For foreign companies with a presence in China, the beginning of a new year can be rather stressful. As required by Chinese regulations, businesses must plan and prepare the audit of the financial statements of the tax year, while adapting to new laws coming into effect and managing the workflow during the holiday season.
Foreign enterprises, including representative offices in China, must present their statutory annual audit before the deadline set for the annual settlement of the company income tax, which is May 31st of the following year.
This is a long and complicated process which should be started months in advance in order to meet the various compliance deadlines. If companies fail to comply, they risk being hit with deteriorating credit, additional fines and penalties, and might not be able to remit their profits overseas.
The statutory annual audit, which should be executed by a qualified CPA firm in accordance with the Chinese Standards on Auditing, represents an opportunity for the company to conduct an in-depth evaluation of their finances and internal operations.
The auditors must assess the company’s financial statements, verify the compliance with the Chinese accounting principles (“ASBE”, Accounting Standards for Business Enterprises) and issue a report at the end of the process.
A comprehensive audit might reveal unexpected irregularities or suboptimal business practices or discover eligibility for tax incentives that had not been previously capitalized. It may also determine whether the financial statements are prepared in accordance with the ASBE, and if they present fairly and in all material aspects the financial position and the economic performance of the company in the tax year. The audit report includes, among other things, the balance sheet; the profit and loss statement; the cash flow statement; the notes to the financial statements, and the reconciliation between the accounting and the tax profit.
Managers and shareholders can use the statutory annual audit to evaluate the company’s performance, potential risks and adjustments, and assess the financial status.
It may take several months to complete the audit, based on the size of the company and the volume of transactions and accounts. Most firms start this process in January after the end of the tax year and finish it by April 30.
The annual audit is the first step in the yearly compliance procedure; the audit is followed by the annual settlement of the company income tax (deadline May 31) and by the annual declaration with the relevant authorities, such as the State Administration for Market Regulation, the Ministry of Commerce, and the State Administration of Foreign Exchange to be performed within June 30 of the following year.
The relevant procedures and key considerations may vary slightly by region and entity type.
For instance, in Shanghai, companies must include a taxable income adjustment sheet in the audit report, which is not a necessary supplement in Hangzhou, Beijing, or Shenzhen.
In China, company income tax (CIT) is paid on a monthly or quarterly basis in accordance with the figures shown in the accounting books. Companies are required to file CIT returns within 15 days from the end of the month or quarter.
However, due to discrepancies between China’s accounting standards and tax laws, the actual CIT taxable income is usually different from the total profits shown in the accounting books.
As such, the State Administration of Taxation (SAT) requires companies to submit an Annual CIT Reconciliation Report within five months from the previous year’s year-end to determine if all tax liabilities have been met, and whether the company needs to pay supplementary tax or apply for a tax reimbursement.
In general, the Annual CIT Reconciliation Report must include adjustment sheets to bridge the discrepancies between tax laws and accounting standards.
Foreign enterprises that conduct frequent transactions with related parties should prepare an Annual Affiliated Transaction Report on transfer pricing issues as a supplementary document to the Annual CIT Reconciliation Report.
According to the “Interim Regulations for the Publicity of Corporate Information”, each year from January 1 to June 30, all foreign companies should submit an annual report for the previous fiscal year to the relevant Administration of Industry and Commerce (AIC).
This should be done through the corporate credit and information publicity system.
Besides the annual reporting to AIC, foreign enterprises in China must conduct an annual combinative reporting to Ministry of Commerce (MOFCOM), Ministry of Finance (MOF), SAT, State Administration of Foreign Exchange (SAFE), and National Bureau of Statistics (NBS).
Under this system, all information can be submitted online through the annual combinative reporting system.
Unlike the previous annual inspection system, annual reporting compels relevant government bureaus to take on the role of supervisors, rather than judges. They no longer have the right to disapprove reports that are submitted. They can only suggest modifications.
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DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.