According to Chinese law, all Foreign-Invested Enterprises in China must undergo an annual audit at the end of the financial year (which in China always ends by 31 December). This means that Wholly Foreign-Owned Enterprises (WFOE), Joint Ventures (JV) and Representative Offices (RO) all have to complete the annual audit and other relevant annual compliance procedures as set out by the Chinese government.
The annual statutory requirements in China can be separated into three 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.
Annual compliance in China is not only important because it is required by law, but also 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. Therefore, in the remainder of this article we will elaborate on China's annual statutory requirements and important considerations for foreign enterprises.
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.
Taking into account the full implementation of the Chinese Corporate Social Credit System, annual compliance in China is more important than ever. 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.
Although we are not a CPA firm, together with our partner firms 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.
If you require more information or need support with annual compliance in China, you can read more about our Assurance Services or contact us at email@example.com.
Note: this article is an update to our article titled "Annual Compliance in China" from December 2017 to provide an updated reflection regarding annual statutory requirements in China.