JOURNEY TO THE WEST
For Chinese investors, now is a cheap time to buy in the West. Supported by the continent's favorable policies and even more favorable prices, the spigot of Chinese capital has officially opened. Between 2008 and 2009, Chinese investment in North America quadrupled and has continued a steep upward ascent since then.
Chinese capital first entered North America in pursuit of affordable real estate, of which there was plenty to be found. California especially enjoyed a wash of Chinese bargain hunters eager to take advantage of the slump in housing prices, although some of this investment also went to Mexico, Western Canada and the inland US. But while they may have come for the housing, many Chinese individual and institutional investors are finding themselves staying for the businesses, snapping up cash-starved startups that struggle to gain financing from a still cautious banking system.
However, there are risks. The doldrums of the US economy have been well publicized, as have Mexico's drug violence. There are few hidden treasures in Canada that haven't already been found. Also, coming from China, the wages requested by a North American labor force can seem daunting. But the continent is far from uniform in strength or in weakness, and concentrated investment can reap great rewards for the careful investor. To help identify investment opportunities, China Offshore Quarterly analyzed six high-potential regions, illuminating the possibilities and pitfalls of the world's largest free trade zone.
California
Key statistics
Population (2011 estimate): 37.6 million (highest in US)
GDP: US$1.96 trillion
Key sectors
Industries: Real estate, rental and leasing, durable goods manufacturing, alternative fuels, internet, software, entertainment
Agriculture: Dairy, livestock and poultry, fruit and nut crops, floriculture
Trade with China
Imports from China: US$120,118 million (2011 value)
Exports to China: US$14,188 million (2011 value)
Taxes
Corporate tax rate (excluding banks and financials): 8.84%
Banks and financials: 10.84%
Alternative minimum tax (AMT) rate: 6.65%
Income tax: 5.8%
Median property tax: 0.74%
Sales tax: 7.25%
Tax incentives
California Enterprise Zone tax credits: Offers corporate credits, other corporate tax incentives, as well as personal-level tax breaks for operating in any one of the 42 California Enterprise Zones throughout the state
Research and Development tax credit: Companies will receive a 15% tax credit for engaging in qualified research and development
Net Operating Loss Carryover: Companies that conclude the year with a loss are allowed to carry it over to subsequent years. Businesses that make a loss in the first year of operation are allowed to carryover 100% of their losses for the next eight years
Investment considerations
Pro: Easy access to research, capital and financial resources
Pro: Innovation and intellectual capital, particularly in Silicon Valley
Pro: The largest population in the US, providing an enormous market
Con: High levels of public debt indicating risk of tax increases in the future
Con: Has one of the highest tax rates among the US states
More information
Sources: California Business Investment Services, The Federal and State Tax Information Portal, United States Census Bureau, Employment Development Department of California
Delaware
Key statistics
Population (2011 estimate): 907,135
GDP: US$65.8 billion
Key sectors
Industries: Finance and insurance, real estate, private health care, law firms, hotels, car rental agencies, wholesale (automobiles, food products, and commercial equipment) trade industry and chemicals
Trade with China
Imports from China: US$574 million (2011 value)
Exports to China: US$465 million (2011 value)
Taxes
Corporate taxes: 8.7%
Income tax: 4.77%
Median Property tax: 0.43%
Sales tax: No sales tax
Tax incentives
Public Utility Tax Rebates: Eligible firms will qualify for a 50% rebate for five years on the public utilities tax for new or increased consumption of gas and electricity
Corporate Income Tax Credits: Firms within targeted industries and geographic areas qualify for a tax credit with every new hire and with every US$100,000 investment
Brownfields Tax Credit Program: Provides tax credits to taxpayers who invest more than US$100,000 in a qualified brownfield facility and who have hired at least five employees
Investment considerations
Pro: Known for its business-friendly incorporation and corporate laws
Pro: Home to more than 50% of all US publicly traded companies’ and more than 60% of the Fortune 500 company headquarters
Con: Only state in the US without commercial air service, meaning residents mostly travel to bordering states to travel on major commercial carriers
More information
Sources: The Federal and Tax Information Portal, United States Census Bureau, AreaDevelopment.com
New York
Key statistics
Population (2011 estimate): 19.4 million
GDP: US$1.15 trillion
Key sectors
Industries: Professional, scientific and technical services, management of companies and enterprises, education services, health care services, nursing and residential care facilities
Agriculture: Livestock, apples, grapes, cabbage, sweet corn, maple syrup
Trade with China
Imports from China: US$21,592 million (2011 value)
Exports to China: US$4,450 million (2011 value)
Taxes
Corporate taxes: 7.1%
Income tax: 6.19%
Median Property tax: 1.23%
Sales tax: 4%
Tax incentives
The Industrial Incentives Program (IIP): Affords industrial companies a range of tax benefits, including real estate tax reductions, mortgage recording tax waivers and sales tax exemptions on purchases of construction material
New Markets Tax Credits Program: Allows taxpaying investors to receive a tax credit for investing in designated Community Development Entities (CDEs)
Commercial Expansion Program: Real estate tax reductions for commercial or industrial leases in targeted areas of the City
Investment considerations
Pro: Easy access to the Canadian market
Pro: Easy access to financial and banking resources
Con: Cost of living one of the highest among US states
More information
Sources: The Federal and Tax Information Portal, United States Census Bureau, New York City Economic Development Corporation
Texas
Key statistics
Population (2011 estimate): 25 million
GDP: US$1.3 trillion
Key sectors
Industries: Logistics and transportation, petroleum and chemical products, industrial manufacturing, aerospace and aviation, biotechnology and life science, energy
Agriculture: Cotton, livestock
Trade with China
Imports from China: US$36,356 million (2011 value)
Exports to China: US$10,932 (2011 value)
Taxes
Corporate tax: 0%
Income tax: 0%
Median property tax: 1.81%
Sales tax: 6.25%
Tax incentives
Texas Enterprise Zone Program: Tax benefits for investments in economically distressed areas of the state
Free port exemptions: Tax exemption for certain goods that enter and leave Texas within 175 days
Renewable Energy Incentives: Tax exemptions and deductions for solar, wind, ethanol, and bio-diesel energy
Investment considerations
Pro: Easy access to the Mexican market
Pro: Boasts a highly developed tech industry
Pro: Abundant in natural resources
Pro: Tax burden ranks among the lowest in the US
Con: Property taxes comparatively high
More information
Source: The Federal and Tax Information Portal, United States Census Bureau, Office of the Governor of Texas
WESTERN CANADA
(Alberta and British Columbia)
Key statistics
Population (2011 estimate): 8 million
GDP (2010 estimate): US$466 billion
Key sectors
Industries: Transportation equipment, chemicals, processed and unprocessed minerals, food products, wood and paper products, fish products, petroleum and natural gas
Agriculture: Barley, oilseed, tobacco, fruits, vegetables, dairy products, fish, forest products
Trade with China
Exports to China (2009 estimate): US$5.3 billion
Canadian FDI to China (2009 estimate): US$3.3 billion
Taxes
Corporate income tax: 15% (Federal), 10.5% (BC), 10% (Alberta)
Top marginal tax rate (individuals): 43.7% (BC), 39% (Alberta)
Individual income tax rate: 15-29% (Federal), 5.06-14.7% (BC), 10% (Alberta)
Tax incentives
Current or capital expenditure on research and development is eligible for a 20% tax credit. (The 2012 federal budget, however, proposed to reduce this rate to 15% for taxation years ending after 2013)
Investment considerations
Pro: Sound financial sector, capable workforce
Pro: Proximity to both China and U.S. gives Western Canada unique access to the first and second largest economies
Pro: NAFTA affords trade advantages for export from Canada to the rest of North America
Con: Relatively expensive labor force
Con: Due to reliance on raw materials exports, economy heavily exposed to fluctuations in commodities prices
Con: High tax burden
More information
Sources: KPMG, Statistics Canada, Parliament of Canada, CIA World Factbook
Northern Mexico
Key statistics
Population (2010 estimate): 25.3 million
GDP (2010): US$244.22 billion
Key sectors
Industries: Manufacturing, wholesale and retail trade, trade and real estate services, construction, transport and warehousing
Agriculture: Coffee, tomatoes, cauliflower, artichokes, avocados and other vegetables
Trade
Total FDI (2011 estimate): US$312 million
Popular FDI destination industries: Manufacturing, real estate, mining
TaxesCorporate income tax: 30%
Alternative minimum tax for companies (AMT): 17%
Value-added tax (VAT): 10%
Federal income tax (individuals): 28%
Tax incentives
Companies engaged in the manufacturing of goods exclusively for export can benefit from a reduced income tax rate on earnings from export operations, with an average 30-60% rate reduction
Investment considerations
Pro: Cheapest North American labor force
Pro: Proximity to United States, the world’s largest export market
Pro: NAFTA affords trade advantages for export from Mexico to the rest of North America
Pro: Corporate income tax slated to fall to 29% in 2013 and 28% in 2014
Con: Risk of corruption
Con: Mandatory profit-sharing (generally 10% of after tax income) increases labor costs
Con: Increased security costs due to violence
More information
Sources: MexConnect, ProMexico, PwC, CIA World Factbook
