Annual compliance in China
Follow the local compliance and keep your company up to date and in good standing with the authorities. Although 2020 has been a year with changes and benefits from the government, foreign–invested companies need to follow the basics:
- Annual Audit
- Corporate Income Tax Reconciliation
- Annual Reporting
The global economic landscape has suffered a significant change last year. Nevertheless, foreign companies in China should comply and follow local regulations to avoid penalties or deduction in their social credit points. One of the most critical steps in staying compliant is performing an annual audit.
Having your company audited by a qualified CPA will reduce the chance of being inspected by tax authorities and help to identify any problem in the company’s internal control and financial system.
Compliance in China for Foreign Invested Enterprises
It is important to note that China adopts the calendar year as the fiscal year for all companies and enterprises. There are three steps in following the annual compliance for Foreign Invested Enterprises:
- Annual Audit – to be completed by 30 April
- Corporate Income Tax Reconciliation – to be completed before 31 May
- Annual report to government authorities – to be filed in June each year
The Annual Audit should be prepared by a Certified Public Accountant in China, meaning an independent firm should be in charge of this process. The report will include the auditor’s review of the full fiscal year’s financial statements from 1 January to 31 December.
Why perform an audit?
Although it is not required to file the report to the Tax Bureau in China, the company will declare if the Audit has been performed. Bear in mind that the Tax Bureau can require the company to provide supporting documents such as audit reports at any time, so audit reports should be kept indefinitely by the company.
Performing an audit in China for foreign companies will be beneficial in other ways:
- It is an important tool when presenting information to the headquarters and shareholders about the company’s operation in China.
- An audit can bring a clear image of the management and the people in charge of the local operation.
- If the company needs to present information to potential investors, an updated audit report shows clarity in the business operation.
- In case a company expects to obtain credit for the operation, the audit report shows the financial strength to obtain help from banking or insurance institutions.
Corporate Income Tax Reconciliation
Before 31 May of each year, companies need to perform the Corporate Income Tax Reconciliation with the Tax Bureau. The reason for this process is to compare the income tax paid monthly or quarterly with the figures in the audited financial statements.
Adjustments of tax payable can occur in the following situations:
- Expenses that were expected to be deductible but the fapiao cannot be obtained, which is one of the most recurrent problems.
- Payments that were expected to be received from clients in the last quarter could be brought forward to the following year.
- With COVID–19, many clients have canceled orders, which should be reflected in the annual profit and corporate income tax calculation.
Annual Reporting to Government Authorities
In the month of June, the companies established in China should file a joint annual report. The annual report will provide key information of the company’s operation, structure, and activities to the different authorities. In recent years, and due to the government’s efforts to simplify the processes, the Annual Reporting is done in one single filing at the National Enterprise Credit Information, which will share the information with other government offices.
If you need any assistance in the annual compliance for 2020, contact us at email@example.com.
Written by Luz Deneb Martinez, Latin Department, CW CPA