Where the road led in 2009

What we said

More lawsuits, closer scrutiny: as Mofcom becomes more confident, it will look more closely at merger filings and learn from criticisms of Inbev/Anheuser Busch. The threat of private actions against foreign companies based on the PRC Anti-monopoly Law (AML) (中华人民共和国反垄断法) will grow, but the courts will be reluctant to accept cases without more guidance from the enforcement agencies.

What happened

There have still been no AML-based cases filed against foreign companies, but several more actions have been taken against Chinese enterprises: Baidu, China Mobile, Sinopec, China Netcom and Chongqing Insurance Association have all been involved in AML litigation. In October, a case filed by Beijing Sursen Electronic Technology Co against Shanda Interactive Entertainment and Shanghai Xuanting Entertainment Information Technology was rejected by the Shanghai No.1 Intermediate People's on evidentiary grounds.

According to competition law specialists, the threat to foreign companies has only grown stronger in the past year. One lawyer told CLP: “Foreign companies were not in the first batch of cases because most cases were brought by individuals as consumers or customers … This doesn't mean foreign companies can be immune.”

What we said

Emerging rules will create inconsistency: Shortcomings in the implementing regulations for the PRC Employment Contract Law (中华人民共和国劳动合同法) will lead to individual provinces issuing their own rules, creating inconsistencies and challenges. Companies will need to work hard on creating localised internal policies and standard contracts.

What happened

It seems much of this inconsistency has appeared as expected. As Pattie Walsh, head of employment in Asia for DLA Piper, wrote in Australia China Connections magazine recently: “[R]egional variations continue to apply not only in the way the law is adopted and applied formally, but also in the variety of local practices adopted by the local enforcement authorities and agencies.”

Different cities have been applying slightly different rules to issues such as termination of employment contracts, variation of employment conditions, and non-compete agreements.

According to several employment lawyers, Shanghai issued “a very controversial reading on when an employee is entitled to an open-term contract” which is “completely out of step with the rest of the country”.

“They are quite pro-employer, which is a markedly different result from what many had predicted,” says Paul Hastings' Lesli Ligorner.

Joe Deng, a partner of Baker & McKenzie, says: “There will continue to be an uneasy tension between local interpretations and national interpretations.” Under the Chinese system, such tension can only be resolved by the Supreme People's Court issuing an authoritative Opinion or Intepretation. Deng recommends speaking with judges and legislators rather than looking back at previous decisions and treating this as precedent (as would be done in a common law jurisdiction).

What we said

Land value appreciation tax must go: A February 2007 tax on land value appreciation is forcing many developers to sell their properties at lower prices; the government has made some other, ineffectual tax cuts, but will need to abolish LVAT in order to improve the market outlook. One specialist predicted the tax would be combined with regular income tax.

What happened

Comments Yongjun Peter Ni of White & Case: “Things have changed a lot since last year. While LVAT revenue accounts for only less than 1.5% of China's total tax revenue, it is unlikely that LVAT will go away anytime soon.” Real estate prices have soared, particularly in Shanghai, and there appears to be no sign of a slowdown. This has led to LVAT being viewed more as a brake to runaway growth, rather than a hindrance to development as it was seen a year ago.

Ni adds that China is also in the process of reviewing all existing taxes on real estate with the plan to consolidate them into a few main taxes. “As part of that process, the long-awaited property tax may be finally introduced,” he says. “The [State Administration of Taxation] officials have clearly stated to the public that LVAT will not be abolished until the real estate tax reform is completed.”

Despite continued strong growth in China, the government is experiencing a tax revenue shortage, and, according to one analyst, may not hit its tax collection target this year. This makes further tax cuts extremely unlikely in the near future.