Chinese Investment in the U.S.: An Interview with HA&W
Chinese Companies Invest in the U.S.: Cross-Cultural Challenges from a Tax Consulting Perspective
Center Director, Penelope Prime, spoke with Mitchell Kopelman, Tax Practice Group Director, and Wendy Lu, Tax Senior Manager, at Habif, Arogeti & Wynne, LLP in Atlanta, Georgia, on November 10, 2015 about working with Chinese clients investing in the U.S. This interview was edited for length and clarity. Habif, Arogeti & Wynne is not a financial sponsor of the Chinese Research Center.
Thank you both for joining me. To begin, please describe what kind of services HA&W provides for your international clients and for Chinese companies in particular. Which services do your Chinese clients need and are they willing to pay for?
MK: We provide our Chinese clients the same types of services we provide to clients from other countries and to U.S. companies. These services range from tax consulting to preparing tax returns. For example, there are companies that come into the U.S. that are performing R&D locally in the United States. They can benefit from R&D tax credits, which are worth a lot of money to a company in the U.S. doing that, and especially in Georgia. Georgia has the best R&D tax credit incentive in the country.
Many companies that come from China – whether they are family owned, state owned or publicly traded in China – typically need their U.S. financial statement audited, so we’ll provide services to audit financial statements of the U.S. subsidiary of the Chinese company in accordance with U.S. or China standards. Similarly, usually a company starting out in the U.S. will set up a retirement benefit for their employees, so we can help them set up a plan like a 401(k). We advise them on how to put the assets under management, and we will meet with the employees to explain the plan and to encourage them to save.
Other services include when employees get relocated here from China we would prepare their U.S. tax returns and interface with their Chinese tax advisor because in the year they move they might have to file returns in both countries. They might be here on a two- or three-year visa, so we would take care of their U.S. tax consequences that are unique to somebody who’s here on a visa. A lot of times the company is paying for us to do the employees’ tax returns, as well. If a company has a stock option plan, we need to do a valuation so they can establish the stock option award to the employees here in the U.S. of the Chinese parent company in accordance with U.S. rules. We also have to review how that stock option plan is written in China to make sure it conforms with U.S. law. So we may advise them to put an addendum to the stock option plan in China. We have a payroll joint venture so when a Chinese company comes here and wants to set up payroll to pay their employees’ salaries, file payroll tax returns, we can have them work with our partner to do the payroll. What other services, Wendy?
WL: Mergers and acquisitions
MK: M&A; we’ve done some very interesting M&A services for our Chinese clients.
And due diligence. We had a client that was a private equity fund that was state-owned in Beijing. It hired us to do due diligence on their behalf because they were making a sizable investment in a U.S. company, which was based in California and also had a subsidiary in China. So we performed financial and tax due diligence for the potential investor who ended up investing. Usually we issue these reports in English, but the investor in Beijing wanted the report in Mandarin. Of course, why not? All of the people who were going to evaluate the investment speak Mandarin. So we produced our report to them in Mandarin.
We work with companies that use different accounting methods. The U.S. is known for generally accepted accounting principles commonly referred to as U.S. GAAP. We have people here who are very familiar with, and consult with, other forms of accounting methods like International Accounting Standards, IAS.
So you don’t find that Chinese companies have a certain set of services needs that tend to be different than other international companies, or is it pretty standard?
MK: They need all the same services.
You would think so, but I’m not sure that they necessarily know that.
MK: Oh, no, they don’t. Most companies that come here from different places around the world, depending on the country they come from, have a perception as to which services they need that are required that they’ve heard of.
For example, what’s typical in other countries is that companies – even small companies – have to have what’s called a statutory financial statement audit. So small companies that come to the U.S. from anywhere in the world, including China where they have these statutory required audits, think they need that. We say, no, you don’t actually have to have your U.S. company audited and submit that to the government. That’s not required in the U.S., but it is around the world. So there are certain things that they’re used to doing but may not need to once they are in the U.S., though their bank or parent company may require an audit.
The other aspect is that there’s a certain comfort level that the Chinese clients want. This is similar to other cultures but it’s always unique in every culture where they have to be very comfortable with you and gain your confidence. And that takes a long time. It takes a few years. We see with other clients it happens much faster than with our Chinese clients. We have a client that actually just paid us for a number of services. And I can tell you that they pay our bills promptly today. Once they agree, we bill them, they pay. No problem. That wasn’t the case three years ago with them. We really had to educate them what it is that we need to do, why we have to do this, what the U.S. rules are. It’s not just about tax issues, it’s the accounting education and the whole philosophy of accounting. In particular, China is at the infancy as far as the profession goes including general bookkeeping and reporting requirements and transparency accounting. It’s pretty new in China.
For example, most companies in China – not unlike companies in Russia and Mexico and some other countries around the world – are used to keeping two or three sets of books: one for the government, one for the owners, one for the bank. It’s not too uncommon to see that in different cultures around the world. So part of that training when a company comes here is to advise them that you can’t have two sets of books here. It’s one set of books.
WL: Another example on culture difference: Chinese companies generally present themselves as those taxpayers that pay lots of taxes to the government. They are proud of this. They show to the media that they make profits by saying how much taxes they pay to the government. Therefore, Chinese companies in general do not put the tax saving as a key factor when they make the business decisions. But now, they are more and more adopting the American concepts and start thinking about tax planning.
So you found working with a single Chinese company they’re learning this, you’re teaching and they’re learning and it’s a back-and-forth. But when you have new companies coming to you, are they already more up to speed? Or do you start over again?
MK: With every company you’re starting over. If they’ve never been to the U.S., if it’s their first entrée, there’s a lot of training and education.
WL: A lot of times with Chinese clients I see a similar trend. As they are adapting to the U.S. rules, they get to some point to where they have to pay us a consulting fee even it’s just for our time spent educating them.
But they’re willing….
MK: Not necessarily at first. It is part of the education. They’re not used to paying too much professional fees for lawyers and accountants in China.
WL: I usually start with a small amount. For example, I spent an hour or two with them consulting. I give them advice. So they gradually understand the value of the information and adapt, and agree to pay. It seems to be much easier for us to work with the Chinese clients on a small project in the first place, so we gain the trust from them. Then we could suggest a bigger project later on.
MK: We’ve had some disagreements that we’ve worked through. We definitely have.
WL: And then the ownership of the company makes a whole lot of difference; that is, whether the company is state-owned, private or public.
Describe that a little bit.
WL: With the private ones, it makes a difference that a person owns the company. That’s their company. With state-owned companies, the CEO knows he is just a CEO, working with money that is not actually from his own pocket. It is just a job. So it’s a big difference. Ownership creates a different management style, or what we call enterprise culture. Then when it gets to the decision making process, it’s all different. The decision process for privately owned companies is more like what we see with U.S. companies. For instance, I deal with a lot of Taiwanese companies as well. They are mostly privately owned and they adapt more easily to the U.S. rules. Of course, Taiwanese people are more familiar with the U.S. system so it’s much easier to communicate. And I also deal with privately owned Chinese companies, too. But the culture is different and therefore still a lot of education is needed. The state-owned and public companies are probably the most difficult types of client to deal with. The management style is different, partly because of the hierarchy of the Chinese system and the need to report to different levels.
So even if you work to educate them, they’re not making the decisions so you’re not educating the right decision-makers. Is that part of the problem?
MK: Many times, that’s the problem.
WL: Another problem is the lack of management continuity. They change people often. They change the CFO every year.
MK: Even in the U.S. the lifetime of a CFO of a private company is under two years. Public company is the same. CFO lifetimes are relatively short, but in particular with Chinese companies, they’ll send a CFO over here from China and that person will be here for two years on a visa and then go back. Our other clients from around the world are more likely to look for a U.S. CFO. That’s actually one of your questions here, any advice I would give these companies coming here. They really need to entrust themselves to someone here in the U.S. who can be their CFO, because if they bring someone here from China who doesn’t know anything about the tax and accounting environment here, it’s really, really difficult, and they’re probably better off hiring a U.S. CFO. The challenge, of course, is finding one who is fluent in Chinese, but they’re out there. Or maybe they bring somebody in who is not to report to somebody but is responsible to deal with the U.S. providers and with the U.S. issues. They need to have somebody on the ground who can respect that this is a different country than China, and it has different rules.
MK: I can give an example. Years ago I saw that one of our clients had a category on their financial statement labeled “kickbacks.” They had no problem putting that on their U.S. financial statements. It was a kickback. They called it a kickback. They said it was paid to government officials here in the U.S. It’s maybe not such a good thing that they should have done that. We found that after the fact, and we counseled them and called their lawyer and made sure their lawyer counseled them on the ramifications of doing that. They said, “Well, we’re just paying a fee, you know, they did a good job and we’re recognizing them and thanking them.” I understand. It’s just not something you want to do here in the U.S.
Do the companies you work with tend to bring their upper-level management from China, as you’ve described, rather than hiring here? What about middle-level and lower-level?
WL: What I have seen is they do bring the high-level people here and try not to hire a CFO locally, for some reason. Even with other high-level positions they like to bring people from China.
What they usually like to hire here in terms of the high-level people is just the marketing functions like V.P. of business development. But for finance, accounting, tax functions, no. They still do not have that comfort level to trust the people locally, even Chinese-speaking people.
It’s the trust factor. They don’t want to hire someone because of the lack of trust.
That’s an important point.
WL: Except one of our prior employees, he now is hired by a big Chinese company. That’s the only one I have seen so far.
And he built that trust by advising them?
WL: Yes, that helped. But other than that, pretty much all my Chinese clients actually have people relocated here as a CFO or the controller to take care of the accounting and tax functions. And usually because they are a startup, they actually have somebody who does not know tax, accounting or legal. They prefer to be here in charge of everything. So that adds to the difficulty to communicate.
Like having a general manager doing all of those functions.
WL: Yes. Communication challenges span concepts, culture, and language. Sometimes I have a hard time translating some of the U.S. terms into Chinese because the Chinese language does not have that term. For instance, the concept of stock options and how it works in China might have fundamental differences from the stock options here in the United States. This will completely change the treatment in accounting and tax on the U.S. book and returns. So both we and the clients should be very careful on some of the terms. They might not be the same.
MK: Although the IRS has a bulletin that we’ve shared with some clients that includes common business terms translated into Chinese.
WL: It doesn’t cover everything. That just covers a small portion of the terms we need.
Do you see any characteristics of Chinese companies that make them more likely to be more successful in the U.S. environment as opposed to others, or does that really just depend on sector and management style and other factors, it’s not so—you can’t really put your finger on.
MK: From what I’ve seen, the ones that are most successful are driving some of the business development out of China before they get here.
So they’ve done some research and background.
MK: They may be exporting here initially so they already have business relationships. One of our clients that recently came here already had business relationships with companies here in Georgia, which is one of the reasons why they came here. So that, I think, is important for them to have had already some business relationships, which is I think typical.
A client I work with from Denmark used to just export here and then they set up an office here and now they’re manufacturing here. It’s a normal trend for any type of international business. Sometimes the Chinese companies think they can just come here, invest a ton of money and do really well. We’ve seen that where they’re not doing well is because they didn’t think through all the business issues. They just figured, build it and they will come. That doesn’t always work if you don’t have the business development strategy that matches with your investment strategy.
Are most of your clients from China in manufacturing rather than services?
WL: I think it’s a split between manufacturing and technology. And some are in distribution, real estate, and farming.
And by technology, you mean developing new products and services?
MK: Yes, new technologies. We have some manufacturers that actually do research and development for their products here in the states. There’s a talent pool here that can help them develop their intellectual property.
And farming and real estate development.
I think around the U.S. there have been many Chinese food companies that have been buying up resources in the U.S. for food resources to be able to export back to China. I think that’s a trend around the country.
WL: And they also export to Latin America.
Is that what they’re doing?
WL: Yes. They set up here but ship it to Latin America.
We always think of Georgia as having that comparative advantage. If international companies want to link Latin America to North America, we want a piece of that action.
MK: We’re a gateway. Savannah to Panama.
Do you have a sense that more and more companies will come to the U.S. from China? Do you see that?
WL: I can tell the trend, yes. There will definitely be more to come and particularly I think a lot of people still think of the United States, as their dream land. Freedom. So a lot of—yes. And not just investment; they also want to protect what they already have. For example, China has a new estate or inheritance tax starting in 2016. Then they start taxing on the real properties. Since you’re going to be taxed in China anyway, why not invest here to get the green card and get the freedom and get the dream land in the U.S.?
But those are more for personal reasons. What about business development?
WL: They will bring the business.
MK: The Chinese market is a huge market. The U.S. is still the biggest single consumer market in the world so other countries, people in China who have companies, really see the U.S. market as a huge market for them to sell into. Whereas U.S. companies see the Chinese market as a population that is growing financially and having more disposable income as their wages go up in China and the lifestyle increases.
The U.S. of course is looking at China as a huge market now and even more so in the future. Hopefully the Chinese economy will not continue to stall like it has. Part of that stalling may be because of infrastructure that’s been built over the last ten years that hasn’t been either needed or used, and inventories that have been built and not shipped or sold. So there’s an excess capacity, I think, in China relative to what they’ve been building internally.
But that being said, the U.S. is still the biggest consumer market in the world and good companies in China want to get their products in the U.S. market. They want to compete here and they’re able to do so and they’re actually finding in some cases it’s more beneficial to build here instead of exporting here. Just build it here.
States like Georgia are providing wonderful tax incentives and business incentives for companies from China to come here and build a facility and do manufacturing and hire people and use the port in Savannah. There’s an extra tax credit if you use the port in Savannah. I don’t know if you’re aware of that.
I didn’t know that.
MK: That’s for any manufacturer. You don’t have to be from a foreign country. Any manufacturing company, if they use the port in Savannah and are eligible for something called a jobs tax credit, can add to that jobs credit more dollars just for using the Savannah port. So that’s a huge benefit, and companies from anywhere can get that. It’s something that – when we meet with potential Chinese manufacturing companies that are going to come here – we talk about that with the representatives from the state, even if we’re meeting with them alone. So there are some really wonderful incentives. Ultimately what the U.S. and Georgia are looking for is companies to come here and employ people who live here or want to move here, and to employ them to increase the economy and to increase the money people are spending in the local economy. And there are great incentives to encourage companies to do that.
So if a company from China wants to come here and invest $20-$30 million or more and build a facility and hire people, incentives will be out there. They’re not going to come for the incentive. They might come here versus Alabama for the incentive or South Carolina for the incentive or New York for the incentive, but they’ve got to want to come to the U.S. to build the business. That’s going to continue because I think it will be some time before China and India become bigger consumers than the U.S. It will be another decade or two before those countries are at the U.S. level of consumption.
MK: We have a major client here that has an investment from a public company in China. We cannot disclose it because even though it’s a public company, what they’ve done is not public record. So there are public companies in China making minority investments in companies here. It’s a minority investment that they have in a client of ours here, a technology company, and they’ve partnered up with this company for technology distribution. This is a pretty big investment and they have several of them in the United States. They’ve got lots of capital and they chose to invest it as a minority investor in companies versus opening up their own shop here. That’s another interesting trend we have seen.
WL: So they’re taking a minority share in a joint venture with our U.S. client here. I feel like that is just a pilot.
MK: But they’ve done that with 10 other companies in the U.S. This one just happens to be one of our clients.
So it’s a strategy.
WL: It’s their strategy of deploying dollars.
But it’s also a learning strategy.
WL: It is. They’re learning how to do business.
MK: I think part of what they’ve done is they’ve invested in several companies around the U.S. and in other countries and some of those companies have been successful; they have then gone and bought the whole company and made it their wholly owned subsidiary. And I’m sure with the client of ours that they invested in, their goal will be if it’s successful, as they expect it to be over the next five or 10 years, they’ll buy the company outright and full. It will become one of their wholly owned subsidiaries. But it’s a strategy because of the capital availability that they have in China, which is immense. A lot of capital has been accumulated there, and that’s been invested in the economy and companies to drive the economy. This is a pretty unique company in China. They make money, and their stock trades very well. It of course got hurt pretty bad recently with the downturn in China, but they will be fine.
So lots of development in China that’s coming our way.
WL: Right, right.
MK: And we’re prepared and positioned in a very unique way to work with those companies from anywhere they want to go in the U.S. We probably have the strongest Chinese team of professionals here at HA&W that you’ll find in North America at a single CPA firm. Our leader of the valuation group is Chinese, and several leaders in our audit and tax practice are Chinese. We have some very, very bright people who are leaders in our organization, and will continue to be leaders.