Annual Audit and Compliance
All legal entities in China, including Wholly Foreign-Owned Enterprises (WFOE), Joint Ventures (JV) and Representative Offices (RO) should perform an annual audit and other relevant annual compliance procedures to ensure all transactions have been carried out correctly. The audit carried out is an evaluation and review of the financial statements of an entity to ensure all financial records and reporting have been done so accurately. The yearly audit entails a thorough examination of various financial documents, such as the income statement, balance sheet and cash flow statement. Failure to submit annual filing report may result in your enterprise being added to the Irregular Operations Catalogue as well as a fine.
The annual statutory requirements in China can be separated into 3 types:
- Firstly, these foreign-invested entities are required to do the year-end statutory audit which only qualified CPA firms in China are allowed to carry out.
- Based on the statutory audit report, the entity is then obliged to calculate and process the Annual Corporate Income Tax Filing.
- Finally, the entity then needs to publish information relating to the audit report, the CIT filing and other certificates on the Annual Publication Report.
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Why is an Annual Audit Important?
Annual compliance in China is important because it provides foreign-invested enterprises in China with an opportunity to review the company’s operations and identify potential tax related issues before the annual CIT reconciliation. Here are some important reasons why your business should carry out an annual audit:
- In order to reduce risk on a financial, operational, compliance and strategic level.
- To improve your finanical reporting practices and ensure your Chinese based entity remains in compliance with local regulations.
- To ensure that the financials that are used in your annual CIT filings are correct.
- If your entity intends to repatriate funds out of China, the tax bureau and bank will both require your business to furnish audited financial records.
- To improve internal control as well as if you are part of international group, your overseas HQ may require an audit for consolidation purposes.
1. Annual Audit in China
The statutory annual audit report is the general financial report which must be conducted by a Chinese-registered Certified Public Accountant (CPA). Although an accountancy firm or foreign CPA may provide support to foreign enterprises during the audit procedures, the annual audit report must be issued by a CPA firm authorized in China.
The purpose of the annual audit report is to ensure that foreign-invested enterprises meet the Chinese financial accounting standards, commonly referred to as PRC GAAP, and the annual statutory audit report would contain the auditor’s opinion on whether the company’s financial statements reflect a true and fair view of the financial position, operating results and cash flow in all material aspects.
A Chinese audit report generally consists out of a balance sheet, income statement and cash flow statement. Because certain requirements for this audit report may differ across the regions, it is advised that companies make sure what the local rules dictate and what additional rules the company has to conform to.
It is estimated that under normal circumstances the audit procedure would take around 2 months to conclude. Audit reports presented to the tax authorities must be in Chinese, but can also prepared for foreign companies in English language to be used for group reporting. This audit report should best be completed during February – March in the fiscal year.
2. Annual Corporate Income Tax Filing
In China, Corporate Income Tax (CIT) is taxed at 25% (where preferential tax rates are applicable to SMEs) and is paid on a monthly or quarterly basis. During the Annual CIT filing an annual reconciliation of Corporate Income Tax must be completed in order for the Chinese tax authorities to verify that all taxes are fully paid.
Because of discrepancies between Chinese accounting standards and Chinese tax law, the actual CIT taxable income may be different from the total profits based on the accounting standards. This means an adjustment on the provisional CIT filing during the year may be required. In case of deficient payment or overpayment, companies can apply for reimbursement or payment of supplementary tax.
Bear in mind that the deadline for the CIT filing is May 31st, and companies may be asked to provide additional documents by the authorities, which may extend the process of annual compliance. Please be informed that penalties are imposed on corporations that fail to abide the deadline schedule as prescribed by the authorities.
3. Annual Publication Report
Once the statutory audit report and annual CIT filing have been completed, foreign-invested enterprises will still need to proceed with publishing information related to the audit report, the CIT filing and other certificates on the Annual Publication Report.
Foreign-invested enterprises are required to submit this information at several government authorities such as the MOFCOM, AIC, SAFE and Finance Authority. This information needs to be provided and updated on an annual basis, normally per 31st June deadline. Depending on the business scope and district of the city in China where the company has been registered, differences may occur or additional documents may be required.
Who Should Do An Annual Audit?
- All companies officially in China are required to prepare year end processes.
- Foreign companies who have a subsidiary, a WFOE, a JV or a representative office in China.
- SMEs that generate revenue, have stakeholders or are financing projects in China.
- Companies that want to reduce risk and ensure compliance with local regulations in China.
Failure to Follow Annual Compliance Requirements
If a company fails to correctly submit annual reporting information at the correct time, they will be contacted by the business bureau and ordered to file the annual report. If after being ordered to perform the filing of the annual report, the company still does not comply, an official from the business buruea will visit the company, whereafter failure to comply will result in the enterprise being added to the Irregular Operations Catalogue and may be subject to a fine.
How Do You Carry Out An Annual Audit?
The annual audit in China and other relevant annual compliance procedures are crucially important for all companies in China and requires diligence and good coordination.
In addition, the annual compliance plays an important role for other operational considerations. For example, a foreign-invested enterprise can only distribute dividends after completing the annual CIT filing. Furthermore, the annual audit can aid with the identification of potential compliance issues concerning transfer pricing.
Together with our partner firms in the Moore group, we offer our clients fully integrated statutory audit support from a single source and with the quality that Moore is known for globally. Our services extend to the coordination between the auditor and client, preparation and review of documentation provided to the auditor as well as management of the audit timeline. Our partners are also experienced component auditors and therefore we support with consolidation and compliance with IFRS & IAS.
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