In the news: TMT gets VAT, Company law affects accountants, bond defaults begin and ZTE wins patent case

Telecom services subject to VAT

China will impose a value-added tax on telecommunications services, which may cut profits for the country's three major wireless carriers. The NPC announced at its annual meeting that this is part of a national trial also applied to railway transportation and postal services. Regulators are pushing the three state-run carriers to cut prices, offer more choices and improve customer service for their 1.2 billion users. The new tax system is expected to begin around April and could cut the annual net income of China Mobile, China Unicom and China Telecom by 6% to 9%. The current business tax sits at about 3% of revenue.

Source:
Bloomberg

This is said to be Congress's biggest policy change affecting the telecom sector this year. The precise degree of impact due to an increased tax burden and reduced net profit is contingent on the absolute level of the tax and the deductions regulators are able to claim. Lower levels suggest a neutral tax as operators will have sufficient deductions to ease the burden, but higher levels will result in a profit decline. The Ministry of Industry and Information Technology attributed the direction of China's telecom reform to promoting competition. The move follows a reduction in China Mobile's carrier fees in December and a trial implemented in May to allow private companies to lease network capacity from state-owned carriers. But do competitors really stand a chance in the heavily-monopolised TMT market?

More from CLP:
Law digest: Ministry of Industry and Information Technology, Provisions on the Protection of Personal Information of Telecommunications and Internet Users
A tax boost for corporate R&D policies
Translation: Announcement on Value-added Tax Issues Relevant to the Asset Restructuring of Taxpayers
Clarifying corporate income tax under the VAT regime
Law digest: Ministry of Finance and State Administration of Taxation, Circular on the Launch of Pilot Tax Policies for the Levy of Value-added Tax in place of Business Tax in the Transport Industry and Certain Modern Service Industries Nationwide


Company law cuts accounting firms' revenue

The Company Law amendments radically change the way private capital is managed, leading accounting (CPA) firms to seek new sources of income. Companies no longer need to engage a CPA, go through verification procedures and amend their business licence each time a capital contribution is made. Large CPA firms generate little revenue from capital verification – less than 2% of total revenue at 10 of the largest CPA firms in Beijing – and have had a head start in seeking other sources of growth. However, verification services make up around 80% of the revenue of small CPA firms. An owner of a small Beijing-based CPA firm has said although the amendments will hurt his business, he has been preparing for the change by modifying operations and expanding other services.

Source:
Want China Times

The Company law reform aims to encourage investment by removing barriers and costs for start-ups. Driven towards freeing the market, the amendments no longer require most companies to stipulate paid-up capital in the business licence as well as to verify capital contribution. Most accounting firms are expected to shift their focus to releasing annual financial reports, as profits are greater since they take longer to issue than verification reports. It is uncertain whether this would be profitable enough for the small CPA firms. But with the expected increases in flow of capital and number of newly-registered companies, there may still be plenty of work for them to do. The key is to offer a diverse range of services.

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SEC spat needs diplomatic solution
Translation: Announcement on the Implementation on a Trial Basis in the China (Shanghai) Pilot Free Trade Zone of Implementing Measures for Increasing the Foreign Investment Percentage in the International Shipping and International Shipping Management Businesses
Going back to basics
Law digest: China Banking Regulatory Commission, Circular on Issues Relevant to the Banking Regulation in the China (Shanghai) Pilot Free Trade Zone


Chaori Solar marks first onshore bond default

Troubled Chinese solar equipment producer Chaori has announced it cannot make its Rmb89 million (US$14.5 million) interest payment due this week and said it can only come up with Rmb4 million. This sets the precedent for a domestic bond default and highlights the record levels of credit risk and corporate debt in China. Chaori narrowly avoided a previous bond default a year ago after a local Shanghai government persuaded banks to defer claims for overdue loans so Chaori could meet its bond interest payment. A last-minute solution appears unlikely this time. The default is expected to kick-start the chain reaction of a liquidity crunch.

Sources:
Reuters
International Business Times

China's solar industry has been in decline for some time, due to severe overcapacity and falling photovoltaic cell prices. The country still awaits its first-ever domestic bond default. A few came close, such as China Credit's high-yield trust product, which was saved at the last minute by an anonymous investor. The many bailouts only further encouraged dicey lending and borrowing activities, especially of weaker companies. Concerns remain over the moral hazard attached to the widespread assumption that the government will step in and rescue any defaults, even though the industry is obviously aware of the high risks associated with loans to indebted companies. This year we may see a rise in bond and trust loan defaults in light of the growing need to discipline the financial market.

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Why shadow banking may never be properly regulated
Law digest: People's Bank of China, Measures for the Administration of Interbank Negotiable Certificates of Deposit
Law digest: China Banking Regulatory Commission, Measures for the Administration of the Liquidity Risks of Commercial Banks (Trial Implementation) (Draft for Comments)
Law digest: General Office of the National Development and Reform Commission, Circular on Further Improving the Review of Enterprise Bond Offerings
Translation: Provisions on Several Issues Concerning the Application of the «PRC Enterprise Bankruptcy Law»(2)


ZTE triumphs over TPL

The US International Trade Commission (ITC) has rejected the claims of Technology Properties (TPL) alleging patent infringement by ZTE, which showed the strength of the Chinese company's defence. TPL initially filed the complaints in July 2012 against more than 10 respondents including ZTE, Samsung, HTC, LG and Huawei. In December 2013 the ITC also rejected the claims made by Interdigital against ZTE and others.

Source:
ZTE

Many patent holders have recently been demanding unreasonable licensing fees and using litigation as a negotiating tactic. Chinese IP owners are realising that litigation can be used both offensively and defensively. Many are no longer hesitant to take issues to the courts, even overseas. Competition within the technology space is particularly ruthless as companies arm themselves with patent rights and strategies for maximum market share, partnering up with some while taking down others.

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Law digest: Supreme People's Court, Annual Report on Intellectual Property Cases (2012) (Abstract)