by Kenneth Green
The biggest challenge to the organic growth of Caribbean entrepreneurs is the WTO-driven reliance on free trade. This is the biggest factor in the distrust of China in many countries where Chinese influence has started competing with American advertising and brands. Free trade is not fair trade, and the Caribbean is a battleground for competing traders.
The sheer enormity of the demand for raw materials needed by China to feed its astronomic growth is both an opportunity and a danger. The danger is that once discovered, any raw materials in demand are depleted if not carefully protected. Therefore it is important to consider three paths for growing with China.
- Chinese firms have technological know-how and experience in building and manufacturing everything from component-based technology to even developing the nutraceutical industry. Enabling them to work with a country like Dominica as a launch pad manufacturing base in joint ventures with existing or new local companies is a logical way to gain a valuable win-win whilst not sacrificing entrepreneurial sovereignty.
- Intellectual Property Exchange. On the whole this is not the world that Sir Arthur Lewis imagined. The source of manufacture is now ceding importance to the source of intellectual property. China has a driven goal to acquire and learn from others, but it is allowing them to use their overriding strength of value-based manufacturing using knowledge shared (at cost) from the Region, that would be a game changer.
- The Chinese market is huge and has space for new innovative products with knowledge protection.
In the Caribbean, most of the private sector entrepreneurs secure intellectual property (IP) over a brand, product or commodity, and then resell at margin in the Region. It is not rocket science that those who have the best credit lines or have discovered the best products and are able to leverage them exclusively in the market, become the most successful. Those who have both capital and exclusive access to brands, dominate the economy. Part of this success is based around a world in which direct market access is relatively unnecessary. Hence the popularity of franchises where being able to manage IP that has equity is more important and profitable than being an innovator (and much less risky).
This is the conundrum we face even with agriculture where the economies of scale mean that it is cheaper to import food than to produce food. The profit incentive compels the local reseller to import more as local production cannot produce enough at a cheap enough price for the reseller to make their required margins and allow the producer to get decent compensation. Something has to give. In a further complexity, the contribution of these local resellers to employment and VAT revenues gives them compelling lobbying power with Governments.
A tomato has no brand whereas tomato ketchup does. Unfortunately, this means that people will buy a tomato from anywhere yet will selectively look for a brand of ketchup.
Why is all of this relevant to understanding China and its coming impact on a country like Dominica? The first is that there is an opportunity to monetize knowledge and to share IP in the other direction for the first time. We do not have resources in any volume to safely export. Any industry that can be destroyed in one season of climate change cannot be relied on for a macro- economy.
Ironically, China is addicted to strong branding and product differentiation. A product like Bello for example could have tremendous brand equity if the formula were unique enough to protect and also could be customized to Chinese tastes. Newer products like Cassava and its use for food can also be leveraged. In China, cassava is mostly used for animal feed. In a country where maximization of food resources is key, being able to produce a new niche industry for a cassava brand such as Cassava Man, utilizing a base product which can be frozen and mass produced as a new edible product is a huge brand and knowledge transfer opportunity. It is also instructive that China is among the top five growers of cassava in the world. Raw material is not their prevailing issue there. Even with Cannabis, 306 of the 600 plus cannabis patents globally, are from China or Chinese citizens and China accounts for 50% of the world’s total cannabis planting area.
There has to be intelligent and persistent courting of partners and a willingness to engage directly in the Chinese market. The export culture has to graduate beyond physical commodity transfer and has to engage on the basis of availability of the product base in China, and there being specific ‘magic’ behind a product brand that has value to the partners.
The alternative is the risk of copying, loss of brand knowledge and loss of the opportunity. This will require Governments like Dominica to work with significant local entrepreneurs to help strengthen the legal and product development base of new and existing brands and to encourage trade engagements in China to find suitable partners.
It is extremely unlikely that countries like Dominica can build strong export cultures of traditional commodities to a country like China. However, brands conceptualized and born in Dominica can discover tremendous success if they have strong USPs (unique selling points) and protection. The Chinese Government’s new willingness to stamp down on intellectual property infringement is a strong sign for those wishing to enter the market.
However, this new potential honeypot comes with a caution: for multinational corporations operating in China, repatriating cash from their subsidiaries has always been an important but challenging issue. China maintains a strict system of foreign exchange controls, meaning funds flowing into and out of China are tightly regulated. Other laws and regulations – such as the Company Law, relevant tax regulations, as well as China’s transfer pricing rules – impose additional barriers to profit repatriation as well.
In this environment, businesspeople need to understand and incorporate a profit repatriation strategy from the very beginning to ensure access to the profits earned. Many multinational corporations use intra-company payments, such as service fees or royalties, to remit cash from China. Other Chinese subsidiaries remit undistributed profits by extending a loan to a foreign related company with which it has an equity relationship. Remitting profits as dividends is the most direct and common way to distribute profits. However, there are issues involved in that approach:
- A foreign invested entity (FIE) can only repatriate profit after its registered capital has been applied in manner set out in the company’s Article of Association.
- Secondly, an FIE generally can only repatriate profit after the annual audit and tax compliance. This is to ensure a 25 percent Corporate Income Tax (CIT) had been paid up with regard to the profit to be distributed.
- Thirdly, the FIE can only distribute dividends out of its accumulated profits, that is to say, the accumulated losses from the previous year must be more than offset by the profits. According to Chinese laws and regulations, the loss incurring in a tax year is deductible from corporate income before tax and can be carried forward to the subsequent five years to be set off if the current year’s profit is not enough to make up the losses. After that, the loss still needs to be recovered before profits distribution, but it can only happen after tax clearance.
- Fourthly, not all profits can be repatriated after tax clearance. For example, a wholly foreign owned enterprise (WFOE) has to place 10 percent of its annual after-tax profits into a mandatory surplus reserve fund until it reaches 50 percent of the entity’s registered capital. Besides, the investors usually allocate a portion of after-tax profits to the staff welfare and incentives fund, though these are not mandatorily required.
- Lastly there is a 10% withholding tax for repatriated dividends.
If a double tax avoidance agreement (DTA) is available, and the parent company qualifies as the beneficial owner, a preferential withholding CIT rate of five percent or even lower may apply. And if non-resident enterprises decided to re-invest the dividends derived from FIEs into projects encouraged by the country, the withholding CIT on this part of the dividends can enjoy deferral treatment by fulfilling certain conditions.
It would be instructive for Dominica to engage China in a double taxation treaty if it has not already done so. The time for educating entrepreneurs about China as a market is now. It also serves as an important re-direct opportunity away from the time-honored tradition of Caribbean business solely serving the commodity import and export paradigm.
The opportunities exist but it requires engagement with China to become more diversified. The propaganda war being carried out against China by the West is practically to support their interests of continued trade and economic dominance. It is inevitable that this period will end, and this Region and Dominica must be ready for the next. Not just an era of the East and China, but an era where intellectual property will be more important than physical commodity transfers. Whether that be in food, music or arts, technology or skills development, the collaboration must grow and must ignore the attempts to bog down this important relationship in geopolitical machinations.
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