, you get preferential tax treatment with a 15% corporate tax rate. But to get the high tech status, you have to jump through many hoops in China. Shenzhen software entrepreneur John Lin is going through the application process now. His start-up company, Noitom, makes motion-sensor products. The main product is a sensor that measures data in a golf swing and transfers the club-head speed, angle and other data to the golfer's smartphone. Lin expects that Noitom will have to wait about two years before getting official approval as a high-tech company. "Years ago, getting a high-tech title was not that difficult. Now it's very difficult. R & D needs to be a certain percentage of revenue. For example, a company with annual revenue of less than 50 million RMB [US$7.9 million], R&D expenditures need to be at least 6%. Another regulation is the high-tech product or service you sell has to be 60% of your total revenue. But the regulations keep changing."
The lowest corporate taxes in Asia are Hong Kong (16.5%) and Singapore (17%). When I asked Lin why he doesn't just relocate to one of these places, he said Chinese high-tech talent is very good and cheap compared to other major cities. For example, he employs ten experienced engineers in Shenzhen and their average salary is US$800-1200 per month. "That's our advantage," Lin says, adding "high tech labor cost is relatively low here compared to Hong Kong and the U.S."
While corporate taxes are an issue to consider for businesses, it can be manageable. After taking various tax deductions, Huff of Innovate International pays an average corporate tax rate in China of about 6%. "The corporate tax is typically not the biggest component, but it can tip you over the edge. I would say there's more significance with the costs of labor, energy and transportation," says Huff.
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