Level the playing field by transferring IP onshore
September 04, 2010 | BY
clpstaff &clp articles &China offers more support to attract foreign R&D centres to set up
If they want equal treatment from PRC authorities, foreign investors should beef up their indigenous product qualifications by transferring intellectual property (IP) ownership into China, and aggressively promote key technologies and energy-saving elements in their products, say counsel.
Foreign research and development (R&D) institutes are assured equal policy support to access the government procurement market. Their products will be considered “made in China” if 50% of a product's added value is produced in China.
Shanghai-based partner Benjamin Bai of Jones Day explains the National Indigenous Innovation Products (NIIP) policy is part of China's efforts to encourage domestic innovation. He says that a common problem faced by foreign-invested enterprises (FIEs) is that “they do not own any IP in China”.
To achieve global tax efficiency, parent companies usually hold all IP outside of China. “To remedy the lack of IP, FIEs can license certain IP from the parent company and then qualify for the NIIP program,” said Bai.
Though the 50% rule is “apparently new”, Bai speculated that it was rolled out to allow more FIEs to qualify as NIIPs, and that having their products certified “made in China' is beneficial to FIEs.
To qualify as being “made in China”, White & Case's China tax head Yongjun Peter Ni suggested seeking Chinese partners for potential investments and making products in special bonded zones, State Council-approved areas where customs duties, inspections, tariffs and quotas are reduced or eliminated.
“In addition to those technical maneuvers, foreign investors are advised to aggressively promote products with high-tech, energy-efficient and environment-friendly elements,” said Ni. He added that the availability of incentive programs and the protection of IP rights are factors that affect foreign investors' decisions to set up R&D centres in China.
According to Jones Day's Beijing-based tax partner Fuli Cao, a further key incentive is the possession of proprietary IP rights of “core technology”, which is one of the requirements to be qualified as a High and New Technology Enterprise (HNTE). The HNTE qualification is mandatory to enjoy a reduced income tax of 15% compared to the regular 25%. “It may place them in disadvantaged positions in qualification for HNTE if their China R&D centres do not own IP rights,” he said.
Products that are included in the NIIP catalogue will receive policy support from the government, which is linked to government procurement preferences. The equal policy support for R&D centres stems from China's renewed attempt to join the World Trade Organisation's Agreement on Government Procurement (GPA). The Chinese government must show that it allows equal access to both foreign and domestic firms for government procurement contracts.
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