One of the most endemic, and yet under-unreported, problems facing foreign investors in China is that of arbitrary charges imposed on their investment projects. Whether in the form of undocumented 'fees' for services or approvals during the course of the project, or as mysterious 'fines' charged for alleged violations, these random demands for payment are at best a nagging irritation to investors in China. At worst they are a significant drain on revenue.
However, while irregular fees are hardly a new phenomenon, foreign investors have traditionally been discreet in their opposition to them. Many seem to believe that in drawing publicity they risk the possibility of souring relationships with government authorities, joint venture partners or, in some cases, both.
This attitude may be now be changing. Executives at McDonald's, for example, recently revealed that the chain's Beijing branches had been approached by municipal officials seeking to collect a total of 31 different fees, amounting to thousands of dollars annually. These requests were reportedly rationalised as funds required for items ranging from 'activities to promote spiritual values' to family planning and 'greening' projects. But although a foreign investor which is well established in China may sometimes have leverage enough to afford any ill-will from Chinese officials, where does this leave the smaller or more vulnerable?
Taking their toll
The signs are that the Chinese government is becoming increasingly concerned about the problem of random charging of fees, fines and other charges.
It is probably the damage that such fees wreak on the profitability of many state-owned enterprises which is now spurring the authorities to take a harder line. As at September 1997, a state investigation had this year uncovered 2,877 cases of irregular fees levied on businesses in 21 provinces. Government statistics claim that reforms have eased the burden on enter-prises by eliminating fees of Ynl5bn each year. Yet this has apparently solved only part of the problem, as the financial load on state and foreign firms amounted to a total of Yn34.5bn from some 3,474 unauthorised charges in 1995 alone. In 1996 fees imposed on state industrial firms ballooned to Yn60bn, compared with post-tax profits of Yn41.7bn ?an uncomfortable ratio for officials to contemplate.
There have been a number of studies of the problem. One of the most recent was completed by the Guangdong provincial government in December 1996 and published earlier this year. It focused on irregularities in administrative law enforcement and charges levied on roads and bridges. The report singled out several main factors contributing to random fee collection:
The administrative bodies collecting such fees are often established arbitrarily by lower-level government or departmental organisations, without examination or approval by the provincial or national government. Their activities are therefore of questionable legal standing and are, in any case, largely unregulated by competent departments.
Supervision of the work of such bodies is often lax and disorganised, when it exists at all in any formal sense.
Many departments collecting fees have overlapping areas of authority, which can mean multiple fees or fines levied on a single service or act.
The government estimates that, even in relatively wealthy Guangdong, the pro-portion of organisational operating funds comprised by fees and fines levied by the organisations themselves is as high as 20-30 per cent.
The quality of enforcement personnel is low, with little training provided in administrative law or practices, and the level of contracted and part-time labour is relatively high.
On July 7, 1997 the State Council issued a notice which targets the levying of irregular fees and ambitiously seeks to eradicate such practices by early 1998. The regulations are entitled the Decision on Controlling the Collection of Unauthorised Levies, Fines and Charges from Enterprises. The reforms contained in the decision aim to centralise fee collection and eliminate all fees not authorised by the State Council, State Planning Commission or the Ministry of Finance.
The decision discusses the standardisation of fee collection under the 'payment certificate' system. Under this system, already partially implemented in some cities (including Beijing), a special certificate is issued by the Commodity Price Bureau to all administrative fee collection agencies. The certificate must be presented at any time when fees are to be collected. In addition, a receipt approved by the Ministry of Finance must be issued to enterprises upon payment of such fees, unless the payments are tax-related in which case the receipts must be authorised by the State Administration of Taxation. The decision states that, if a fee demand is not accompanied by both these evidentiary documents, the enterprise should refuse to pay. Moreover, designated 'pilot' areas will implement an 'enterprise payment registration card' system. This programme is not fully explained in the decision, which merely indicates that 'areas with the appropriate conditions may implement unified collection management measures and regulate fee collection activities', but presumably refers to another means of documenting payments made by enterprises.
Finding the cure
The concrete steps put forward in the State Council decision should encourage foreign investors grappling with periodic demands from various government departments for payments. The decision does provide a degree of protection by requiring the proper authorisation of fee collection entities and by ensuring that valid documentation is made of payments received. It has been our experience that properly-drafted contracts and a firm, legally-based approach to handling random fee requests help protect against exploitation. The battle against random fees can be won by those with the patience and know-how to refuse them. ^
Freshfields is an international law firm. Most of its offices throughout Asia, Europe and North America include China specialists. For further details, contact Matthew Cosans through its office in Hong Kong, tel. (852) 2846 3400 or Beijing, tel: (86) 10 6410 6338.