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  2. 2. 1 | BEST PRACTICES FOR EFFECTIVE RELOCATION TO CHINA | CARTUS Best Practices: China For global mobility managers, as well as business and organizations worldwide, China continues to loom large on the scene as a business powerhouse, and, in turn, it continues to present both opportunities and challenges for relocation programs and assignees. For the past several years, China has ranked among the top destinations receiving—and expected to continue to receive—relocation volume from companies around the globe. Respondents from our 2014 Policy & Practices survey ranked it #2 on the top destinations list. 2014 TOP DESTINATIONS* 1) United States 2) China 3) United Kingdom 4) Singapore 5) Hong Kong And although China is rated the second highest location in terms of its importance to companies’ business goals (Cartus’ Biggest Challenges survey 2014), it has also been rated among the most challenging locations for both companies and assignees over the past few years.** Challenges in Managing Relocation for Your Company Importance to Future Business Goals Location Percentage Location Percentage Africa 69% North America 51% Indian Subcontinent 55% Greater China 41% Greater China 53% Europe 35% Companies doing business in China face critical issues when talent decisions are in play, and primary among them is how to get top candidates to accept an assignment to China in the first place, and then how best to support them once there—issues that are at the top of mobility managers’ daily agendas. * Cartus 2014 Biggest Challenges Survey ** Cartus 2014 Policy & Practices Survey BESTPRACTICES:CHINA
  3. 3. CARTUS | BEST PRACTICES FOR EFFECTIVE RELOCATION TO CHINA | 2 The top challenges in Greater China, according to Cartus’ 2014 Biggest Challenges survey, are intercultural issues, finding suitable local candidates, and controlling relocation/ assignment costs—the last being intensified by a continual escalation in local prices for rental housing, cost of living, etc., which increases issues for all assignees. Housing and language issues rounded out the top five concerns. Survey respondents also mentioned issues familiar to companies doing business in China: the rapidly changing nature of regulations and requirements in China, including tax, visa and immigration, and work permits. Payroll, currency, and compliance issues are also frequently cited. Health and safety concerns, such as pollution and air quality, paint toxicity, and lack of medication standards, are also common. Finding suitable local candidates remains a key issue, although companies are making progress in terms of understanding more clearly what is needed to recruit and engage local Chinese professionals. Companies dealing with many of these challenges have instituted a number of approaches, including: Considering shorter term assignments, intra-regional or “local-plus” Providing greater hardship allowances outside Tier I—but potentially trimming or eliminating them in Tier I* Offering split family options (where allowed) What do mobility managers need to know about these challenges—and what kinds of policies and practices can they put into effect to ensure that their programs, and their assignees, can be successful in China? In the pages that follow, we describe the best practices that Cartus has evolved to address major issues raised by our clients and their assignees in China. TOP CHALLENGES: AN OVERVIEW What are the key challenges, and what steps can be taken to mitigate the risks? Challenges in Greater China (percent rated 4 or 5 on 5-point scale) * Note: Although there are different approaches to categorizing China’s city tiers, they typically refer to issues such as economic development, infrastructure, and historic or cultural significance. This Best Practice document primarily focuses on China’s Tier I cities, typically including Beijing, Shanghai, Guangzhou, and Shenzhen. Second-tier cities include Tianjin, Chongqing, Chengdu, Wuhan, and Xiamen. Third-tier cities include Guilin, Hangzhou, and Zhongshan, among others. 54% 53% 48% 47% 46% 40% 39% 38% 33% 16% Complying with laws and regulations Controlling relocation/assignment costs Transportation Finding suitable local candidates Attracting qualified candidates Structuring compensation packages Moving into areas with limited infrastructure Managing relocation for your company Economic instability Safety and security Housing 53% 53% 53% 53% Intercultural issues Language issues Payroll and currency issues Schooling 59%
  4. 4. 3 | BEST PRACTICES FOR EFFECTIVE RELOCATION TO CHINA | CARTUS Cultural Issues Assignment success in China depends to a significant degree on an understanding of Chinese culture and of the traditional cultural values, such as hierarchy, face, and relationships (guanxi). HIERARCHY The concept of hierarchy is deeply embedded in the Chinese culture. Rooted in the precepts of Imperial China and Confucian philosophy, hierarchical guidelines cross over into virtually every aspect of society— family, government, and business—and are reflected in everything from language and greetings to seating at events and business protocols. The hierarchical world view includes elements such as clearly defined power structures, clear lines of authority, and respect for elders and those in authority. How does hierarchy influence work in a multinational company? In Chinese business culture, this is reflected in a clear gap between management and the general workforce. The power structure is clear and unquestioned, and everyone knows their role in the group. In addition, age, gender, and position in the company all matter when it comes to interactions and how one is treated in the business hierarchy. Subordinates will not correct superiors in group settings, and decisions are typically made at the highest levels in the organization. To quote an old Chinese saying, “One heart cannot serve two masters,”matrix reporting lines often cause confusion for Chinese employees, who must ask themselves: Who is my true leader—my direct-line manager, or the dotted-line manager? “SAVING FACE” One way harmony is maintained in China generally, and in business specifically, is through careful attention to “face.” In China, “face” (or one’s reputation, to define the term loosely) can be lost, given, and/or saved. One can “lose face” simply by causing someone else to lose face. Even beyond not correcting their superiors, subordinates usually do not even ask questions of them in group settings, and confrontation is to be avoided. For example, if a subordinate doesn’t understand a request and shows his concern, he might be thought of as not smart enough to understand what was being asked. Or, his boss might be thought of as not having done a good enough job of explaining the request. If both parties lose face and this is witnessed by others, the result is a lose-lose situation—clearly something to be avoided. BESTPRACTICES:CHINA
  5. 5. CARTUS | BEST PRACTICES FOR EFFECTIVE RELOCATION TO CHINA | 4 How does face influence international assignees working in China? In order to save someone’s face, instead of saying “No” directly, your Chinese counterparts will show their concern by saying “Maybe”,“That will be difficult,” or simply by remaining silent. Many assignees do not understand such indirect communication and, therefore, they miss the key message completely. For assignee success when working in China, the skills of reading between the lines and listening for hidden messages are crucial. RELATIONSHIPS Relationships, or “guanxi,” are very important in China. Establishing and building trust are key, and relationships with family or friends can make a huge difference in the potential for professional development or opportunities. To build trust initially, you will need to make a good first impression by having a third party introduce you to a new group or contact. This demonstrates that you are worthy of being vouched for or are significant enough to be shared with others. “Name dropping,” often frowned upon in some cultures, is actually a good way to demonstrate to others what a strong connection you can be; it gives you value in a relationship or social setting. How can this concept of relationships increase assignees’ success? Some simple practices illustrate how an assignee can put relationships to work. For instance, in many cultures’ workplaces, it is perfectly acceptable to eat alone in the cafeteria or spend time at your desk, but eating alone in China sends the message that people are not worthy of your time. It’s best to eat in a group and share your food with your colleagues to develop strong relationships. This is very important for assignees in China, as Chinese contracts are typically finalized at a banquet after sharing a nice meal together and drinking Chinese white wine (sorghum). Additional cultural values in China include a world view that is group-oriented, rather than individual. In other words, “we” before “me.” Group harmony is viewed as being orderly and well-behaved, and references to a successful initiative, for example, should be phrased as, “My team finished this,” versus “I met the deadline!” Reciprocity is also of key importance in Chinese culture and is usually associated with gift giving and favors. When giving gifts, of course, company protocols and sensitivity should be considered: a gift does not have to be expensive, but could be something of meaning, such as something from an assignee’s home or corporate location. Gift giving should take into consideration cultural meaning as well: watches, for example, or items packaged in sets of 6, should never be given as gifts, as these are symbolic of death. And whether it is a gift or a favor, keep track of what you receive and be prepared to reciprocate—with interest!
  6. 6. TOP TIPS FOR SUCCESS Even if your corporate culture is very strong, assignees who pay close attention to the preceding three cultural business drivers in China will gain the trust of their Chinese colleagues, and will have a much greater chance of accomplishing their assignment objectives. Demonstrate flexibility in thinking outside the familiar linear patterns. Keep in mind the Chinese world view of “me” versus “we” in speaking of accomplishments and initiatives. Respect hierarchy. Understanding the role that hierarchical thinking and guidelines play in both day-to-day and business behavior can make sense of practices that often seem confusing to expatriates, especially those from Western cultures. For example, a “maybe” that really means “no,” and the lack of subordinates’ interaction with superiors in meetings make sense in the context of the strict hierarchy and decision-making process. Be mindful of the role of “face.” Losing face—or causing someone else to lose theirs—is to be avoided at all costs. Even simple actions, such as posing a question to a superior in a meeting, can lead to a loss of face—on both sides. Understand the value of relationships. Even simple activities, such as making a point of eating with others instead of alone, can go a long way toward building and reinforcing good working relationships with Chinese colleagues. Be aware of reciprocity. Accepting— and returning—hospitality offered is important. Be careful to keep track of (and reciprocate) both gifts and favors. Remember that a gift received some time ago may need to be reciprocated with an “inflation factor” applied—in other words, if that gift is worth more now, your return gift should reflect that new value. Provide the right support. Cross-cultural training is especially important for assignees moving to China, given the comparative differences from Western business culture. 5 | BEST PRACTICES FOR EFFECTIVE RELOCATION TO CHINA | CARTUS
  7. 7. CARTUS | BEST PRACTICES FOR EFFECTIVE RELOCATION TO CHINA | 6 Language Language issues loom large for assignees in China. In fact, respondents to Cartus’ 2014 Biggest Challenges survey rated China as the #1 problem area for assignee language challenges. For daily tasks, a lack of familiarity with the language can make life challenging, even in large cities such as Shanghai and Beijing. Mandarin (also known as ‘Pu Tong Hua’) is the common language for both business and social, as there are many dialects in China. English isn’t widely spoken, and the majority of transport, road, and building signs are written only in Chinese. Ayis (domestic helpers) are considered a “life support” and are a common fact of life for many assignees, but not all ayis (or personal drivers) speak English at a high level. To reduce frustration, spouses need to learn how to speak basic Mandarin with the ayi as well as with drivers—both key for assignees to avoid misunderstandings and facilitate communication of basic needs, at a minimum! TOP TIPS FOR SUCCESS Basic knowledge of Mandarin is a must. As a result of the language issues in China, language training, especially in Mandarin is strongly recommended for all assignees and their families relocating to China. Use expert trainers for “survival language” basics. Many assignees believe that Mandarin is a very difficult language to learn, but if the assignee and spouse zero in on their immediate needs, learning Mandarin becomes easier. Applying “language learning shortcuts,” an approach used by many expert trainers for learning Mandarin—or any other language—can help. For the first few lessons, the assignee should learn how to count, tell time, and give directions in Mandarin. Learning how to speak sentences, using a fluency journal, and focusing on survival language—such as taxi language—can help assignees navigate daily life. Incorporate cultural values. Language training should also include an understanding of the cultural backdrop and role that the concepts of face, hierarchy, and relationships play in day-to-day interactions, in both social and business settings. BESTPRACTICES:CHINA
  8. 8. 7 | BEST PRACTICES FOR EFFECTIVE RELOCATION TO CHINA | CARTUS Housing Housing is probably the most important issue from an assignee’s perspective: A wide variety of housing is available in the major cities, with many different neighborhoods offering very different lifestyle experiences, from serviced and non- serviced apartments and central city living to larger properties with gardens in the city suburbs. We recommend that assignees and their families always take a look-see visit to preview the types of properties available. This will set expectations about the rental market from the outset. Families should remember that properties are usually rented furnished or partly furnished; that the detailed finishing is not always to the standard expected at home; and that appliances such as dishwashers, ovens, and dryers are typically not included in Chinese kitchen design. Assignees should also be aware that if they want to remove and/or change items, they may be charged by the landlord. With pollution levels quite high in certain cities, some assignees conduct air quality tests as part of the home search process. In these instances, it is worth considering paying an additional allowance to the family for the purchase of air filtration units, if these are necessary. Also, the leasing market is quite active, particularly in April through September when landlords receive a number of offers on a property and normally accept the highest and those with the fewest requirements from the assignee. For that reason, it is recommended that families prepare two or three backup property options in case their first choice doesn’t work out. Given the size and congestion of Chinese cities, we recommend that assignees arrange schooling for their children first, and carefully consider commute times both to the school and to their place of work when making a housing choice. Assignees should also ensure they fully understand what is included in the rental payments prior to signing a lease; for example, management fees, heating, etc. BESTPRACTICES:CHINA
  9. 9. CARTUS | BEST PRACTICES FOR EFFECTIVE RELOCATION TO CHINA | 8 TOP TIPS FOR SUCCESS Plan a “look-see” visit. We recommend a pre-move visit for the assignee and their family that includes a preview of the property types available. This will set expectations about the rental market before the home search begins. Don’t use the Web! Reliance on Internet- based property research is not advised, as real estate web listings are notoriously unreliable and are not regulated by any kind of “trade descriptions” act. As a result, listings are often out of date, inaccurate, too good to be true, or unavailable. Understand what “furnished” means. Property in China is normally rented either fully furnished or partially furnished (with basic appliances and some bathroom fixtures and fittings). It is quite common for the landlord to wait and purchase furnishings after a tenancy has been agreed upon. Dishwashers, ovens, and clothes dryers are not commonly used in China, and space is rarely available in kitchens to install them. If assignees want to change furnishings that are in place prior to the rental agreement, there may be a charge. Be prepared for ongoing tenancy issues. The quality of housing varies greatly, although many properties will look fine on the outside! Generally, renowned developers offer better quality homes. Mold and mildew are common even in new properties, and less attention to detail in finishing is the norm. Similarly, the quality of fixtures and fittings varies, and assignees should be prepared for “snagging” issues (i.e. identifying and resolving defects) when they first move into a home. Consider providing ongoing tenancy assistance and coordination. Don’t be put off by a sloppy appearance. During house hunting, some properties may look messy or dirty. Landlords typically clean the premises only after the lease agreement has been signed. Have backup plans in place. The leasing market is quite active, and Cartus recommends that after the home search, families should select two or three backup property choices in case the first choice doesn’t work out. It is possible to negotiate. Lease negotiations are sometimes possible. In these instances, landlords will typically favor an earlier start date, fewer additional requirements for preparing a property, and/or a longer lease term. Confirm what is included in rental payments. Assignees should ensure that they fully understand what is included in the rental payments prior to signing a lease; for example, management fees, heating, etc. Cash on hand is key. Organizations need to make sure that security deposits and rental payments are available as soon as possible because the landlord will expect payment before the start date.
  10. 10. 9 | BEST PRACTICES FOR EFFECTIVE RELOCATION TO CHINA | CARTUS Schooling In the past few years, many international schools in China have opened or expanded to accommodate the demand from incoming expatriate families. China leads the way for significant, rapid growth in international schools when you consider that in 2000, there were only 22 international schools, and today, there are more than 400 international schools throughout China catering to students of all nationalities! SCHOOLING “WATCH OUTS” TO KEEP IN MIND In most instances, only students with foreign passports may attend an international school, and class sizes are usually around 20 students, with a teacher and a teaching assistant. The most widely used curricula are UK, U.S., and International Baccalaureate (IB). English is usually the language used in international schools, and most schools offer Mandarin Chinese as a second language, with some implementing bilingual programs. Foreign language teachers are usually from the native countries of the language taught to ensure an optimal learning environment. Some of the new international schools in China include: Hangzhou Chinese International School – opened 2014 Hangzhou World Foreign Language School – opening 2015 Keystone Academy (Beijing) – opened Sept. 2014 Harrow International School Shanghai – opening 2015 The Britannica International School Shanghai – opened Sept. 2013 Wellington College Shanghai – opened Aug. 2014 The excellent international schools that exist in China’s Tier I and II cities have topnotch facilities, but there is a downside: some of the more popular schools have long wait lists, and assignees need to plan well in advance to secure their school of choice. Most families will apply to several schools to maximize their chances of successful entry. BESTPRACTICES:CHINA
  11. 11. CARTUS | BEST PRACTICES FOR EFFECTIVE RELOCATION TO CHINA | 10 SPECIAL NEEDS SCHOOLING IN CHINA It is worth noting that special needs schooling in China is very limited. Some international schools will be able to accommodate mild to moderate learning differences, but many lack resources and staff to address more complex diagnoses. Furthermore, certain brands of medication may not be available in China, so pre-planning may include researching alternatives with doctors or making arrangements for periodic international deliveries. It is important to make sure that the child with learning differences can be supported in the host country, as that could put the entire assignment in jeopardy. Families have spent a considerable amount of time and resources to ensure that their child has the support they need in their home country, so they will not move if similar resources cannot be secured in the new location. Additionally, more and more parents with young children are choosing to expose them to the Chinese education system in an effort to give them a strong Mandarin background early on, while also avoiding the high international school fees. For some families, local schools may be an option with enough planning and preparation to manage expectations. Homeschooling is legal, although not as widely practiced compared with other countries. As China continues to develop, its education options and standards are rising. BEYOND THE TOP TIER CITIES In Tier III and IV cities, schooling options are limited or unavailable, and this can prove challenging for relocating families. The quality of teachers and delivery of curricula may vary, so it’s important to make an in- person visit to speak with staff and teachers, ask questions, and observe the students interacting with each other and with their teachers during a typical school day. Some assignees who live in Tier III and IV cities have their families live in a Tier I city (also known as a “split family” situation) because in Tiers III and IV, international schooling is limited or nonexistent. In these situations, the dependent’s residence permit will have to be arranged in the city where the assignee lives. NOTE: These situations depend wholly upon the local government education bureau. Where appropriate, additional policy and program support should be given to assignees who consider this split family option to accommodate educational needs. TOP TIPS FOR SUCCESS Allow sufficient advance planning time. Advance planning is essential to identify educational options and incorporate wait list times in the process. Due to the lengthy application process and high demand for popular schools, assignees are encouraged to apply to preferred schools as early as possible. Detailed research on all the options available and school visits during a look-see trip are important best practices. Consult a professional. A local, professional education consultant with home-host knowledge can help ensure the best fit for a child and ease the stress in a complex schooling landscape. Policy and program support should also be given to assignees considering a split family option to accommodate educational needs.
  12. 12. 11 | BEST PRACTICES FOR EFFECTIVE RELOCATION TO CHINA | CARTUS BESTPRACTICES:CHINA Health, Environmental, and Medical Issues Companies regularly report ongoing concerns with health, environmental, and medical standards in China, in both Tier I and Tier II-IV cities.* Specific issues include food safety, air pollution, paint toxicity in apartments, authenticity of mainstream medication, and access to medical care. Preventive measures, such as masks and air testing, are common. In some situations, facilities, such as schools, are reported to have taken extreme measures, including building domes over their playing fields. The air pollution issue has been mentioned by Cartus survey respondents as a prime cause for split family situations for China-based assignees, and it is frequently a cause of assignment turndowns. * Various criteria exist for defining the tiers of cities in China, but they usually concern economic development, infrastructure, and historical and cultural significance. China’s Tier I cities usually refer to Beijing, Shanghai, Guangzhou, and Shenzhen. Tier II cities include Tianjin, Chongqing, Chengdu, Wuhan, and Ziamen. Tier III cities include Guilin, Hangzhou, and Zhongshan, among others. Top Challenges in China— Tier I Cities Top Challenges in China— Tier II-IV Cities Health, environmental, medical standards (including food, air pollution) 60% Health, environmental, medical standards (including food, air pollution) 54%
  13. 13. CARTUS | BEST PRACTICES FOR EFFECTIVE RELOCATION TO CHINA | 12 RECOMMENDATIONS: Perform upfront tests. As pollution levels in some cities can be extremely high, assignees often conduct air quality tests to ensure that the location they select has optimum levels. Since many landlords will not agree to any clause in the lease related to pollution issues, and are only responsible for documented issues, many companies perform additional tests such as those on water, furniture, and paint, as well as for the presence of lead. Such testing is typically expected to be paid for by the client/company. Testing can be performed only by registered inspection companies. Input from some Cartus clients indicates that a few companies have begun performing a “residential assessment,” which includes a structural, safety, and air quality review, once a property has been selected. Consider simple mitigation steps that can help. Some companies have found that minor problems—whether detected before or after lease signing—can often be mitigated through simple steps, such as air filters, fans, or dehumidifiers. Air filters with absorbent material can be effective in capturing harmful chemical gasses, trapping them and preventing their release into the atmosphere. However, some assignees still have concerns about the air quality and may continue to report medical symptoms. Some companies approach this by agreeing to cover the costs of moving, lease cancellation (if applicable), and obtaining a new residence if the air quality tests show unsatisfactory results. If the tests come back within acceptable limits, but the assignee still wants to move, the assignee would normally be expected to bear the related costs. Explore housing assessments and hardship allowances. Other solutions, such as upfront city assessment to determine realistic available housing choices, help to determine budgets and set expectations; pre-selection by the company and ongoing tenancy management can help manage housing concerns on assignment. Organizations may consider providing an additional hardship allowance so the assignee and family may purchase health-related items such as face masks and air filtration units.
  14. 14. 13 | BEST PRACTICES FOR EFFECTIVE RELOCATION TO CHINA | CARTUS Transport Getting around China’s large cities can be difficult without knowing the language. Road signs are not always displayed in English, and local driving styles can be hazardous. In major cities, the volume of traffic makes for long queues, regular delays, and gridlock—especially at peak times. Taxis are numerous, but the drivers do not typically speak or read English, so assignees using taxis should exercise caution. They should know where they are going and how to get there, and have a colleague write down destination addresses in Chinese. It is also helpful to have a friend’s phone number handy in case you need more assistance with indicating to taxi drivers where you want to go. Public transport is fast and efficient, but it is crowded and often difficult to navigate without an understanding of the local language. TOP TIPS FOR SUCCESS Provide car and driver. We recommend that assignees in China receive a car allowance to enable them to utilize the services of a car and a driver. Cars are normally leased by the company, rather than purchased, for this purpose. The leasing term is typically annual, with a one- or two- month notice period following this. Typically, the assignee is responsible for the vehicle rental cost, the driver’s salary, fuel, and any associated tolls/taxes/fees. A car allowance should be in the region of RMB15,000- RMB20,000 per month. Some companies determine the size of the car allowance according to job position but some base it on family size as well. Typically, the cost of insurance is included in the car lease, and the assignee and other family members are not permitted to drive the car themselves. Take numbers and directions if using taxis. Taxi drivers do not typically speak English. Clear directions and/or business cards in Mandarin, with destination information and backup friends’ phone numbers, are critical to make certain that assignees get where they want to go. BESTPRACTICES:CHINA
  15. 15. CARTUS | BEST PRACTICES FOR EFFECTIVE RELOCATION TO CHINA | 14 Regulatory Issues Regulatory issues of all kinds—visa and immigration, Social Security regulations, compensation, payroll, and tax—pose huge issues for mobility programs and assignees in China. It is critical to be aware of the ins and outs of these areas when developing policy and establishing practices that can help ensure that things run smoothly. VISA AND IMMIGRATION The visa and immigration process for China is complex. Different cities have various rules and interpretations, and the application process and time schedule can be lengthy. Respondents to recent Cartus surveys point to this issue, remarking that visas and their limitations may be different in various cities. Supporting documentation, such as birth certificates and non-crime certificates, are required, and applicants also need to show proof of a medical examination. Changes were made to the visa types and categories in 2013 relating to exit and entry, stay and residence, and the employment of expatriates, and stricter enforcement measures (including fines) were introduced for non-compliance. With the new Exit-Entry Administration Law and the Exit-Entry Administration Regulations in force, it is likely that the Chinese government will conduct extensive and stringent compliance audits when approving visa applications. Furthermore, new rules effective from January 1, 2015, on short-term work visas mean that some international assignees working in China for up to 90 days may require work authorization, and may have to apply for a “Z” visa in order to engage in certain work activities. While most business travelers can continue to complete short-term projects using the current M or F visas, companies should check to ensure that their short-term visa program remains compliant. BESTPRACTICES:CHINA
  16. 16. 15 | BEST PRACTICES FOR EFFECTIVE RELOCATION TO CHINA | CARTUS RECOMMENDATIONS Planning and coordination are critical. A successful relocation depends upon careful coordination of all aspects of an assignee’s move. We recommend that companies that relocate families to China apply early, select a good immigration provider to ensure professional advice, keep travel arrangements flexible to accommodate processing delays, and track and renew any expiring visas and permits well in advance of expiration. Companies may also want to consider increasing the assignment authorization process to allow for delays or shifting timeframes. Work permits determine timing. In China, time schedules are typically driven by the work permit application. It is important that companies understand the latest visa regulations and appreciate that they can vary by city and province. Items such as household goods cannot be released until the work permit is obtained, so careful timing of this aspect of the move will ensure that additional costs are not incurred on shipment storage or extended periods in temporary accommodation. SOCIAL SECURITY Following the introduction of a law in 2011, foreign workers in certain cities are expected to participate in the country’s Social Security system by contributing toward five insurance categories: pension, medical, work-related injury, unemployment, and maternity. The contribution amount varies from city to city. The legislation dictates that once a work permit application has been submitted, Chinese companies have 30 days to register their foreign workers in the country’s Social Security system. The rules around payments are still unclear, with some cities adapting these measures while others have not yet done so. Given the uncertainty, companies typically aim for compliance while attempting to determine the full details supporting the new procedures. Some businesses have removed assignment types (e.g., extended business travel, where payroll remains at home location) in order to simplify administration. TOP TIPS FOR SUCCESS We recommend that companies contact their tax/payroll provider or legal firm for details on this complex area.
  17. 17. CARTUS | BEST PRACTICES FOR EFFECTIVE RELOCATION TO CHINA | 16 COMPENSATION, PAYROLL, ALLOWANCES China’s restricted currency and tax policies complicate many of the issues involved with compensation and payroll, as well as payment of expenses and allowances— with implications for both companies and assignees. The issues and potential best practice solutions are outlined below. Due to the complexity of these areas, the recommendations and tips are included in the explanatory text for each issue. Home/Host Payroll Issues Split Payroll Chinese Renminbi (RMB) is a restricted currency, and this can cause issues for assignees when moving money into and out of China. For example, regulations restrict the amount of money that can be converted from overseas currency to RMB on a daily basis, often requiring assignees to visit banks several times in person to make transactions or withdraw money. There is also a yearly restricted limit of US $50,000 which is important to note should an assignee need to pay rent in local currency. For this reason, we suggest operating a split payroll scenario where your assignees receive a portion of their salary in China (via your local payroll department or third-party payroll provider), and the remaining percentage in their non-China home/host payroll. That also provides a mechanism for paying allowances, including all lump-sum payments, as well as other miscellaneous allowances. Your third- party provider should be able to provide in- depth information on how to treat these costs. If desired, you may want to have your third- party company instruct your China payroll to make allowance payments in China. If there are expenses to be covered by an allowance prior to the assignee’s arrival in China, a plan should be in place to make some type of facilitated payment, allowing the assignee to cover those expenses while en route. Shadow Payroll With a split-payroll arrangement, you will have to operate a shadow payroll since China does have a shadow payroll requirement. The term “shadow payroll” describes a process in which compensation amounts are entered into the payroll system that do not actually create net pay to the assignee, but rather ensure that taxes are paid in compliance with all local and global tax requirements. In order to remain compliant in China, compensation paid from sources outside China—including accounts payable— must be added to the China payroll system. Appropriate China tax will then be calculated and remitted to the host tax authorities. Some companies use other terminology for the shadow payroll process, such as “memo payroll” or “mirror payroll.” Although the terminology is different, the theory and purpose are the same. Relocation Expenses Because of China’s tax policies, it is most beneficial for companies to contract locally with a third-party company that is registered as a China-based entity to ensure compliance in processing funds and tax. The information below discusses the reasons for this and the potential value for companies in adopting this approach.
  18. 18. 17 | BEST PRACTICES FOR EFFECTIVE RELOCATION TO CHINA | CARTUS Offshore Remittances When payments are being made between companies or business units that are not both located in China, especially when the payments exceed a specific dollar value (set at US$30,000 or equivalent), regulations relating to China’s Renminbi (RMB), a restricted currency, make the process more complex. In practice, when an offshore unit bills the China-based organization for costs incurred in China, that China-based entity has to pay a specific tax in addition to an amount of business tax. Not only does the process entail extremely detailed documentation and the involvement of tax authorities, but in addition, banks may ultimately not even be willing to process the remittance. Because of these requirements, for those expenses that occur in-country, we recommend that companies outsource to providers who are registered as China-based entities (either a WOFE or a legal entity). This will ensure compliance in processing funds. Fa Piao Requirements Although this local contracting approach eliminates the issues involved with offshore remittances, companies do then have to adhere to the country’s tax policy, which involves the collection and reporting of Fa Piao. The Fa Piao is an official tax invoice provided by businesses to consumers (both individual and corporate) for the amount of services or goods rendered. Fa Piao is used by Chinese tax authorities to calculate and collect taxes. All expenses incurred in China are required to be supported by a Fa Piao for tax purposes, with a few exceptions: security deposits and payments made to government agencies (e.g., customs, immigration, etc.), both of which can be supported by either a receipt from the landlord or an official receipt from the appropriate agency. When expenses are incurred outside of China, an invoice or receipt is required as the supporting document. Payment of Expenses Administering the collection of Fa Piao— required for any expense paid in China—is a highly manual and administrative process. When one considers all of the third-party vendors that need to file monthly tax receipts to remain compliant (including landlords, schools, and non-contracted suppliers), the best practice is to outsource this administration to your relocation company, as well as to ensure that the employee always requests the Fa Piao if it is not included with the receipt. Again, it is best to contract with a third-party relocation firm that is registered as a China entity with an appropriate business license. Contracting with a properly licensed third- party firm also facilitates the payment of relocation service fees made by a company to its relocation firm. Additionally, the way in which the contract is structured impacts those payments that fall under the VAT scheme (currently being expanded in China), and may allow your company to recoup the VAT and avoid additional potential taxes.
  19. 19. CARTUS | BEST PRACTICES FOR EFFECTIVE RELOCATION TO CHINA | 18 SUMMARY RECOMMENDATIONS Assignments to China, with the multiple challenges of language, the environment and regulatory, housing and schooling issues, can take a toll on assignees and create additional cost—both direct and indirect— to the business. One key step to take in advance is to address up front preparation before the employee makes the decision to move. This preparation can help companies and assignees determine the level of investment necessary for assignment success. A second step is to be prepared to customize policies and approaches. Here, it is not enough to focus on country-level solutions; your program should include customization of specific elements of policy and service delivery at the city level to address location-specific challenges. The end goal is to ensure that the right kind of talent can be attracted, and that that talent is supported properly to maximize assignment success. A customized approach will: Ensure that enhancements to the relocation program respond to logistical challenges, Enable the assignees and accompanying family members to orient themselves more quickly to the cultural differences; and, Strengthen the company’s ability to attract the right kind of talent to this dynamic market. With so much to consider in a relocation to China, it is critical that the provider managing the move retains an overall coordination role. This will ensure that all aspects of the move, such as visa, schooling, household goods, etc., will be managed in an optimum timeframe to meet the expectations of the company and the assignee.
  20. 20. Content for this publication was provided by Cartus Consulting Solutions, Cartus Intercultural and Language Solutions, Cartus China Destination Services team, and School Choice International.
  21. 21. © 2015 Cartus Corporation | All rights reserved. Cartus and the Cartus logo are registered trademarks of Cartus Corporation. The information in this publication is general information, current as of April, 2015. Cartus suggests that you consult your own tax or legal advisor with respect to your specific situation. | connect with us: