Two Canadian companies recently came to us looking for advice on how they could temporarily export goods to a foreign country without incurring duty and taxes. These goods were intended for demo purposes, and not for sale. Title and ownership belonged to the exporter.
You Asked Us
How do I avoid paying taxes and duty on tradeshow material for demo purposes?
The Canadian companies would need to obtain an ATA (Temporary Admission) Carnet, a bond that is issued by the Canadian national guarantor, the Canadian Chamber of Commerce.
In 1961, the World Customs Organization (WCO) established an internationally recognized process that would allow the temporary admission of goods in more than 71 countries worldwide. This process allows goods to be imported duty and tax free for a one year period in any of the participating countries. Why? The Carnet guarantees payment of duties and taxes to the custom authorities and territories if the goods are not returned to their country of origin before the bond’s expiry date.
The ATA Carnet helps Canadian companies manage the temporary flow of goods sent to foreign countries typically for trade shows, demonstrations, exhibitions or commercial samples. The ATA Carnet does not, however, cover the following:
- Controlled goods that require export or import permits,
- Disposable goods; or
- Goods sent abroad for repair or rework
The Canadian Chamber of Commerce has published a web page on How to Apply for a Carnet to help Canadian businesses better understand the procedure and to guide them through the process.
For countries that do not actively participate in the ATA carnet program, the exporter can apply for a temporary import bond (TIB) through a local customs broker at the time of entry. Unlike the ATA Carnet, TIB deposits and payments are usually made in cash in the currency of the importing country rather than Canadian dollars. A TIB must be purchased every time a product is imported into a foreign country, and fees vary from country to country. Additionally, exporters should expect a long lead time before deposits are refunded.
CEPA – A Free Trade Agreement to Help Canadian Exporters
Access the Chinese Market
A buyer in China would buy as much Canadian product as the exporter could supply, however high tariffs and import restrictions limit the product’s entry. Another needs to employ foreign workers to install a temporary facility, but is faced with Chinese employment law and subcontracting provisions of the labor code. Yet another exporter is having difficulty obtaining regulatory approval for their medical equipment.
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How can I sell into Mainland China without having to deal with the country’s sometimes complicated import requirements?
Canadian exporters can access the Mainland market through Hong Kong and benefit from provisions of the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA).
Implemented in 2004, this agreement is considered by many as a shortcut into the Mainland market and covers trade in goods and services between the two counterparties as well as trade and investment facilitation.
With the agreement, zero tariffs are applied to over 1600 products imported from Hong Kong into the Mainland. It also provides service companies, based in Hong Kong, privileged access to service sectors in the Mainland market (e.g. accounting, advertising, banking, distribution, etc).
Canadian manufacturers can sell to a Chinese affiliate in Hong Kong, or set up, invest in or outsource to manufacturing operations in Hong Kong to meet the CEPA rules of origin and enjoy the benefits of the agreement. Service companies can access the Mainland market by setting up a service company in Hong Kong, or partner with, invest in or acquire an existing service supplier in Hong Kong.
In addition to providing the exporter with insight into the local culture and business practices, being based in Hong Kong also provides advantages related to the recognition of intellectual property rights in the Mainland.
Other CEPA provisions relate to business regulations, the standardization of e-commerce and relaxing customs clearance requirements and processes.
More information on CEPA is available on the Hong Kong Trade and Industry Department website.
Corporate Social Responsibility – Some key resources
A Canadian oil and gas service company was investigating an investment in an emerging market. The company was looking for examples of best practices and corporate social responsibility guidelines to establish internal guidelines for anti-corruption, environment, ethics, etc. They approached their EDC Account Manager inquiring about where to receive information and resources to support them.
You Asked Us
What are best practices regarding Corporate Social Responsibility? Are there any guidelines we should follow?
Corporate Social Responsibility (CSR) is more than just compliance with legal standards - it is the integration of values such as honesty, respect, fairness and integrity into daily business practices. The goal of CSR is to provide organizations with a mechanism to actively monitor compliance with the spirit of the law, ethical standards, and international norms ensuring business actions maintain a positive impact on the environment, consumers, employees, communities, stakeholders and all other members of the public sphere who it considers stakeholders. More and more Canadian exporters are embracing and adopting CSR policies into their business model as a form of corporate self-regulation and a way of demonstrating good business.
The following resources can be useful when establishing corporate social responsibility guidelines:
- Our Corporate Social Responsibility pages provide links to many resources on topics like business ethics, environment, transparency, community investment, and employee engagement
- The International Chamber of Commerce’s section on corporate responsibility has many relevant links
- TRACE International Inc., a Washington-based consultancy, provides advice to organizations about corruption risks, etc.
- World Bank’s Worldwide Governance Indicators aggregates individual governance indicators for 213 economies over the period 1996–2010, for six dimensions of governance including Voice and Accountability, Control of Corruption, Rule of Law, Government Effectiveness, Political Stability and Absence of Violence, and Regulatory Quality.
- Transparency International is a global movement that works with partners in government, business and civil society to put effective measures in place to tackle corruption.
- UN Global Compact is a strategic policy initiative for businesses that is committed to aligning operations and strategies with ten universally accepted principles in the areas of human rights, labour, environment and anti-corruption.
- Partnering Against Corruption of the World Economic Forum is a global anti-corruption initiative developed by companies for companies.
- Control Risks Group Limited has published an insightful resource titled: Facing Up To Corruption: A Practical Business Guide (PDF)
- Organisation for Economic Co-operation and Development (OECD) is an international economic organization of 34 countries founded in 1961 that promotes policies that improve the economic and social well-being of people around the world.
Finally, our 2011 CSR Report is another good resource. It includes three video customer case studies, Kinross, Nexterra and Ostara Nutrient Recovery Systems, that provide insight into corporate approaches to CSR and how these organizations have worked with our support.
Establishing a Presence in Europe
A Canadian exporter recently came to us looking for advice on how to set up a local presence in Europe. The exporter was considering various European countries and was looking for guidance as to which location would best fit their exporting growth strategy.
You Asked Us
What are good sources to consult in order to make an informed decision about where to establish a presence in Europe?
There are various factors to consider prior to entering a new market. The Forum for International Trade Training (FITT) offers a course (and a handbook) called International Market Entry Strategies. Alternatively, here are three recommended steps to help guide you:
1. Research Online Resources
In Europe, the European Commission website has a wealth of information that covers various topics about each of its member countries. The World Bank and the International Finance Corporation have produced a report about Doing Business in the European Union where they rank countries based on Ease of Doing Business. Forbes has a similar list called Best Countries for Business.
At a more micro level, countries normally have a government agency that promotes foreign investment. These agencies will provide information and references to foreign enterprises interested in establishing a presence in their respective market. Here are a few examples: Germany Trade & Invest, Invest in France Agency, UK Trade & Investment.
Closer to home, EDC offers economic insights on the Euro Zone along with thoughts surrounding the Economic Impact of the Euro-Zone Crisis on Emerging Europe. The Government of Canada offers insights for exporters as well.
2. Reach Out to the Canadian Trade Commissioner
The services offered by The Canadian Trade Commissioners Service at the Department of Foreign Affairs, Trade and Development Canada (DFATD) can be extremely useful for Canadian companies with international operations. Trade Commissioners can help provide country information, market potential assessments, in-country contacts and details on upcoming events. Canadian Trade Commissioners are located abroad and locally across Canada. Locating a Trade Commissioner relevant to your sector and market of interest can easily be done.
We also suggest that all companies register (at no cost) with the Virtual Trade Commissioner to access additional country reports and in-country local contacts.
3. Seek Local Legal Assistance
Once your company has narrowed its search on a country, it is worthwhile to seek legal counsel from a firm familiar with local legal restrictions. The following websites can help you identify legal experts in countries around the world: International Financial Law Review and Chambers & Partners.
Export Strategies for China (Distribution and Warehousing)
A Canadian manufacturer of electronic and process management controls, looking to better serve Chinese clients by getting goods into the market faster, came to EDC for some advice. To gain time-to-market efficiencies, the exporter was considering storing equipment in China which would also have enabled them to delay paying duty and value added tax (VAT) until the actual delivery to a Chinese customer occurs.
You Asked Us
- How to delay paying tax and duty for goods entering China?
- What is the best way to maintain inventory in China and who to contact for advice?
- What to consider when establishing distribution channels and a presence in China?
The value of bonded warehousing
One way to delay the payment of tax and duty is to hold inventory in China in one of many bonded warehouses – usually overseen by China Customs.
Using a bonded warehouse provides the benefit of storing equipment in China without having to pay the duty and VAT up front. However, as soon as the goods leave the warehouse and “enter” China as part of a buyer and seller transaction the goods would be subject to VAT and duty charges.
Bonded warehousing considerations
There are hidden costs associated with this type of strategy since it may require that you establish sales and administrative functions in China.
A strong word of caution. The terms, bonded warehouse, free trade zone, export processing zone etc., are all governed by a variety of regulations for what the Chinese call “custom specialty supervised areas” (CSSAs). Why the goods entered China (i.e. store, process and store, sell only to China, sell to China and/or export further to other Asian countries) will influence where the goods should be “warehoused” as well as any end costs to sellers and buyers.
Storing finished goods in a bonded area before they are sold to a mainland buyer can be less complex than if the exporter conducts additional processing in the CSSA prior to the sale of the goods. The degree of local value added, including processing, marketing and administration, will affect end costs and taxes.
Who exporters can turn to for advice
- Consultant groups can provide advice on how to set up CSSA structures. For example, Ernst and Young’s report entitled ‘Chinese Bonded Areas: Choosing the Right Location’ outlines requirements and key steps in the planning process.
- In addition to speaking with consultant groups, the Department of Foreign Affairs, Trade and Development Canada (DFATD) should be contacted for assistance in vetting locations.
Finding a trading company partner and establishing presence
Most international companies tend to outsource shipping in China to other companies rather than establish their own distribution channels. If the exporter is looking for a trading company partner, DFAIT is a good point of contact as well as the Canada China Business Council (CCBC). They may also be able to provide additional insight about tax and legal considerations.
AT Kearney, a global management consulting firm that provides advice on transportation and logistics has produced a helpful report on transportation considerations in China titled ‘China 2015: Transportation and Logistics Strategies’.
The CCBC Business Incubator Centre (BIC) can also provide Canadian companies with an affordable, low-risk way of building a presence or virtual office space in China. In Shanghai, for example, for less than CAD 800 a month Canadian companies can rent fully equipped office space.
Helping Auto Sector Companies Invest in Mexico
Three Canadian tool and die manufacturers (TDMs) for the automotive sector, considering an expansion into Mexico, recently came to us looking for advice about doing business in that country.
You Asked Us
What information can we provide automotive sector companies expanding into Mexico?
For all country-related requests, we suggest exporters register (at no cost) with Foreign Affairs, Trade and Development Canada's Virtual Trade Commissioner to obtain country information, market potential assessments, in-country contacts and events, as well as the name of the relevant Trade Commissioner by sector and country. The Trade Commissioner website can also provide the name and coordinates for the local trade commissioner in Canada.
In addition to the above suggestions, we have developed online information available for download, which includes:
DFATD has developed a podcast that describes three ways to manufacture in Mexico and another that provides information about mitigating risks related to security, trade and investment.
Our sector experts indicate that excellent opportunities exist in Mexico for qualified Canadian TDMs. They suggest contacting the Secretary of Economic Development in the state targeted for an investment as part of a company’s due diligence. As well, Canadian sector associations (e.g. Automotive Parts Manufacturers' Association (APMA) and Canadian Association of Mold Makers (CAMM)) are good sources of contacts.
How to Transfer Profits Made in China Back to Canada
A Canadian manufacturer is considering setting up operations in China. They have heard from other Canadian companies with foreign operations in this market that getting profits out of the country is often challenging.
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What to expect and consider when transferring profits from Chinese operations back to Canada?
China has strict foreign exchange regulations in place that prevent large amounts of currency from moving quickly out of the country. Most foreign companies with operations in China will tell you that banking in this country can sometimes be challenging, especially when trying to convert RMB earnings into USD or other hard currencies in order to transfer back to their country of origin. Currency flows are quite heavily regulated by the Chinese Government through The State Administration of Foreign Exchange (SAFE), however China is making a significant move toward a more flexible currency system.
In theory, wholly owned foreign invested enterprises (and joint ventures) are allowed to transfer their profits, dividends and royalty payments out of China once the entity presents the required documentation to its Chinese bank (e.g. Articles of Association / business license).
Unlike most countries with fully convertible and open current and capital accounts, setting up operations in China requires a bit more forethought. Things you should consider:
- Work in close collaboration with both a lawyer and tax specialist who specializes in helping businesses with operations in China
- Plan a successful remittance strategy. This should happen at the outset of setting up an affiliate in this country.
- Articles of Association (approved by local Chinese authorities), business license type and board of directors’ resolutions (board resolution to pay dividends is a standard process / requirement in most corporations in order to pay a dividend – not just in China) all play a critical role in the strategies available to distribute the affiliate’s profits.
- The company could lose out on a considerable percentage of the total turnover through tax payments if a strategy is not established from the beginning of operations.
- Royalty payments, service fees charged by the parent for ongoing work done in China, research and development cost sharing on intellectual property, and interest payments on shareholder loans are all options that offer varying methods to move revenue from the affiliate back to the parent. Each comes with its own legal restrictions and taxation levels and may not be available or applicable to every company type. But all are worth exploring with an experienced lawyer and accountant.
- Before transferring funds, foreign enterprises are required to pay in full any penalties or fines facing the company including carried forward losses from past years’ operations.
- Also taking precedence are a few special funds that an affiliate may have to make contributions to from after-tax profits, and only after this has occurred is the remaining after tax profit available for distribution to shareholders.
SAFE may at all times seek additional documentation and/or investigate a company should they deem the company's remittances are not aligned with industry norms.
Corporate Taxation in China
Chinese tax authorities levy a 10 per cent with¬holding tax on dividends, interest and royalty payments. The tax levels on dividends may be reduced up to half if the investor is a resident in Hong Kong and has a minimum ownership in the affiliate of twenty-five percent.
- Establishing a business in Hong Kong involves leveraging the Special Administrative Region (SAR) status of Hong Kong and the Closer Economic Partnership Arrangement (CEPA) Hong Kong has signed with mainland China.
While repatriation challenges may not be resolved by establishing a Hong Kong holding company, enterprises interested in establishing a presence in China should speak to a lawyer and a tax planner to assess possible tax benefits of having an ownership structure in Hong Kong may offer.
Protecting Online Intellectual Property
A Canadian company develops and distributes online training services. Their website is used as the primary tool for marketing, but also serves as an online catalogue by which customers and prospective clients can solicit product information and purchase services. They have recently been affected by online piracy when a US competitor copied their product information and pricing to compete against them in a bid. The company is considering competing for business in the Middle East and wonders if it should register its domain name in that jurisdiction and others where it would like to conduct business.
You Asked Us
How do I protect my company from copyright infringements? Do I need to register my domain name in any other country besides Canada to protect my online IP rights?
Concerns are continually raised about how proprietors should protect their online content from others who may use it to make money. Given its ever-changing nature, the law is constantly playing catch-up when it comes to the web, search engines and other online technologies.
Intellectual property (IP) is an intangible creation of the mind that can be legally protected using patents (e.g. inventions), trademarks (e.g. brand name), copyrights (e.g. artistic expression), industrial designs, trade secrets (e.g. formula or process) and contractual rights (e.g. license to use).
If a business uses the web as an electronic catalogue to showcase its products and services or as a means for conducting online transactions it needs to protect the online assets it creates. The Government of Canada’s Canada Business Network, a web site for entrepreneurs, provides useful information about IP and how to protect it.
Canadian SMEs should be aware of the IP implications when they export their products and services. Steps towards IP protection, described by the Canadian Intellectual Property Office, should be taken prior to any exporting activity. Registration of IP in Canada provides protection only in Canada. Similar protection must also be sought in targeted markets.
About Domain Name Registration
In Canada, the Canadian Internet Registration Authority (CIRA), a not-for-profit Canadian corporation, is responsible for operating Canada’s “.CA” Internet country code top level domain. A company can protect its online content (as much as is possible) by ensuring that their domain is registered in jurisdictions abroad where they wish to conduct business.
Where to go for additional resources and information:
A Canadian company performs work in Indonesia. The Indonesian buyer wants to withhold a portion of the payment to satisfy taxation requirements in that country. The Canadian company, knowing that Canada has a tax treaty with Indonesia, approached us for advice about how to obtain a Residency Certificate in order to avoid having to pay taxes in both Canada and Indonesia on the same income.
You Asked Us
How do I obtain a tax reduction or exemption from income earned in a foreign country?
Generally, domestic companies are required to withhold a certain percentage of any payment that they make to a foreign company in order to cover taxes associated with the income earned by the foreign company.
Thankfully, Canada has tax conventions, commonly known as tax treaties, with many foreign countries, including the USA.
A tax treaty is designed to avoid double taxation for people or companies who otherwise would pay tax on the same income in two countries. Under these treaties, residents of Canada (both individuals and corporations) are taxed at a reduced rate, or are exempt from foreign taxes on certain types of income they receive from sources within those countries.
Typically, in order to receive the benefit of tax treaties, it is necessary to submit a document to the foreign company that will be making a payment to the Canadian company. These documents are often called Residency Certificates.
Residency certificates provide confirmation that the company is a resident of Canada and indicates that there is a tax treaty in place between Canada and the foreign country. Every country has different requirements for these certificates with some countries requiring certification by Canada Revenue Agency (CRA) as well as authentication by Foreign Affairs and International Trade Canada and their country’s consulate.
In the USA, residency certificates are actually forms that are to be completed by the foreign company. Although there are many forms depending on the type of income and individual circumstances, the most common is referred to as the W8-BEN form.
Temporary Import of Vehicles into Canada: Who to Contact
A Canadian manufacturer of oilfield service equipment is required by their clients to install their product onto trucks prior to delivery. To fulfill its contractual obligations with many European customers, the company must import European trucks into Canada on a ‘temporary’ basis following very strict procedures outlined by Transport Canada and the Canada Border Services Agency.
At the time of this request, the manufacturer was within two weeks of receiving delivery of two European trucks into Canada. However, they had failed to properly complete the documentation required by Transport Canada and risked losing their ability to import the trucks in time to fulfill their contractual commitment to the European buyer.
You Asked Us
What groups within government or other organizations can we make contact with that possess expertise in Canada’s compliance requirements and import authorization policy?
Though EDC does not house the expertise to respond to this type of query, EDC does, however, maintain relationships with other organizations/associations that have complementary expertise and knowledge to that of EDC. In this instance we were pleased to be able to reach out to I.E. Canada, the Canadian Association of Importers and Exporters, as well as Transport Canada in order to help the anonymous EDC customer.
I.E. Canada’s expertise resides in customs and security regulations, compliance, and supply chains. They were very familiar with the situation facing EDC’s client and were able to provide guidance to help the EDC customer. I.E. Canada provides businesses across Canada with information and programs (conferences, webinars, and seminars) to help them become more competitive in the global market place.
In reaching out to Transport Canada, EDC discovered that the Road Safety and Motor Vehicle Regulation Directorate is the organization within Transport Canada that administers the Motor Vehicle Safety Act. The Motor Vehicle Safety Act outlines the compliance requirements for importing vehicles. Transport Canada was able to provide some direction to help the client in the event they needed to escalate their issue.