Tatiana Bokova, Intern of the Russian National Committee on BRICS Research – special for InfoBRICS

Since 2006, China, Russia, Brazil, India and South Africa have been building and supporting cooperation in various fields, including the business sphere. Small and medium business is a driving force behind economic development, since business is the main factor in the formation of a competitive environment and the development of a market economy. As a consequence, it contributes to a simultaneous increase in employment and improvement of the social environment. The BRICS countries present opportunities for small and medium-sized businesses not only to the BRICS members but also to other nations of the world.

At the fifth summit of the member states in 2013, the BRICS Business Council was founded as an important institution in expanding business cooperation among the BRICS countries in the sectors of investment, trade, and economy. In June, during the BRICS Business Forum, the Beijing Initiative of the BRICS business community was unveiled, aiming to strengthen cooperation and promote global economic recovery. The initiative encouraged the BRICS nations to expand cooperation in trade and investment facilitation, increase transparency in the business environment and deepen exchanges in e-commerce, intellectual property rights, trade in services, micro, small and medium-sized firms, and economic and technical cooperation.

During the online meeting of the BRICS Business Council, a joint statement on building a quality partnership among the BRICS countries was also issued, appealing for efforts to deepen dialogue and expand cooperation. The Chinese party expressed, particularly, its willingness to broaden high-level openness and actively respond to demand from foreign enterprises localized in China to ensure a favorable environment.

Factors such as ease of doing business, property registration, tax legislation, credibility, infrastructure, business registration procedures, and others influence the opportunities for businesses to operate successfully in a particular country. Considering each BRICS member separately, we analyzed and compared doing business opportunities in Russia, China, Brazil, India, and South Africa.

China

China is, without a doubt, one of the key global economic leaders. Since 2010, China has been the world’s second-largest economy. China is ranked 31 among 190 economies in the ease of doing business and, according to the latest World Bank annual ratings.

Business presence in China is possible only with certain types of entities in the country. Among the six forms of enterprises in China, three are the most popular: Representative Office (RO), Wholly Foreign Owned Enterprise (WFOE) and Joint Venture (JV). A Representative Office (RO) is an ideal option for companies first enter into China marketplace to lay a foundation for future investment. A RO doesn’t demand a registered capital, and has a relatively short establishment processing time (approximately 1-3 months).

A Wholly Foreign Owned Enterprise (WFOE) has higher establishment requirements and can conduct a full range of business activities, including sign contracts, collect payments, and issue special tax invoices (Fapiao) in RMB. A Joint Venture (JV) is a limited liability company formed between a foreign company or investor(s) with a Chinese company where the foreign company owns over 25 percent share of the business entity. JV does not represent a merger between two companies, but a new entity that is partly owned by foreign and Chinese partners.

Unlike residents, beginners of foreign businessmen need to take several extra steps on the way of registration of a legal person, lasting from two months to six months:

- Choose an agency to help with the registration;

- Select the preferred company scope;

- Apply for approval to own shares in a Chinese company;

- Prepare the required documents;

- Apply for approval with the responsible authorities;

- Get a business license; ¬

- Opening a bank account and depositing the registered capital.

Another issue is the tax system. The tax system in China divides taxation into taxes for corporations and for individuals. There are a number of different taxes applicable in various fields; foreign investors interested in the business environment applicable by the Chinese authorities can also benefit of the provisions of double taxation treaties signed by China, if they are residents of states which have signed such agreements. Foreign companies are also subject to Chinese taxation if they operate through a permanent establishment, or if they derive income from China, even if they do not have an establishment here.

Brazil

Brazil is the largest economy in Latin America and the fifth largest country by area and population. Brazil ranks 124th in ease of doing business and 176th in firm formation, making it a tough country to start a business.

The most common forms of company are corporations and Limited Liability Companies. Limited Liability Companies are the most common type of legal entities in Brazil, mainly because of the lower costs associated with this type of company and the minimal number of disclosure requirements. It is worth noting that the registration of a foreign company in Brazil requires prior authorization from the Executive Department, and can take about 2-3 months.

The country's tax system is as follows: there is a flat federal tax rate for all legal entities and it is 15% of profit. There is a different system of taxation for individuals and partner organizations. The state tax is 5% of the federal tax. The amount of the value added tax depends on the laws of the state where the company is located (from 17% to 25%). Moreover, there is a certain peculiarity of doing business in Brazil, namely the presence in the company of a trusted legal person and legal manager, who must be a resident of Brazil.

Russia

Russia has one of the largest economies in the world and an important domestic market. The country's economic potential attracts foreign investors who want to open a business in Russia. According to the World Bank, compared to China, Russia ranks 28th in the ease of doing business and the same 28th in the ease of setting up a new firm. Although there are now difficulties in the desire of foreign companies to be represented in the Russian market, the government continues to pursue a policy that encourages foreign investment, especially in business areas such as innovation or technology.

During the registration of a business in Russia, it is necessary to choose a suitable form of company in the country, which means that an investor can open a limited liability company, a joint-stock company or a partnership. As for foreign companies, they can also open a branch or representative office. Each company must be registered with the Russian authorities; branches and representative offices must also be registered with the tax inspectorate for foreign companies.

Compared to China, in Russia it is necessary to follow four steps when starting a business - company name verification and reservation, preparation of Articles of Association, tax registration, and application for special licenses and permits.

Russia's taxation system facilitates foreign investment since these types of companies are treated the same as domestic companies. Every entity is subject to taxation, and corporate taxation is based on residency: Russian resident companies (those that are actually registered in the country or have a place of management here) are taxed on their worldwide income. Non-resident companies are taxed only on the income they receive from their commercial activities in Russia. The corporate tax rate is 20%. In addition, dividends paid to a foreigner are taxed at the rate of 15%.

South Africa

South Africa ranks 84th in ease of doing business and fourth among the BRICS countries. Registering a firm in South Africa allows you to expand your commercial activities from South Africa to the rest of the region. Moreover, South Africa is attractive for business because it has a favorable regulatory environment, a developed financial sector and transport infrastructure, as well as access to advanced information and communication technologies.

Among the preferred forms of companies are the private limited company (assumes a minimum of one director and one founder and makes the business specialized); the public company (there is no minimum share capital requirement compared to other types of businesses); the non-profit company, the company with personal liability and the registration of a free zone company in South Africa (business start-up in one of the free zones of the Republic of South Africa). According to business surveys, the number of processes required to establish a new company or enterprise in South Africa is about 11 steps.

Regarding the tax system of South Africa, a company or closed joint-stock company pays 28% income tax on taxable income for the tax year and 10% secondary tax on the net amount of declared dividends. VAT is an indirect tax on the consumption of goods and services. VAT is levied at a standard rate of 15% when goods and services are supplied by registered suppliers.

India

India ranks third after China and Russia in ease of doing business, standing at 63rd place. Compared to last year, the country has moved up 14 places in the ranking, which is definitely related to business procedures. For example, not only has India reduced or simplified post-registration procedures such as tax registration, social security registration and licensing procedures, but it has also recently created online platforms to perform these operations, all of which have helped India raise its ranking.

In general, there are two types of strategies for foreign business entry into India: registration of a company; establishment of a representative office or a branch. The most popular legal form for foreigners is a limited company, which requires an initial capital of about USD 2,000 and only one founder. The tax rate for a limited company is 36.59% of all profits.

Registration of Branch Office, Liaison Office or Project Office requires RBI and/or Government approval. This form is particularly popular with companies engaged in importing their products into India and then selling them in the country. The tax rate for a branch of a foreign company will be 41.82% on all profits. However, regardless of the form of organization, a foreign company in India must pay taxes annually on its profits (the rate depends on the chosen form of company organization) and submit to the supervisory authorities an annual registered statement of income of the company.

Company registration in India takes from 3 weeks and requires a minimum paid-up capital of Rs 100.000, a registered local address, a minimum of two shareholders and two company directors. Moreover, registration includes the following steps:

- Reserving the name;

- Obtaining a Director Identification Number (DIN);

- Obtaining a digital signature certificate;

- Obtaining certificate of company registration in India;

- Creation of company seal for official documentation;

- Printing of all company documents;

- Obtaining a permanent account number;

- Obtaining a tax account number;

- Obtaining a certificate from the state/municipal inspector in accordance with the Stores and Establishments Act;

- Filing an application for GST registration;

- Obtaining a professional tax certificate from the State Tax Inspectorate;

- Completion of registration with the National Employees' Insurance Fund.

We have analyzed doing business in the BRICS countries, and have identified business opportunities for foreign companies when they enter the BRICS nations. Thus, the best and easiest country among the BRICS members to do business in many indexes and parameters is Russia, followed by the People's Republic of China, India, South Africa and Brazil.