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c. Tax
International double taxation refers to a situation in which more than one country imposes comparable taxes on the same taxpayer in relation to the same item of income for an identical period. Double taxation has the effects of discouraging exchange of goods and services and movement of capital and persons across border. Double taxation treaties are viewed by host countries as an important tool to attract foreign direct investment by restricting the state’s ability to tax corporate income from foreign investors. The Agreement Between Brazil and China for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income is a double taxation treaty betweem China and Brazil concluded in 1991.
The Agreement is applicable to federal income tax in Brazil with a few exceptions. In particular,Article 23(1)(a) provides that, if a tax resident of China earns income derived in Brazil, the amount of tax on that income payable in Brazil can be used to credit against the amount of tax the taxpayer is obligated to pay on that income in China. Article 23(1)(b) states a special rule for dividend derived from Brazil. If a company resident in China receives a divided paid by a company resident in Brazil and the Chinese company owns no less than 10 percent of the shares of the Brazilian company, the credit will include the corporate tax paid by the Brazilian company in relation to its income in Brazil.
Under Article 23, if Lenovo has paid tax for its income that derives from Brazil in accordance with Brazilian laws, the amount paid can be used to credit against its tax payable in China. In addition, Lenovo operates through the two wholly owned subsidiariesin Brazil, Lenovo Tecnologia (Brasil) Ltda and Motorola Mobility Comércio de ProdutosEletronicosLtda in Brazil . The Group and the two subsidiaries are three separate legal entities the assets of which are independent from each other. The Group’s income derived from these two subsidiaries will be received in the form of dividends distributed to the parent company. Therefore, since Lenovo holds no less than 10 percent of the shares of the two subsidiaries, the tax the two subsidiaries pay on their income can be used to credit against Lenovo’s payable tax in China as well.
China has concluded a double tax treaty with Mexico which contains a similar term to Article 23 contaiend in the Brazil-China Double Taxation Agreement.Lenovo has a wholly-owned subsidiary in Mexico, Lenovo Mexico, S. de R.L. de C.V. Therefore, both the dividend Lenovo received from its Mexican subsidairy and the tax the Mexican subsidiary paid on its income in Mexico can be used to credit against Lenovo’s payable tax in China.
Article 24 of the China-Venezuela Double Taxation Agreement provides methods to eliminate double taxation between the two countries. In comparison to the afore-mentioned agreements, the China-Venezuela Double Taxation Agreement is silent on the special rule in respect with income in the form of dividends. Therefore, even if the Lenovo Group has set up a wholly owned subsidiary in Venezuela, called Lenovo (Venezuela), SA, it cannot claim the same tax credit applicable in Brazil and Mexico.
Article 22 contaiend in the China-Ecuador Double Taxation Agreementis similar to the term contained in the Brazil-China and China-Mexico agrrements, execept that it requries the company resident in China to own on less than 20 percent of the shares of the company resident in Ecuador. However, no publicly available information indicates that Lenovo has establshed a company in the country.
6. Brazilian Law on Foreign Direct Investment
International instruments are generally oriented toward the protection of investor rights. In contrast, individual state’s domestic foreign investment laws might afford additional protection to investors and impose further restrictions on a foreign investor’s activities.
In general, Brazil creates a favorable legal and political environment for foreign investors. Primarily, a guarantee for property rights is enshrined in the country’s Constitution. It is widely recognized in Brazil that expropriation of property rights cannot take place without due compensation.
In Brazil, foreign direct investment is governed by the Foreign Capital Law. At present, all foreign direct investments in Brazil must be registered with the country’s Central Bank. Brazil’s market entry rules are not strict. Foreign investors are only categorically prohibited from conducting business activities in a few sectors, including health services, communications services, nuclear energy, domestic flight routes and the aerospace industry. In addition, foreign investors are only allowed to possess a minority shareholding in a media company, a financial institution or an insurance company. None of these sectors is Lenovo involved in at present or likely to enter in the future.
The Brazilian Civil Code provides several forms of business entities if foreign direct investment is made through establishing a legal person. The most commonly seen legal entities include Limited Liability Partnership, Joint Stock Company and Joint Venture.
Other countries have their domestic laws in place to regulate foreign direct investment as well. For instance, Mexico has a series of domestic laws in place to govern foreign investment, which include the Foreign Investment Law and its Reforms, the Regulations to the FIL and to the National Registry of Foreign Investments and the Federal Expropriation Law.
7. Chinese Government’s Regulations on its Outbound Investment
a. Approval Procedures on Outbound Investments
As Chinese shifted from a capital-importing country to a capital-exporting country in the past decades, the Chinese government has made ongoing efforts to regulate the overseas investments made by Chinese enterprises. Before 2014, the government undertook an approval procedure for nearly all outbound investments made by Chinese enterprises. The regulatory regime significantly loosened after the introduction of the Administrative Measures for the Verification and Approval and Record-Filing of Outbound Investment Projects by the National Development and Reform Commission in April 2014. The Administrative Measures removed the approval procedures for almost all outbound investments in the amount of less than $1 billion. The approval procedure further relaxed through the Administrative Measures for Outbound Investment released by Ministry of Commerce in September 2014, which essentially established a record-filing mechanism for all outbound investments regardless of their sizes.
In August 2017, the State Council promulgated the Guiding Opinions on Further Guiding and Regulating the Directions of Outbound Investment, which establishes abrand new regime in regulating outbound investments. The Guidelines classified outbound investments into three main categories: encouraged investments, restricted investments and prohibited investments.
Under Article 3 of the Guidelines, Chinese enterprises are encouraged to invest in infrastructure that contributes to China’s “One Belt, One Road” initiative; to facilitate the export of high quality products, equipment and technology; to participate in the exploration and production of energy resources; to enhance cooperation with overseas enterprises with advanced technologies, etc. First, this Article is in line with the nation’s grand strategy to enhance economic, cultural and political connections with the Eurasian countries. Second, the Article intends to address the problem of energy shortage in China. Third, it indicates the country’s determination to climb up the global value chain by encouraging the development of technology intensive industries.
Under Article 4 of the Guidelines, three types of outbound investments are subject to the approval of relevant administrative authorities: investments in countries and regions that have no existing diplomatic relationship with China, war-torn countries and regions, or countries and regions in which investments are restricted under China’s international treaties; outbound investments in real estate, hotel industry, entertainment industry, sports clubs, etc.; and outbound investments that establish equity investment funds or platforms without developing particular industrial projects aboard. This Article might disproportionately affect Chinese outbound investments in Central America because nearly half of the countries that still maintain diplomatic relations with Taiwan are located in this area, including Paraguay, Belize, Dominican Republic, El Salvador, Guatemala, Haiti, Honduras, Nicaragua. The practical impacts of this Article, however, are less severe than it appears to be. It is within China’s political interests to strengthen its economic connections with these countries to lure them away from Taiwan. For instance, in June 2017, Panama, which used to recognize Taiwan as a state, cut its ties with the region in light of China’s increasing influence in the region. Therefore, even if investments in these areas are subject to approval, it does not necessary lead to the conclusion that investment opportunities by Chinese enterprise in these regions are substantially diminished.
Under Article 5 of the Guidelines, Chinese enterprises are prohibited from engaging in outbound investments that undermine or have the possibility of undermining national interests and national security, including investments with the purpose of exporting core technologies and products of the military industry without approval of the government; investments that utilize technologies or products which the government has prohibited from being exported; investments in gambling and pornography industries, etc. |
