Recruiting in China

The Yomiuri Shimbun

Labor costs in China are skyrocketing. The low-cost environment in the country where abundant, talented human resources can be obtained cheaply is declining.

One major factor is the presence of migrant workers. In China, about 120 million farmers once worked at factories and construction sites in urban areas, sustaining the nation's economic growth.

Over the past three or four years, however, the number of migrant workers has decreased, resulting in increases in labor costs at a record high pace.

Last year, the average salary for workers throughout the country increased by 14.1 percent compared with 2004.

This year, many local governments are raising the minimum wages of workers, set independently by localities. The move is in line with a policy set out by the administration of President Hu Jintao to protect the poor.

The local government of Shanghai, where the average salary is the highest in the country, decided to boost the minimum wage by about 9 percent. Major cities such as Guangzhou, Beijing, Tianjin and Dalian, where many foreign companies have their Chinese bases, have decided to introduce double-digit increases in the minimum wage.

The decline in the portion of migrant workers in the labor force is partly due to economic reasons, including an increase in farming income and increased job opportunities in provincial regions.

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Shifts in population

In addition to the economic factors, demographic changes in the country, in particular the decline in the number of young people in farming villages, are affecting the labor supply. The labor shortage in the relatively developed coastal regions, including Guangdong Province, has started to spread inland.

Under the circumstances, local governments of major cities are growing more concerned. Hikes in the minimum wage have started to take on a tinge of competition to secure sufficient numbers of workers.

If labor costs continue to climb in China, foreign companies doing business there may have to revise their management strategies.

Furthermore, China is reviewing its policy of giving favorable treatment to foreign companies.

One major issue is whether to unify corporate income tax, which is similar to Japan's corporate tax, as the rates for foreign and domestic companies differ. China has given a preferential tax rate to foreign firms in an attempt to procure funds from overseas as it has suffered from a shortage of capital.

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Attractive tax arrangement

While the tax levied on domestic companies is about 33 percent, foreign companies pay less than 15 percent.

However, with competition between domestic and foreign firms intensifying, criticism has increased over the preferential treatment given to foreign firms in China.

As debate on whether to abolish favored treatment for foreign companies continues, the State Development and Reform Commission recently announced unification of corporate income tax rates. The commission manages China's economic policies.

At the same time, the commission said it would shift its policy of luring foreign companies from "quantity" to "quality." To enhance its international competitive edge, China will probably become more selective toward foreign businesses, giving priority to foreign companies in high-technology industries.

If the new policies are put into effect, the investment environment will be greatly affected. For foreign firms, China's attraction as a target for investment will inevitably decline.

However, compared with other Asian countries, China still holds economic advantages. Increases in labor and other costs will promote advancement of domestic markets and industrial structures.

Both positive and negative aspects of the increased costs in doing business in China must be thoroughly examined.

(From The Yomiuri Shimbun, Aug. 28, 2006)

(Aug. 28, 2006)

Shanghai will launch a major campaign today to catch overseas workers who are holding jobs illegally.

The monthlong inspection effort aims to make sure companies have acquired work permits for their foreign employees and those from Hong Kong, Macau and Taiwan, the Shanghai Labor and Social Security Bureau said yesterday.

Businesses that violate work rules face fines ranging from 5,000 yuan (US$617) to 50,000 yuan and will be required to complete proper documentation. Workers who lack permits could be sent home.

Though there were no estimates on how many foreigners are working illegally in the city, officials said about 60 expats were warned, fined or forced to leave the country for various reasons last year, including illegal employment.

Today's campaign is the result of growing concern that government work rules are increasingly being violated.

"With a surging number of foreign professionals in the city, the intensive crackdown is expected to raise awareness among employers and foreigners about the need to follow the law, and it will also help us get a better idea about the size of the illegal employment situation," said Sun Hande, director of the bureau's employment office for overseas workers.

Shanghai had issued 92,000 work permits to foreigners from 152 countries through the end of last month. Around 51,000 foreign nationals are currently working in the city.

The city issued 18,325 permits last year, more than a fourfold increase from 2000.

The registered number of working professionals from Hong Kong, Macau and Taiwan has totaled 42,500 so far.

Foreigners and overseas Chinese can be granted a work permit for China after signing an employment contract and acquiring a work visa.

Students are banned from taking jobs here as are those who hold tourist or short-term business visas.

It is the employer's duty to apply for a work permit for foreign staff, bureau officials said.

Routine checks by the Shanghai Labor Inspection Team found that 21 foreigners were illegally employed by 15 companies in the first half of this year.

Expats were also advised they should insist on work permits to protect their rights.

One-fourth of the 64 labor complaints filed last year by expats working in the city were rejected because the plaintiff lacked a valid work permit.

By Yan Zhen

By Frank Mulligan, Talent Software

The labor law in China is about to be changed radically. The current law has been in operation for many years but it was created many years ago and necessarily has weaknesses.

Setting out the basis of the current law, I thought, might be a good way to build a base for comparison with the expected changes in the new law.

So here is a quick summmary of where we are now. It is meant as a quick refresher and should not be taken as legal advice.

* Employer and employees need to enter into a written employment contract. However, an oral contract is also enforceable.

* Contracts can apply to a fixed period, an open period, or a specific project.

* There can be a trial period of no more than six months during which time the employer can terminate the employment contract.

* The law allows for a clause requiring employees to keep business information confidential.

* Employers can terminate on 30 days notice, if the employee is not able to do his work due to illness or injury but if he is still being treated this does not apply.

* Termination can be carried out if the employee is not suitable for the work he is doing. This decision must be made after training or alternative work has been given.

* The contract becomes unenforceable because a ’major situation’ has changed on which the employment contract mainly relies. This has not been defined.

* Employees should give 30 days notice except when they are are in the trial period or the employer does not satisfy his end of the contract.

* Redundancy is a vague area that allows an employer to dismiss an employee if the company is about to go bankrupt. Payments to employees equate to one month’s pay for every year with the company.

* The work week is an 8-hour day with no more than 44 hours per week and at least one day off per week, in practice always 2.

* Paid leave is mandatory but depends on local regulations. There is a 90 days maternity leave provision.

* Disciplinary action has a definite path. First an oral warning, then a written warning and finally, dismissal. If this is not followed the dismissal is invalid.

* If the breaches of discipline is very serious instant dismissal is available.

So we can easily see that the basic labor laws in China are not so complicated and many areas are sufficiently vague as to require a new definition.

The current regulations are under review and the government has invited submissions from concerned parties. The new contract law is likely to differ considerably from the current law in terms of details and provisions. The object is to make it fairer and clearer for all parties, and to underline the rights of workers in a market that is considerably different from the one that pertained when the original law was written.

Next week we can make a comparison with what is expected in the new law.

21/08/2006
According to the latest quarterly State of the Executive Search Industry report by the Association of Executive Search Consultants (AESC), executive search industry revenues increased 14% over the previous quarter and 18% over the previous year. New searches worldwide were up 6% from Q1 2006 and the average revenue per consultant rose 14% from Q1 to Q2 2006, a sharp rise from the previous quarterly increase of 3%.

Commenting on these figures, AESC President Peter Felix noted, “Executive search industry revenues continue to build momentum with global figures consistently increasing quarter over quarter and year over year. By year end we expect that most member firms will be reporting significant increases over 2005.”

Industry Trends
All reported industries experienced an increase over the previous quarter, with the exception of the Industrial sector, which revealed a 3.8% decrease (in contrast to the previous quarter in which this sector accounted for the largest increase). The industries experiencing the largest quarterly increase of searches in Q2 2006 were Non-Profit (+34.7%) and Financial (+17.8%); both figures more than double the previous quarterly increase for these sectors.

Consistent with previous quarters, the Financial sector captured the largest share of number of searches started as compared to all other reported industries, with 26.4% of the market. The Industrial sector followed with the second largest share, 21%. Consumer Products (16.8%), Technology (15.7%), Life Sciences and Healthcare (12%), Non-Profit (4.6%), and the Professional Services (2.2%) sectors round out the industry breakdown.

Regional Trends
North America saw a minor quarterly increase (+0.8%) in the number of searches started in contrast to the previous quarter on quarter increase of 13.1%. Europe experienced an increase of 3.4% in searches started. Asia-Pacific revealed a significant increase of 18.9%, in comparison to a previous quarterly drop (-3.7%). Central/South America witnessed a 13.4% increase in searches started in Q2 2006.

European Market Share
UK searches accounted for 29.9% of the total European market, a 5.4% quarterly decrease. The number of searches started in Germany also decreased (-1.7%) from the previous quarter, with Germany capturing 13.8% of the total market. Similarly, France saw a quarterly drop (-3.9%) in searches following a previous rise of 7%, resulting in a 9.5% Q2 2006 market share for France.

This data was collected from a sample of AESC member search firms representing the activity of over 1,200 executive search consultants in 42 countries worldwide. AESC access to job search data positions this report as a leading indicator of the future worldwide job market and a barometer of hiring trends in key market sectors.

A full copy of the Q2 2006 State of the Executive Search Industry report is available upon request (for AESC members and the press). Please contact Natasha Renton at nrenton@aesc.org.

www.aesc.org

Individual Income Tax (IIT)
There has unfortunately been a lot of nonsense spoken about registering for individual income tax in China, how much to pay, being paid partially overseas, actually working here but consistently on tourist visas and so on that the real picture over registering for, assessing liabilities and the payment of IIT in China has become rather muddled. Ask one expatriate, then ask another, and they’ll give you different opinions. However unfortunately, China's tax regulations are not decided by expatriates. Neither is the situation short of clarity in the eyes of China's tax bureau, who are quite clear on the subject and who are progressively clamping down on abuse of non-working visas and the under-declaration of income by foreigners in China. In this article we outline the circumstances, liabilities and procedures for registering for Individual Income Tax (IIT), explain the rationale and hope to take some of the pain away from being a tax payer in the PRC. Assessment of IIT can be very complex. You should also do your homework well in advance to assess your personal tax situation with the related authorities and ensure you are in compliance — China's tax authorities are increasingly targeting expatriates who evade or only partially declare their IIT, with painful consequences for them and the international companies who employ them if tax is found to have been under declared.

Tracking Liabilities
Up until recently, China has been able to effectively track potential tax abuse only by inspecting foreigners’ passports and crosschecking with the tax bureau over whether or not registration had been completed. In practice such inter-government bureau co-operation never really transpired, with the Immigration and Tax bureau worlds apart. This has now changed and more information-sharing activities are taking place between different bureaus in the country. Entry/exit forms are computerized with the data compiled and made available to the tax bureau who now, at a glance, can ascertain visa types, length of stay, numbers of entries / exits and other information to assess whether IIT is applicable or not. This effectively means that the Chinese authorities can track properly movements of aliens through the country and retrieve data pertinent to tax assessments, as is routinely common in most Western nations. New regulations have also specified how to count the days in China and specifically the arrival date and departure date. These will all be counted as days effectively spent in China and are actively used for computation of IIT purposes.

Who Has to Pay?
China has a multi-tiered system of tax liabilities for foreigners, which has lead to some confusion, particularly over the so-called "90 or 183 days rule". We identify the more likely scenarios and the tax liabilities as follows:

Expatriates on extended business trips to China
If you are sent by your organization to China and your salary is paid off-shore (probably in your home country) and you spend more than 183 days in China in a calendar year, than you have to pay IIT in China based on the days you effectively spend in the country. This means that if you spend in China, let's say, 184 days within a calendar year, than you would have to pay taxes on all income sourced from China (meaning income related to your work performed in China).

Foreigners working for legal enterprises in China
Without going into too many complicated calculations and theories, if you hold positions such as the Chief Representative (CR) of a Representative Office (RO) or the General Manager of a Chinese Limited Company, Wholly Foreign Owned Enterprise or a Joint Venture anywhere in China, then you are subject to IIT from the first day you commence work in the country.

Interestingly, should you not actually visit China within a calendar year but are still acting as the Chief Representative of a Representative Office, then zero tax filings should still be made monthly to the local authorities.

According to the law you should declare the full salary for the position and pay IIT accordingly. In practice, however, it is common to see foreigners declaring an "arranged" fixed salary for their China position (with the rest being paid off-shore) and pay taxes accordingly, lowering to a great extent their full tax liability. This practice is illegal so be careful should you decide to pursue this route. While this has been common practice in the past, it also puts the employer out of compliance — fines of several million RMB have been levied just recently to FIE's engaged in such practices in China — and the risk of being caught — with the issue now highlighted at audit — is increasing.

Foreigners holding concurrent posts both in China and elsewhere.
Firstly, you should be arriving in China on a business visa, and are subject to IIT based on the number of physical days you are in China. This is assessed upon the total salary you are claiming from your local employment position and from the parent company overseas — the Chinese tax bureau may want to see proof of earnings from your parent (tax slip, payment voucher etc) to support your case. At the end of each month, your China office should take copies of your passport, together with the entry/exit stamps for that month, and file and pay for taxes based upon the number of days spent in the PRC. The tax bureau will issue a receipt showing this has been paid, this can be credited against the tax paid in your resident location (ie: you won't have to pay tax both in China and your resident location for the time spent in China).

China residency status and IIT on your worldwide income
Be aware that if you are regarded as tax resident by the Chinese government, which means you have stayed in China for more than 5 years (without residing outside the PRC for more than 90 days cumulatively each calendar year or 30 consecutive days always within a calendar year), you have to pay IIT on your worldwide income without limitation of source. This means that shall you have income elsewhere related to property rentals or interests, these shall also be declared to the Chinese tax authorities. The taxes paid overseas can be deducted from the taxes payable to the Chinese tax authorities. To be fair, we did ask the State Administration of Tax if they had ever collected such revenues, and the honest (and slightly bashful) answer was "No" — however why expose yourself to such a law without reason ? It's easy to avoid so count those days and give yourself a month out of China every 5 years.

Work Permits Registration Procedures
If you are based in China and working here, then you should apply for working visa, working permit and residence card.

Please be aware that constant checks in residential areas are conducted by the local Public Security Bureau and one of the first things you should do when you arrive and rent an apartment in the country is to get registered with the local Pai Chu Suo (local police responsible for your area).

Before you obtain all the documents mentioned above you should also go through a medical examination at the appointed local hospital. It should not take you more than a couple of hours to get through the exams with the results normally being issued the day after (or if you pay more on the same day!).

Your spouse and children (if any) would also have to register with the local authorities.

Tax Rates & Liabilities
The first RMB4,000 of your earnings in China are tax free. That does not mean you can rush out and declare salaries of RMB4,500! The tax bureaus are wise to this and will demand to see concrete proof of your earnings elsewhere. If you can't provide this they may refuse to register you, effectively immediately making your presence in China illegal.

China's IIT rates are high compared to neighbouring countries. The following table demonstrates salary brackets and tax rates, plus the quick tax deduction system. Your Total Liability can be calculated as follows:

Salary minus 4000 x Tax Rate, less Quick Deduction Figure = IIT Tax Bill
Monthly Taxable Salary-----Tax Rate-----Quick Calculation Deduction

From RMB500 to RMB20,000-----20%-----RMB375
RMB20,001-40,000-----25%-----RMB1,375
RMB40,001-64,000-----30%-----RMB3,375
RMB60,001-80,000-----35%-----RMB6,375
RMB80,001-100,000 -----40%-----RMB10,375M
In excess of RMB100,000-----45%-----RMB15,375

There are some implicit or explicit benchmarks at local tax bureaus on what a reasonable salary is in certain industries and this could vary with your position, your education background and the country you come from. Local authorities have the power to increase your declared salary. Should this be manifestly low or inadequate to your position, they shall assume and obtain the proved confirmation that you are deliberately reducing the figure to escape from a higher IIT threshold. This can be enormously damaging for you and your employer who would be placed under far greater tax scrutiny in the future for potential tax evasion issues within the business.

Deductible Allowances
China is also pretty reasonable as regards non-taxable elements as part of an expat package, however some attention may need to be paid to the structuring of the inclusive package with certain items needing to be properly defined in the employment contract.

As a rule of thumb, if you pay for the expenses yourself (against local official invoices) and the company provides you cash allowances, then these are considered taxable. However, if the company pays for certain expenses on your behalf (for ex. Your apartment rental), then this kind of allowance is not taxable and can be deducted from your company FEIT computation basis.

Benefit Taxable as Part of Overall Package?
Hardship Allowance - Yes
Housing at Cost - No
Fixed Housing Allowance - Yes
Free Use of Vehicle - No
Fixed Expenses Paid in Cash - Yes
Reasonable Expense Reimbursed - No
Reasonable Home Leave Allowance - No
Reasonable Education for Dependents - No

Enterprises are obligated to withhold employees' IIT when paying salaries to them; failing to do so will cause penalties. Meanwhile, the enterprises can get 2% of the IIT withheld from the tax bureau as commission. Pay attention to the calculation of the IIT if the companies are paying IIT for the employees, in this case the income has to be grossed up for the purpose of calculating IIT.

Individual Income Tax calculations for standard salaries are fairly easy to assess, but get more intricate according to the complexity of the expatriate's salary package. It makes sense to take professional advice when structuring expatriate salary packages to ensure liabilities can be planned, and catered for in the most tax-efficient manner.

Non-Compliance Penalties
No Government likes tax evasion and China is no exception to the rule. The penalties for late payments, non-payment and other transgressions (naivety is no excuse) can be severe — often up to five times the amount due, plus the original liability. In cases of blatant evasion, businesses can have their licenses withdrawn and assets seized. If you have any doubts, please seek professional advise immediately — this is the one area it is best not to mess about with, fees spent on decent advise are less than the amounts levied in fines and penalties!

Though China has a vast workforce, the country is facing a severe shortage of skilled labor. " [The shortage] is across the board,"says Stella Hou of Hewitt Associates, a human-resources consultancy. "[International] companies have a hard time recruiting ideal candidates to run their operations in China. The local workforce mainly lacks management skills, leadership, creativity, autonomy or risk-taking, marketing and research."

Developing economies often encounter talent shortages as they take off, and China is no exception. Private business has flourished only during the past 15 years and most professionals are still at a junior level. Since most enterprises were previously State-owned and operated within a centralized economy, a sense of "corporate spirit"and "business initiative"has yet to take hold in the domestic workforce. Concepts, such as branding, project management and other skills involving international standards of corporate operations still need to be learned. "After more than a decade under State-owned enterprises, Chinese businesses lack the mindset to adopt Western working practices,"says Larry Wang of Wang Li & Asia Resources, a recruitment company based in Beijing.

However, economic growth is pushing most companies to develop higher work standards. It has also pushed them to expand domestic operations, and thus to increase their demand for employees with strong leadership and management skills. As a result, China is currently demanding a bigger talent pool that it can supply. Chinese professionals with experience working at the international level are highly sought after, and rare. Unable to find domestic workers with these qualifications, companies have thus continued to lean on experienced and skilled expatriates for management of regional operations. In fact, the dearth of a skilled domestic workforce threatens the competitiveness of companies in China, since the need to rely on skilled foreign (and therefore expensive) labor has increased operating costs.

Expatriate Demand
Multinationals have always relied heavily on expatriate executives to head their departments and organize business expansion. Foreign firms choose expatriates from their company headquarters because they represent a bridge from corporate office to the local market. "I was chosen because I already have the experience in expanding businesses overseas and can quickly adapt to diversity,"says Sheila Lester-Smith. former vice-president of Motorola for the Asian Region. Analysis by Hewitt on expatriate annual salaries for 2004 indicates that salaries are high and packages attractive. A country-level managing director receives US$250,000 to US$300,000 per year, while top executives can expect US$500,000 or more. "The salary is completed with bonus and compensation such as free housing and schooling for the children and company,"says Stella Hou.

According to Hewitt, the number of expatriates in China is rising and includes both Western foreigners and, increasingly, Asians from neighboring countries. "It is getting difficult to define what 'expatriate' actually means, since there are so many different kinds in China. We do not have a one-size-fits-all type,"says Hou. The Asia-Pacific region expatriate population represents fully 55.6 percent of China's external recruitment channel. "There is a continuous transfer of Asia-Pacific headquarters to China. China is a growth in the multinational radar screen and companies are sending their employees there to ensure the development of their firms,"adds Hou.

Chinese returning from study overseas are filling up some of the shortages at the most senior levels. Confident in getting more rapid career advancement in China than in the Western countries where they studied or worked, returnees are also attracted by China's fast business growth and improvement of quality of life. In 2004, the number of foreigners (from multinationals' home countries) sent by their companies to China fell to 41.7 percent (from 52.9 percent in 2003). Conversely, the number of Asia-Pacific workers (Hong Kong, Taiwan and Singapore) and Chinese returnees continues to increase. "The Asia-Pacific workforce is more sensitive to Chinese culture, can often speak Chinese and English and is seen as 'quasi-international' by most employers,"says Larry Wang. "Their package is comfortable compared to the one they can have in their home countries and most importantly they can develop or sustain their career in the mainland."

Recruiting, retaining and localizing
Human resource issues have become high priority concerns for companies in China. Recruitment, retention and localization of staff represent their top priorities. Georges Desvaux, director of China for McKinsey, says the key point is that the critical skills that are missing in many firms are not so much top management, where one can find highly qualified locals, but more often highly specialized functional skills at middle and supervisory levels where experience in organizations that have long-standing systematic processes is critical. Strong multinationals that want to operate at global performance levels hire expatriates for these jobs, and slowly build a cadre of skilled locals.

But most firms realize that they cannot replace their expatriate staff for local employees as quickly as they have planned. They are therefore customizing their expatriate packages and creating hybrid packages to attract skilled employees into their companies. "Most multinationals keep their expatriates and manage the process based on better selection, preparation, and mentoring of local successors,"says Hewitt. The agency indicates that 36.9 percent of companies in China have current formal localization plans and 61.3 percent plan to or are making a transition over one to three years. Since many firms are investing in training staff in leadership, management and talent development, the local skill base is rising quickly. More than 69.7 percent of companies in China have development programs to build local successors for expatriates.
But while expatriate compensation is shrinking as the workforce diversifies, the number of expatriates will continue to grow. Most firms can now find more foreign talent choices in the local market and will continue this recruitment strategy. Multinationals are also competing for talent with China's domestic companies, which need to improve the quality of their people as their markets open to foreign rivals. Despite this demand, however, Western expatriates are still reluctant to work for local companies.”

Local companies have now started to offer decent packages for expatriate employees that can include an annual salary of US$80,000 to US$120,000 for manager and top executive levels. However, only a few local companies have successfully hired and kept expatriates in their firms. "I am extremely skeptical about local companies hiring foreign expatriates”, says Larry Wang. "Most of these companies are used to being in a more centralized economy and are uneasy about giving up control."

Despite the high cost, foreign firms hope to keep their expatriates until the "localization"of their staff is completed. But some firms have difficulty retaining them within their companies after termination of their assignments. "I quit my job as the Motorola vice-resident because it was the end of my term in China and I preferred to stay in China and look for opportunities over the next few years,"says Sheila Lester Smith.

China's shortage of talent has indeed given a bright future to expatriates but "they have to love the people and the country first to enjoy their work here,"says Stella Hou.