Tax-Exempt

A Look Ahead at the Expiring Tax-Exempt Fringe Benefits for Expats in China

With global tax revamp afoot, multinational companies are facing more tax-related challenges operating across the globe. However, changes are inevitable. China will follow the change to reform its taxation policy over the next five years.

Since 1994, China has granted its working foreigners tax benefits via its individual income tax policy. This preferential policy granted the tax-free status for 8 categories of expenses including rent, children’s education, language training, meal, laundry, relocation, business travel and home visit expenses.

However, it has now become the most prominent concern to expats, as two years ago China decided to end the preferential policy to equalize benefits between local and foreign workers.

In a policy implementation document Cai Shui [2018] No. 164, China set a transition period to allow companies and expats a three-year period in preparing for transiting from the existing preferential policy to the unified Special Addition Deduction policy.

During the period from 1 January 2019 to 31 December 2021, a foreign individual who satisfies the resident individual criteria may opt to claim special additional deductions for individual income tax as Chinese residents or opt to continue enjoying the existing preferential tax-exemption policy. Once the foreign individual decides on which tax deduction policy he/she wishes to enjoy, the option cannot be changed within a tax year.

Most expats working in China still prefer opting for the existing tax exemption policy for the 8 tax-exempted allowances, of which the purpose was to attract high-level foreign talents to relocate and work in China.

In principle, under the existing tax exemption policy, allowances can be exempted from individual income tax so long as the expenses incurred are reasonable with legitimate supporting documents. Due to discrepancies of consumption levels among different cities, the amount of allowances which can be deemed as reasonable is different city by city. However the existing tax-exempt policy provides a much higher amount of deduction for IIT purpose compared to the Special Additional Deduction Policy introduced by the new IIT Law. Additionally, compared to the preferential tax-exempt policy for expats, the Special Addition Deduction policy provides deductions in fixed amounts. This exposes their pre-tax income to China’s 45% top income tax rate.

After the expiry date, expats in China must follow the same deduction method as Chinese residents according to the revised Individual Income Tax Law (IIT Law) which was enacted on 1 January 2019. If conditions are met, Chinese residents deriving comprehensive income can claim deductions on child education, continued education, mortgage interest, rental expense, elderly care and major medical expense when calculating the annual taxable income using the Special Addition Deduction policy.

Alongside, foreign companies have become increasingly worried as the deadline (31 December 2021) approaches. It is estimated that the change would force a multinational company to pay an additional 785,000 yuan (US$119,000) in taxes for a foreign employee with two children receiving a typical allowance of 960,000 yuan (US$145,500) for housing and school tuitions annually. The employee would have to pay extra tax of 432,000 yuan per year.

As an example, consider rental expenses. Imagine that a multinational company headquartered in Brazil sends a Brazilian technician to its Chinese subsidiary located in the city of Shenzhen. According to the accommodation standard provided to the expatriates in Shenzhen, the reasonable range of monthly rent for this Brazilian expatriate may be from RMB 8,000 to 10,000. The Brazilian technician can deduct the actual cost of renting the apartment before taxes so long as his/her monthly rent is within the reasonable range. However, if a Brazilian technician chooses the Special Additional Deduction Policy, the maximum deduction for his/her rent is only RMB 1,500 per month, which is drastically lower than using the existing tax-exempt policy.

Considering the upcoming inevitable changes, responding to the expiration of the transition policy cannot be overlooked. Taking no action will certainly cause a substantial rise of foreign employees’ individual income tax burden. Given this expected outcome, what actions can a business take to reduce the impact on its financial operations? Here are our suggestions:

Cashflow planning

Review the status of foreign employees already in China, including their salary and benefits, and estimate the increased tax burden according to special additional deduction policy. Timely adjust the company’s cash flow plan according to the increased tax burden.

Modification of Labor Contract

Review the labor contracts of existing foreign employees. If it is necessary to modify, consult the relevant legal personnel to modify the relevant provisions.

Provide training to foreign personnel

Foreign personnel must be trained and given proper guidance on the special additional deduction policies. Employers should assist employees to determine the amount of each special additional deduction item and clearly inform foreign employees of their rights and obligations.

Although there is no official explanation for the termination of the existing tax-exempt policy, it is undeniable that the increase in the tax burden of existing foreign employees will ultimately be transferred to the companies. In such case, the operating cost of hiring or dispatching foreign personnel will substantially increase. 

Businesses always try to reduce costs. Considering cost control for businesses with the new change, foreign companies would be more cautious about whether to invest in China in the future. In addition, existing multinational enterprises would also be more cautious in planning the dispatch of foreign personnel to China.  

Written by Delilah li, CW CPA

Newsletter

Tax incentives to attract talents to the GBA

The Chinese Government has linked the largest urban cities to develop the world’s biggest urban area, The Greater Bay Area (GBA). The cooperation between the 11 member cities aims to develop further and improve multiple sectors, including technology and innovation, infrastructures, and transportation networks, ultimately building job opportunities. However, alongside comes many challenges. One is attracting talent. Hence, the question arises, how does the government aim to attract this talent who will be the driving force of this ecosystem? 

In March 2019, The Ministry of Finance and the State Administration of Taxation announced the “Preferential Individual Income Tax Policies in GBA” that will be implemented between 1 January 2019 and 31 December 2023 in the 9 cities.

The incentive would allow workers to balance their tax expenses and parallelly allow employers to benefit by reducing the employment cost via tax rebate. The government brought this tool for Individual Income Tax to leverage foreign profiles from Mainland China and Hong Kong, Macao, and Taiwan, motivating them to consider GBA as an option and retain them.

The subsidies are calculated based on the following items:

– Comprehensive income (wages, salaries, labor compensation, remuneration of independent services, royalty income) and an excess progressive tax rate of 3% to 45% is applicable.

Less than 36,000 yuan

3%

36,000 – 144,000

10%

144,000 – 300,000

20%

300,000 – 420,000

25%

420,000 – 660,000

30%

660,000 – 960,000

35%

Above 960,000

45%

– Operating income, an excess progressive tax rate of 5% to 35% is applicable

Less than 30,000

5%

30,000 – 90,000

10%

90,000 – 300,000

20%

300,000 – 500,000

30%

Above 500,000

35%

– Other income – 20% proportional tax rate is applicable (interest, dividends, bonuses, property lease, property transfer, and incidental income)

– The subsidy is calculated by the following method: Individual Income Tax – Taxable Income in sub-items x 15%.

 

Though the policy aims to promote the whole GBA, local rules differ when assessing the profiles of the talents applying for the subsidy. Each city has different requirements qualifying workers as “Talent in short supply” or “High-end talent”. Therefore, workers need to meet conditions based on each local area in the 9 cities.

Ralph Waldo Emerson said, “Of all debts, men are least willing to pay their taxes”. With now tax incentive in place, motivating workers to consider GBA and attracting talent would be smoother. However, being qualified for the subsidy or dealing with several government institutes in applying for the tax incentive may be difficult. Therefore, it’s highly recommended to consult with a professional tax advisor.  

For more information, feel free to contact Ms. Phenix Zheng:  phenix.zheng@cwhkcpa.com.

Written by Anselm, CW CPA

Newsletter

Electronic Audits by the Customs Authority in Mexico

Based on the Customs Valuation Agreement of the World Trade Organization, the customs authority of any country has the power to doubt the veracity of the information presented regarding the value of imported goods. In this sense, following the faculty granted by the mentioned International Agreement, the Mexican customs authority has determined the causes that will take into account to reject the customs value of imported goods. The table below shows a summary of some of the most important causes:

Accounting of the Mexican enterprise

Documents provided by the suppliers aboard to the Mexican importer​

The importer opposes the exercise of the verification faculties of the customs authorities, or it is detected that the importer has incurred in any of the following behaviors:

  1. Not keeping the accounting, or not keeping it according to the principles and legally applicable precepts; not make the accounting available to the customs authority.

  2. Omitting or altering the records of foreign trade operations.

  3. Omitting the presentation of the tax return exercise of any contribution until the moment at which the exercise of verification faculties begins.

  4. Not meeting the requirements of the customs authorities to present the documentation and information proving that the declared value was determined according to the legal provisions.

If it is established that the value declared by the importer was not determined following the customs laws, upon updating any of the following assumptions:

  1. In the documentation or information provided to justify the customs value of the merchandise that has been declared, it is not possible to corroborate its veracity or accuracy. In the case of having used the method of the transaction value for their determination, it is not reliably proven the price that was actually paid or will be paid for the mentioned merchandise;

  2. Any payment not justified to suppliers and exporters of the merchandise is detected in their accounting. It is known, derived from an international certification, that the alleged supplier of the merchandise did not make the sale operation to the importer or denies having issued the invoice presented by the importer in the petition; or

  3. When the value declared in the petition is 50% or lower than the transaction value of identical or similar goods determined following the customs laws.

RISKS

The Mexican tax and customs authorities will have full faculty of electronic revision. They will be able to review all payments made abroad related to the purchase of foreign merchandise imported into Mexico.

In this sense, the situation becomes delicate when the Mexican customs authority reviews the movements of money abroad and when the movements of money do not exist in the accounting records or are not justified to the satisfaction of the mentioned authority. Then, there will surely be a rejection of the customs value of the merchandise, which could lead to the omission of taxes, having to be paid along with their accessories, and the consequent payments of the corresponding fines.

OUR SUGGESTION

In the case that your enterprise has branches in Mexico, such as trading companies or manufacturers, we recommend you to ensure that accounting is carried out following the applicable legal principles and precepts; make correct payments abroad that are related to merchandise imported into Mexico and relate them to the accounting entries, to avoid unnecessary inconvenience from the Mexican tax and customs authorities.

If you have any questions about the incremental or decrementable concepts that must be declared in the import petition or the accounting, please do not hesitate to contact our team of professionals.

Written by Baker Tilly Garza García, 

Members of Allinial Global 

Baker Tilly Garza Garcia

 

Contact

Monterrey Office 

Jorge Hernandez Parra

Email: jhernadezp@btmgg.com.mx

M: +52 1 81 8396-3872

Alejandro Angeles Acosta

Email: aangeles@btmgg.com.mx

M: +52 1 81 1707 5378

 

Querétaro Office

José Ángel Blanco M.

Email: jblanco@btmgg.com.mx

M: +52 1 56 1584-0019

Juan Carlos Castro

Email: jcastro@btmgg.com.mx

M: +52 1 442 154 99 54

Newsletter

E-Commerce

E-commerce in the European Union and its VAT changes in 2021

  • The European Union will implement new Value Added Tax (VAT) regulations on cross-border e-commerce businesses on 1 July 2021. Due to the increase in globalization, international trade and the need for worldwide tax controls, the new regulation aims to simplify and modernize the procedures.   

    How will this affect exporters from China? How can you regulate your sales in EU? 

In response to the increase in globalization, international trade, and the need for worldwide tax controls, on 1 July 2021, the European Union will enact the new regulatory package of Value Added Tax (VAT) on e-commerce.    

The package introduces the ‘Import One-Stop Shop’ electronic portal, which regulates the payments of e-commerce VAT in each member state. This change concerns the growth of e-commerce and digitalization, which have boosted international trade; Companies based in the European Union selling online can also export to mainland China and Hong Kong, and vice versa. 

 

KEY CHANGES IN VAT REGULATIONS  

  • Changes in VAT declaration   

The regulation includes an important change of the VAT collection method on e-commerce. Previously, VAT was paid in each European Union member state, depending on the seller’s location. To illustrate, if a seller in Germany sells products online to a Spanish client, VAT would be declared and taxed in origin, Germany.   

As of 1 July, 2021, tax will be declared in the state where the buyer is located and the purchase is made. Hence, in the previous example, the VAT declaration would be made in Spain. This regulation also affects sellers outside the European Union.  

  • Exemptions of the VAT   

The current system permits VAT exemptions on products imported to EU which are less than €22, while those products exporting from EU are still subject to VAT. This exemption makes imported products more competitive in terms of price compared to those of European origin.    

The regulations as of 1 July will eliminate the e-commerce VAT exemption for products with a value of less than €22, which implies that all imports to EU, even those of little value, will be charged VAT at the destination. This is one of the most supported initiatives since it can balance the playing field between imported products and local products.   

Meanwhile, imports of products with a value of less than €150 are still not subject to customs duties and do not require a full customs declaration. 

 

IMPLICATIONS FOR ONLINE SELLERS FROM MAINLAND CHINA OR HONG KONG  

The different online platforms and marketplaces are contemplated in this regulation as these platforms are, by far, the most used vehicles for the sale of online products from overseas, including China and other parts of Asia. On behalf of users and buyers, the platforms will act as guardians of compliance with the e-commerce VAT, which especially includes those outside the European Union member states and that import from non-member countries.  

Although the general concern for exporters whose sales cover the entire EU territory is how to make the declaration in multiple states, the ‘Import One Stop Shop’ records, and files all declarations across the EU. On the contrary, if the seller does not want to use the ‘Import One Stop Shop’, the alternative is to allow the final consumer to pay VAT when the product is delivered, and all responsibilities and declarations rest on the consumers.  

The foreign trade community is concerned about the increase in costs borne by the final consumers. As VAT is an indirect tax, it is transferable to final consumers. For example, a European consumer who initially purchases a product imported from China valued at €20 may have to pay €24.2 for the same product in Spain after the implementation on 1 July 2021.  

There is a worldwide trend for regulation of VAT on imports. To demonstrate, some cross-border trading platforms in China require companies that ship products to pay VAT in advance for all merchandise.   

How quickly will the final consumers adapt to the VAT regulations of electronic commerce in the European Union, especially in pandemic times? It is only a matter of time the end consumers adapt to these changes.   

Written by Luz Deneb Martínez, Latin Department, CW CPA

Newsletter

Ecuador

Ecuador: Laws and Regulatory Changes for Entrepreneurs and Startups

Article presented by the firm of auditors and business consultants Audit Corporate and Tax Corporate, Member of Allinial Global

Contact Email: Diego Zambrano

dzambrano@taxcorporate.org

The entrepreneurship law and regulatory changes in 2020 correspond to the creation and management of companies in various industries in Ecuador. Details of changes shall be in force in 2021, which led to noticeable results.

 

Organic Law of Entrepreneurship and Innovation

The Official Gazette Supplement No. 151, published on 28 February 2020 (Friday), focused on the Organic Law of Entrepreneurship and Innovation. A summary of the main aspects addressed by the standard includes:

  • Creation of Simplified Stock Companies (SAS);
  • Companies of Benefit and Collective Interest

At the time of adopting the status of a company of benefit and collective interest, a company is obliged to create a positive material impact on society and the environment, where an annual report is presented to the management;

  • The definition of “entrepreneur” is provided, and the government entities are established to disseminate the procedures and applicable rates for entrepreneurs;
  • It is arranged to develop work and contractual modalities to be implemented in entrepreneurial work, including part-time, legal benefits and others;
  • Regulatory frameworks are established for crowdfunding, and other platforms in their different products, such as donations, pre-purchase, investment in shares, reimbursable financing;
  • Limited companies are allowed to subsist with a single shareholder;
  • The joint-stock company and the limited liability company may subsist with a single shareholder/partner. For its constitution, at least two contracting parties must participate;
  • The existence of the position of the commissioner becomes optional. In accordance with the provisions of the statutes, Public limited companies may or may not have commissioners as an oversight body;
  • A company will incur cause of dissolution due to losses, when these represent 60% or more of the equity and that this situation is maintained for more than 5 continuous years;
  • In companies whose bylaws provide for the existence of a Board of Directors, the Legal Representative of the company may not be president or representative of that collegiate body;
  • It is allowed that the financial statements presented to the tax authority are not presented to the Superintendency of Securities and Insurance Companies;
  • Holding general meetings through telematic means is allowed;
  • It is allowed to carry out capital increases under the compensation of credits, rights of attribution and absorption of losses; When a company registers operational losses and has reserves, these will be eliminated automatically;
  • Voluntary and early dissolution does not require prior authorization from the Superintendency of Companies, Securities and Insurance. Therefore, the direct registration of that corporate act in the Mercantile Registry is allowed for the beginning of the liquidation that will be supervised by the control body. The change of name, change of address and modification of the company term do not require prior authorization either;

Less than 50% of the instruments proposed by the regulation to promote the creation of businesses in the country are operational. The Law defined the creation of new types of credit and companies, among others, but only the latter has been effectively operationalized with the creation of firms through Simplified Stock Companies (SAS).

From May 2020 to February 2021, more than 5,000 companies of this type were registered. Another benefit that the norm raises is to generate an employment contract that implies fewer costs for entrepreneurs, this type of instrument was generated last year through new work modalities with durations of only one year, with the cancellation of the eviction.

Newsletter

Hong Kong budget 2021-22

Hong Kong Budget for Fiscal Year 2021-22 during the times of Uncertainties

On 24 February 2021, the Financial Secretary of the Hong Kong Special Administrative Region, Mr. Paul Chan Mo-po, delivered the 2021-22 Budget Speech.

With the impacts of China-US tension, social incident, COVID-19 pandemic, Hong Kong is faced with a lackluster economy and a deteriorated labour market.  Hong Kong expects a record deficit of HK$257.6 billion and HK$101.6 billion for 2020-2021 and 2021-22 respectively, meaning that there would be deficit for four consecutive years.  The Financial Secretary’s 2021-22 budget is focused on supporting enterprises, supporting employment and relieving people’s hardship.

 

2021-22 Budget Highlights

We summarize the 2021-22 budget’s key highlights relating to salaries tax, profits tax, measures to smoothen livelihoods, support enterprises and achieve diversified economy, as follows:

 

Smoothen livelihoods 

a)HK$5,000 electronic consumption vouchers in instalments to Hong Kong permanent residents and new arrivals aged 18 or above

b) Salaries Tax and tax under personal assessment for 2020-21 will be reduced by 100%, subject to a ceiling of HK$10,000 (2019-20: HK$20,000). The reduction will be reflected in the final tax payable for the year of assessment 2020-21

c) The rate of Stamp Duty on Stock Transfers will be raised from the current 0.1% to 0.13% of the consideration or value of each transaction payable by buyers and sellers respectively.

 

Support Enterprises

a) Profits Tax for 2020-21 will be reduced by 100%, subject to a ceiling of HK$10,000 (2019-20: HK$20,000). The reduction will be reflected in the final tax payable for the year of assessment 2020-21

b) Concessionary low-interest loan

c) Extension six months of the Pre-approved Principal Payment Holiday Scheme

d) Waive rates for non-domestic properties for 2021-22, subject to a ceiling of HK$5,000 per quarter in first two quarters and HK$2,000 per quarter for remaining two quarters

Continue to implement relief measures announced last year

e) Waive the business registration fees for 2021-22

f) Water and sewage charges of non-domestic households: waive 75% of charges for every month, subject to a monthly cap of HK$20,000 and HK$12,500 respectively

 

Achieve diversified economy, Innovation and technology

a) Issue no less than $24 billion of Silver Bond and no less than $15 billion of iBond this year. Lower the eligible age for Silver Bond subscription from 65 to 60

b) Issue green bonds totalling $175.5 billion within the next 5 years, and plan to issue retail green bonds

c) Roll out Green and Sustainable Finance Grant Scheme to subsidise expenses on bond issuance and external review services

d) Strive for the launch of Southbound Trading of Bond Connect within this year, and enhance the domestic Central Moneymarkets Unit

e) Provide subsidy for Real Estate Investment Trusts to list in Hong Kong

f) Launch a Pilot Insurance-linked Securities Grant Scheme to subsidise issuance cost

g) Provide subsidy for Open-ended Fund Companies to set up in or re-domicile to Hong Kong

h) Review tax arrangements relevant to family office business

i) Earmark over $200 million to roll out “Knowing More About IT” Programme, subsidise primary schools to enhance students’ interests and knowledge in I&T and their applications through extra-curricular activities

j) Regularise the pilot scheme which subsidises students studying science and technology in local universities to enrol in short-term I&T related internships

k) Inject $9.5 billion into the Innovation and Technology Fund by two yearly instalments

l) Hong Kong Monetary Authority to consider enhancing its Fintech Supervisory Sandbox to reduce time for launching innovative financial products in the market

m) Press ahead with the development of the Hong Kong-Shenzhen Innovation and Technology Park in the Lok Ma Chau Loop

n) Continue to implement the Science Park expansion and Cyberport 5 development

o) Continue to support the development of 5G networks and applications

p) Commence progressively the operation of the first batch of about 20 R&D laboratories under the “InnoHK Research Clusters” in the first quarter of this year

CW welcome the Budget’s cautious and targeted measures, which pave the way to foster post-pandemic economic resilience and betterment of livelihood.

 


 

Appendix

PROFITS TAX

*For 2020-21, the profits tax is proposed to be reduced by 100%, subject to a ceiling of HK$10,000. (2019-20: HK$20,000)

 

SALARIES TAX

  • Salaries tax is charged at the lower of net chargeable income (Total Income – Deductions – Allowances) at progressive rates or net total income (Assessable Income – Deductions) at standard rate.
  • Standard rate remains the same at 15%.
  • Progressive rates are as follows:

*For 2020-21, the salaries tax and tax under personal assessment are proposed to be reduced by 100%, subject to a ceiling of HK$10,000. (2019-20: HK$20,000)

 

Allowances

 

Deductions

 

PROPERTY TAX

The standard rate (for non-corporate owners) remains at 15% for 2021-22.

Written by May Tung, Tax Advisory Services, CW CPA

Newsletter

tax

Breaking News About Tax Matters Presented by Regulatory Entities in Colombia During February

Article presented by the firm of auditors and business consultants Alfredo López y Cía.  
Member of Allinial Global 

Contact Email: llopez@alfredolopez.com.co 

  • The Council of State Contentious-Administrative Chamber

The section four ruled that the ICA, in commercial activities, states that this tax is effective in the municipality  upon which the price and the goods to be sold are agreed and it is based on the  principle of territoriality of the tax, and reassert the jurisprudence uttered by the same, in the following articles: Exp. 22817 dated 23 November 2018, Exp. 22614 dated 26 September 2018Exp. 21681 dated 8 June 2016, of Exp. 18413 dated 29 September 2011 and Exp. 14852 dated 19 May 2005. It also states that, the place where the commercial activities of sale of goods is carried out should be the one where the essential elements of the contract are specified, that is, the price (and within this, the form of payment) and the goods that are sold, regardless of the place where the orders are made. Similarly, this regulation states that the destination of the goods or the place where the sale contract is signed are not factors determining the establishment of carrying out the commercial activities. 

 

  • Clarification of Simplified Stock Companies issues

 Another issue relevant to shareholders’ responsibilities in simplified stock companies (Sociedades de Acciones Simplificadas, SAS) was clarified by the superintendency of companies where the law states that shareholders of the SAS are not responsible for the obligations incurred by the company.  

Article 2 of the Law 1258 of 2008 states that they would form a legal person other than their shareholder(s) once the SAS are registered in the commercial register. Therefore, following the provisions of the second paragraph of Article 1 of the same rule, except as provided in Article 42 of the law mentioned above on lifting the corporate veil, the shareholder(s) will not be responsible for the labor conditions, tax, or other obligations incurred by the company. 

 

  • Tax matters: Realization of income and payments based on shares 

Regarding the realization of income and payments based on shares, the tax treatment applicable to payments based on shares is based on an employment relationship that is being executed. The income will be recognized when the option to acquire shares is exercised. If these shares are received as part of the employee’s compensation, the income will be recognized at the time they are deliveredwhen the employee appears as a shareholder of the company, or the entry is made into the account, whichever comes first. The realization of the income must be taken into account to determine the withholding tax.  

  

  • Tax matters: Sales Tax, Exempt Tax under Legislative Decree 551 of 2020

The Directorate of National Taxes and Customs (Dian“) responds to the query on the validity and conditions of the VAT exemption for the importation and marketing of medical equipment and supplies.   

The provisions of Legislative Decree 551 of 2020 came into force on 15 April 2020, as of its publication in Official Gazette No. 51,286, and are not applicable retroactively. The Decree establishes a temporary exemption for the import and sale in the national territory of 211 types of goods and medical supplies necessary and essential for the prevention, diagnosis, and treatment of the Coronavirus COVID-19.   

For the VAT exemption to be applicable, those responsible must comply with the procedure established in Article 2 of Decree 551. Failure to comply with these requirements will lead to the non-application of the tax treatment of exempt goodsWhat is established in the Decree does not only apply from its publication date in the official gazette. Compliance with the requirements established in the standard must also be carried out for the exemption to be applicable. 

 

  • Deduction for difficult-to-collect debts

originated in a mandate contract without representation between financially related parties. The deduction for debts that are difficult to collect in a mandate contract is applicable for the principal where the debtors are hired by the agent. The liquid income for recovery of deductions originates in the materialization of any of the economic events described in Article 195 of the tax statute. 

Newsletter

compliance

Your Simplified Annual Compliance Guide in Hong Kong

Are you considering setting up a company in Hong Kong? Perhaps you have a Hong Kong Company but find it confusing to keep up with the compliance. Has your accountant suddenly reached out to you with a new charge that you are not familiar with? This article is to clarify the basic responsibilities that your Hong Kong Limited Company shall take up every year.

 

Annual compliance in Hong Kong

Annual compliance refers to a set of responsibilities a company should assume once it has been established. You must observe these compliance requirements according to your company’s fiscal year-end and the anniversary date. In Hong Kong, every private company must comply with the obligations administered by these two government entities:

– Companies Registry

– Inland Revenue Department

 

COMPLIANCE WITH THE COMPANIES REGISTRY

The Companies Registry is the department in charge of registering local and non-local companies in Hong Kong. It maintains records of active and dissolved companies.

 

Annual Return

Every year, a company should deliver an Annual Return, which contains its particulars, such as the registered office, shareholders, directors, company secretary. If the company does not file the Annual Return after 42 days of the deadline, the company will have to pay penalties. Please see the Annual Return Form “NAR1(Private)_Specimen-e” for your reference.

Business Registration

Business Registration must be renewed upon its expiry date. Normally, if you have applied for a one-year Business Registration, we recommend preparing the renewal of the Business Registration before the anniversary of the company. Please see Business registration specimen for your reference.

Significant Controller Register (SCR)

To enhance the transparency of corporate beneficial ownership, a company

incorporated in Hong Kong must obtain and maintain up-to-date beneficial ownership information by keeping a Significant Controllers Register. The SCR register must be kept at its registered office address or a place in Hong Kong. In the latter case, the company must file a Form NR2 to the Companies Registry reporting the location of SCR. The Register should be open for inspection by law enforcement officers upon demand. Failing to do so will render the company and the responsible person of the company liable to fines.

 

COMPLIANCE WITH THE INLAND REVENUE DEPARTMENT

 

Bookkeeping

The company should prepare financial statements for each fiscal year. The periodicity of the reports will depend on the company and the need for the availability of financial information. The reports can be prepared on a monthly, quarterly, biannual, or annual basis.

Audit

Regardless of the size, companies in Hong Kong are required to audit their financial statements and present them together with a profit tax return to the Inland

Revenue Department. The audit should be performed on an annual basis.

Profits tax return (“PTR”)

Annual profits tax returns are normally issued to taxpayers on 1 April each year. Once a Profits Tax Return is issued, the company is required to lodge the completed PTR together with the profits tax computation and the duly signed audited accounts for the basis period. Please see “ebir51” regarding the format of the Profits Tax Return.

Employer’s return

Hong Kong Salaries Tax is charged on the assessable income earned by an employee or an office holder in a year of assessment that runs from 1 April to 31 March of the following year.

As an employer, the company has the following reporting obligations to the Inland Revenue Department (“IRD”) if it anticipates that the company hires an employee who is likely to be chargeable to Hong Kong Salaries Tax.

i. Commencement return – The company has to file Form IR56E within 3 months of employing the employee

ii. Annual return – The company has to file Form BIR56A and IR56B. The annual return BIR. 56A is normally issued in early April and the filing deadline of the form (together with completed IR56B, where applicable) is within 1 month from the date of issue.

iii. Cessation return – The Company has to file Form IR56F (Employee who is about to Cease to be Employed) or IR56G (Employee who is about to Depart from Hong Kong) one month before the date of termination of the Philippines employee’s employment. IR56G has to be filed in the situation when the employee leaves Hong Kong for good or a substantial period of time usually in excess of 1 month. From the date of filing IR56G and until such time the employee has made tax clearance and can produce to the company a “letter of release” issued by the IRD, the company should withhold all amounts due to be paid to the employee (including salaries, commission, bonus, reimbursement of rent/expense, gratuity, money or money’s worth included).

Please note that the company does not have a tax withholding obligation except in the situation mentioned in (iii) above when the employee is about to depart from Hong Kong.

Compliance

Our suggestions:

1. Understand the basic accounting and taxation system and practice in Hong

Kong.

2. Review in-depth the service proposal you receive from the external accounting and secretarial services provider.

3. Establish a good habit of keeping and organizing business records from day one.

4. Don’t delay the declarations and reporting. This might lead you to the loss of information and records internally and the delay in presenting information to third parties like the banks, and penalties from the authorities.

5. For companies with a large number of transactions, it is important to prepare financial reports on a more frequent basis.

6. Review your financial reports. Once you receive the financial reports from your accountants, go through the information and seek clarifications if you have doubt. A responsible service provider will be able to answer your questions swiftly.

7. Keep your company statutory and business records up to date.

8. Update your bank at least once a year on the company status. Make sure your bank account has sufficient funds for bank charge deduction.

If you have any questions regarding your company’s responsibilities or how to

prepare the information, please get in touch with us and request a free consultation.

 

Contact: Ms. Lily Xiang, Accounting Manager

Email: lily.xiang@cwhkcpa.com

Written by Luz Deneb Martínez,  Latin Department, CW CPA

Newsletter

compliance

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, foreigninvested 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 enterprisesThere are three steps in following the annual compliance for Foreign Invested Enterprises:  

  1. Annual Audit – to be completed by 30 April 
  2. Corporate Income Tax Reconciliation – to be completed before 31 May 
  3. Annual report to government authorities – to be filed in June each year 

 

Annual Audit 

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 timeso 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.  
  • Ithe 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 orderswhich 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 cw@cwhkcpa.com. 

Written by Luz Deneb Martinez, Latin Department, CW CPA

Newsletter

Colombia and the significant changes in accounting and tax matters

In the search for a system of international approval, the process experienced by Colombia in all areas presents the best letter of introduction to join the Organization for Economic Cooperation and Development (OECD), reflecting that Colombia exercises good practices and that our companies have adequate corporate governance schemes, information, and management of companies in their standards. After seven years of the previous government’s accession process, Colombia becomes the 37th member of the organization, reflecting that the country has reached high standards in global public policy on 28 April 2020. 

On the other hand, the accounting industry needed to be more dynamic and proactive with current accounting and tax regulations. Thregulatory framework causes Public Accountants to improve their profiles as professionals and be even more competitive. The companies must keep their teams updated and pay particular attention to the Government and other high-impact entities such as the National Directorate of Taxes and Customs of Colombia DIAN.  Since previously there was no route needed to follow in this field, the map was not very clear regarding compliance with Decree 2649 /2650, the provisions of each of the regulatory and control entities.  

We must consider that the adoption of International Financial Reporting Standards (IFRS) led us to implement the International Standards on Auditin(ISA) in Colombia. It is a part of the evolution that our country is undergoing since it actively required the development of a globalized frameworkmaking it necessary to standardize a common accounting and financial language to prepare financial statements. (Law 1314 of 2009). 

The real challenge lies in the process of transition from the Latin model to the Anglo-Saxon model; determine its proper direction with all the impact that the country may have due to the participation of the States, companies and professionals who exercise independent Fiscal Auditing practices such as accounting firms, which are ratified in Decree 2420 on 14 December 2015. It is mentioned that accountants must venture into greater regulation and under a more international scheme. 

It is clear that this tremendous effort for Colombian accountants translates into speaking the same language internationally, which allows us to be competitive not only locally, but also outside our territory. In addition to the fact that we are tax auditors (only applicable in Colombia)we provide higher quality work and rigorous compliance in terms of regulations for Colombian entities. 

We must consider that the adoption of the IFRS in Colombia was part of our country’s evolution in the framework of globalization, characterized by free trade agreements, openness, and access to international markets. These are necessary for the standardization of an accounting and financial language to generate an increase in consulting services. Even though it is necessary to mention that this has gradually decreased, currently, only consulting services are performed to support regulatory updates under IFRS. Regarding ISA, Colombia is also starting with the applicability of ISA 705, already advanced for some sectors, given the importance of issuing an opinion including an emphasis on internal control, which could open more business opportunities for other service areas. 

The exercise for business presents different difficulties to our country. Considering the current economic and social circumstances and Colombia as a country with greater participation by small and medium-sized enterprisesit is necessary to continue with the progress that has been achieved in accordance with the reforms that the country made to get where it is today. As they have been very important for the growth and development of our economy. Currently, the government has supported more than 34 reforms since 2006, according to the World Bank’s Doing Business 2018The government continues to offer incentives for foreign investment and legal stability for investors, taking advantage of the free trade zones established in the region, which also have different tax benefits that may be attractive for future investors.  

It is also important to consider that Colombia is currently, as part of the economic development program, promoting the areas that were affected by the armed conflict, given that it is in the Development Plan that addresses the primary needs of the country. This plan is designed and executed to achieve continuous growth and competitiveness. 

Contributed by Johana Valencia 

Alfredo López y Cia Ltda 

(An Allinial Global Member Firm in Colombia)

About the Author: 

Johana Valencia 

Email: ajlopez@alfredolopez.com.co 

Public Accountant from Universidad San Buenaventura de Cali, with International ACCA – Association of Chartered Certified Accountants accreditation for International Financial Reporting Standards IFRS. Currently, she is doing a Master in Business Administration with the European University of the Atlantic in Spain, has more than 10 years of professional experience in financial auditing, tax review, evaluation of internal controls, implementation of local and international accounting (full NIIF, Pymes and NICSP). 

For more information about this article you can contact Ms. Johana Valencia from Alfredo López y Cia Ltda 

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