When Lewis Lu, a tax partner at KPMG's Shanghai office, moved to China after practising in Canada, it took him a while to adjust to the tax code. "When I first came here I thought you had to read the law word for word. But in China you need to get behind the principles," Lu said.

China's tax code was first published in 1991. Its youth means that it lacks the detail of more developed codes in countries such as Canada, the US, Germany. "You're right if the rules say so" does not apply in China. The rules are not precise enough to deal with all tax situations. In China, practitioners must read between the lines, uncover what the code is implying, and confirm this with the local tax authorities. The nature of the code fundamentally alters the tax services required in China.

"China has a practice that's different. You have to know how to talk to people, you have to understand what's behind their answers. You have to really understand the local knowledge and practice," said Jeff Xu, a partner at Ernst & Young's Shanghai office.

To get the best for their businesses, tax directors must have advisers who can deal with the vagaries of the code through cooperative discussion with tax officials.

Big-four

The big-four accounting firms, Deloitte, Ernst & Young, KPMG, and PricewaterhouseCoopers, dominate China's tax market. Larry Sussman, a tax practitioner at O'Melveny & Myers, said: "Historically, counsel did not handle tax matters and did not want to handle tax matters.Most of the work is ceded to the big-four and smaller local tax agency boutiques.There are very few tax lawyers as a distinct profession and the concept of a tax bar is essentially non-existent."

Despite the high cost, most tax directors here advise companies to outsource – especially in the early stages of setting up here. Jason Ingersoll, formerly China tax manager at Universal Compression, said: "The KPMGs and Deloittes are not cheap but they have a good idea what's going on. And you have to get tax in China right."

The four are considered similar in standing. Gong Jun, a partner at Jun He Law Office, said: "It's hard to say who is best out the big-four. It depends on the individuals." David Geng, senior finance manager at C&A China and a former adviser at PricewaterhouseCoopers, said: "We prefer to use international firms such as the big-four, who are experienced in serving multinational clients globally. The technical base of these firms is generally at the same level. So we focus on whether the consultant understands well business."

Ryan Chang, a partner in Deloitte's Shanghai office, knows that clients demand more than tax advice. "The most rewarding thing about my job is that you get to grow with the client. Your involvement is not limited to tax, you also have to show knowledge of the client's business market. You have to deal with the CEO and the business development manager."

Deloitte has 10 offices: eight on the mainland (Beijing, Shanghai, Guangzhou, Tianjin, Shenzhen, Dalian, Nanjing and Suzhou), and one in each of the special administrative regions of Hong Kong and Macau. As of December 2006, the tax practice had 1,000 professionals, including 50 partners. As a sign of its ambition, the firm plans to recruit another 1,000 in 2007, though not all are expected to join the tax practice.

Deloitte is aware of the shift in Chinese tax work that companies require. Chang said: "We're taking on a lot more concepts, a lot more ideas. China has traditionally been a base for low cost manufacturing. But we're now doing hybrid planning. This represents a big step forward. There is more demand for the creative side of things. It's not just about knowing the rules, it's about how to apply the rules."

Chang added that the shift to more creativity will alter what Deloitte look for in new hires. "In Shanghai at the moment there are more than 250 people in the tax practice. We have just hired more than 80 new graduates that will join us later this year and in the meantime, we are active in recruiting experienced people. It's very helpful finding people with a Chinese background. The mentality has to be that they can leap to the creative side," he said.

Deloitte advised on the first ever bilateral advance pricing arrangement between China and Japan. The firm has a separate Japanese service group within the tax practice, alongside departments for M&A tax, transfer pricing, international tax, and R&D tax. Deloitte has worked on the largest e-commerce M&A project in China and was involved in one of the top 10 state-owned enterprise (SOE) restructuring projects. The firm has recently begun to specialise in securitisation and assisted in early asset-backed securitisation projects in China.

PricewaterhouseCoopers has roughly 1000 tax practitioners, including 38 partners. It has the most offices, with mainland tax practices in 10 places: Beijing, Chongqing, Dalian, Guangzhou, Qingdao, Shanghai, Shenzhen, Suzhou, Tianjin, and Xi'an, as well as Hong Kong and Macau practices offshore. The tax practice is growing fast, especially in certain areas. Edward Shum, a Beijing-based tax partner, said: "Last year tax practice revenue grew by between 30% and 40%. Transfer pricing is strong. The M&A tax structuring market has had good growth of 60%." In summer, Cassie Wong, China tax leader, highlighted transfer pricing, M&A, and the domestic client portfolio as strengths. "China has a lot of foreign direct investment but Chinese companies are also growing stronger, so that area of the practice is very important to us," Wong said.

Ernst & Young's China practice has been busy, with new branches in Wuhan, Dalian and Suzhou opening in the last two years. The firm also has offices in Beijing, Shanghai, Guangzhou, Shenzhen, Chengdu, Hong Kong and Macau. It has 689 professionals, including 58 partners, and is growing quickly. Jeff Xu, a tax partner in Shanghai, said: "In China, overall growth is very fast. In the past couple of years, the practice has grown by more than 40%. More than 200 people work in the tax department in Shanghai." An impressive client list features many of the world's biggest companies, including: GE, Coca-Cola, IBM, Goldman Sachs, Shell, Daimler-Chrysler, and Nokia. The firm also represents many of the biggest SOEs such as the Industrial and Commercial Bank of China, Air China, and PetroChina. Clients agree that the big-four firm is excellent. Oliver Qian, Asia tax manager at imaging company Kodak, said: "We had some tax projects working with E&Y in Shanghai recently. The E&Y engagement team has exerted high professionalism and efficiency in these projects."

KPMG set up on the mainland in 1983, opening its first office in Beijing three years before expanding down the Pacific coast with offices opening in Shanghai and Guangzhou in 1986. Four other offices have opened, adding to the firm's capabilities in Hong Kong and Macau, where it has had offices since 1945. It too has experienced rapid growth. Lewis Lu, a Shanghai-based partner, said: "In terms of headcount, there has been a 20% to 40% increase every year since 1998. There has been very, very quick growth." Four hundred tax professionals, including16 partners, worked on the mainland as of December 2006. The firm has worked on offshore initial purchase offerings (IPOs) for SOEs. The market for IPOs is expected to grow. Lu, who worked on offshore listings for SOEs said: "The mega jobs are running out, but the smaller state-owned companies and privately-owned companies are beginning to launch IPOs." The firm is recommended for advice in setting up in China.

A rival

Staffed by ex-Arthur Andersen employees, Hendersen Taxand is the firm of choice for many prominent names in transport as well as other industries. Transport clients include Boeing, BMW, GM and Ferrari. The pedigree of its employees has been a big factor in securing its good reputation. Geng said: "Hendersen is staffed by ex-Arthur Andersen people, and Arthur Andersen had the best name in Chinese tax." The firm believes that being a member of Taxand gives it a unique advantage over its big-four competitors. Dennis Xu, a founding partner at the firm, said: "Taxand is the fifth largest global tax practice after the big-four, besides, it is independent. Not having an auditing practice allows Taxand to have different focuses. For example, there's a lot of S-OX related compliance work at the big-four while many Taxand member firms like us focus more on valued added tax planning projects." Xu's fellow partner, Kevin Wang, agrees. Wang said: "My personal experience at a big-four firm was that there was a lot of internal procedure, a lot of red tape. Many clients select Taxand for their responsiveness." Hendersen opened in August 2004, and already has 45 professionals, seven of whom are partners, working from offices in Shanghai, Beijing and Chongqing. Xu believes that the firm's youth works to businesses advantage. "As a growing firm, Hendersen is very committed to client services as we cannot afford any client dissatisfaction," Xu said. Along with tax structuring, M&A, and compliance advice, Hendersen is involved in lobbying and led the discussion group of multinational companies regarding the new income tax code in China.

Chinese law firms

China's corporate law firms are starting to invest in the historically neglected area of tax . King & Wood, the biggest corporate law firm, hired Stephen Nelson, a former head of Baker & McKenzie's China practice, last November. Nelson said: "The mindset of China is that which existed on the (European) continent 30 years ago. The mindset to have a tax practice hasn't hit yet. It's ironic given that for comprehensive tax advice you need someone who understands the legal aspects." The firm has eight PRC offices located in Beijing, Shanghai, Shenzhen, Chengdu, Guangzhou, Chongying, Hangzhou and Hong Kong, as well as overseas branches in Palo Alto and Tokyo. An office will shortly open in Tianjin.

Another reason for the lack of development of tax practice's law firms is the non-specific nature of the Chinese tax code. Because of this, Chinese lawyers shied away from being specialists, preferring to practise tax alongside other areas of financial law.

Gong said: "Based on a statistic I read several years ago, the average US lawyer has three specialisations; the average Chinese lawyer has 13." Gong's law firm, Jun He Law Offices, is one of the largest and oldest corporate law firms here, having been established in 1989, and is renowned for its high quality work. The firm has a New York office to add to its five offices on the Chinese mainland in Beijing, Shanghai, Shenzhen, Dalian, and Haikou. The tax team comprises six lawyers, including three partners. The majority of clients are foreign firms. Morgan Stanley, Wal-Mart, JP Morgan, Samsung, Sony, KPMG, Motorola, Nissan and adidas feature on the client list. In the last year the firm advised a global software provider on the tax aspects of importing a product, which can be difficult here because of the administrative overlap between the customs and taxation departments of the government. The firm also helped out a company that bought out a rival only to find out that the client had broken the tax code, post-acquisition.

In China, special economic zones (SEZs) and tax-beneficial industrial parks make location an important factor in tax planning. Clare Lu, a Shanghai-based tax partner at law firm Richard Wang & Co has recently completed a guide on SEZs, advising on tax incentives, foreign exchange control and customs administration. Lu said: "There are many factors in a company's SEZ decision. There are many types of SEZ, with different policies based on different industrial orientations." Lu is a co-founder and vice-chair of the finance and tax committees of the Shanghai Bar Association. Though Richard Wang & Co's tax team is small, with four associates and Lu, the client list is impressive featuring adidas and Warnaco.

Local work

China has a number of tax boutiques, used for small amounts of compliance work. The boutiques are mostly run by former state tax officials, giving obvious perks to clients in a jurisdiction where good relations with the tax authorities are fundamental.

Advisory firms also hire ex-tax officials to assist with government relations, insights into day-to-day practice of the tax bureaux, and an inside take on policy developments.

Foreign law firms

Regulations curtail what lawyers working at the Chinese branches of global firms can do. The firms are restricted to employing non-Chinese lawyers, who cannot practise law, issue opinions on Chinese law, or speak in court. But these restrictions are partly irrelevant in China's tax market as it is impossible to get a formal ruling from the tax authorities, so opinions are less useful and court cases are rare because of a cultural dislike of open confrontation.

Foreign lawyers are allowed under Ministry of Justice rules to advise on laws of other jurisdictions and international practice.

The foreign firm with the highest profile in China's tax market is Baker & McKenzie. The world's largest law firm has 16 lawyers in the PRC, including three partners. It came to Beijing in 1993, and has had a Shanghai office since 2002. However, the Shanghai tax practice was only set up last year. The highly recommended Brendan Kelly moved here from Deloitte in August 2006. He believes the firm has a different perspective to offer big-four clients. "I've been on a number of large transactions since I got here where I have been working with the big-four, with the idea being that we bring a slightly different perspective," Kelly said. "What we do here is almost exclusively structuring, we look at things like regional structuring plans from a tax minimisation perspective, such as contract manufacturing, sourcing strategies, and strategic M&A." Since Kelly joined the tax practice has grown significantly, recruiting eight lawyers. The firm is one of a few law firms that does transfer pricing work, a bonus given that China is introducing further compliance measures at the start of 2007. The firm's M&A department has also been active recently. It advised on a potential $1 billion acquisition in the manufacturing industry, a potential $500 million acquisition in the consumer products area, and a $400 million acquisition in transport.

Larry Sussman heads O'Melveny & Myers's China tax practice. The firm's Beijing office, where Sussman is based, opened in 2002, six years after the Shanghai office started up. Significant work done in the past 18 months includes tax structuring of private equity formation and cross-border deal work, structuring for a cross-border acquisition, and for domestic funds and securities transactions.

DLA Piper is also making successful inroads into China.

Daniel Chan, who is based in Hong Kong, heads DLA Piper's Asia tax practice. Chan's focus is on supply chain management, distribution, and retail sectors. He has assisted several multinationals in restructuring their distribution and retail operations here. On the mainland, the firm has offices in Beijing and Shanghai. In all, 10 tax practitioners work in the PRC. Significant recent work includes structuring and planning wholesale, retail and sourcing operations for European and US brands in the clothing and electronics industries; a big restructuring project for large medical companies; and transfer pricing analysis for a US consumer electronics company.

The future

China's tax landscape is rapidly changing.

"The market is unlimited, it's growing so fast. It's very attractive to the practitioner as this is potentially a huge market," said Shum.

"Things are becoming more and more dynamic. Five years ago, you couldn't feel it, now you can feel it immediately," said Xu.

As the market becomes more dynamic, companies are posing more difficult questions to tax practitioners.

Kelly said: "People are asking more complex questions, they want to know what our best structuring advice is. What clients are expecting to see is a lot of the same value added services that they get in a lot of other major and more complex jurisdictions, such as the UK, the US, and Japan."

A raft of legislative changes are also likely to affect the market.

The new income tax law, which will introduce corporate tax parity for foreign and domestic firms, that the National People's Congress is expected to adopt in March, will include a provision on controlled foreign corporations. "China is stepping up its focus on transfer pricing and permanent establishments. So things are getting more and more interesting," said Jon Eichelberger, a tax partner at Baker & McKenzie's Beijing office.

Because of the authorities dislike for confrontation, court cases will remain rare. But the tax code is becoming more complex and this will give law firms more niche areas to cater to.