china company annual filing

China company tax filing
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In this article, we outline the steps for completing the annual compliance requirements in China.  China company tax filling and accounting.

Step 1: Prepare Audit Report

All FIEs (including wholly-foreign owned enterprises (WFOE), joint ventures (JV) and foreign-invested commercial enterprises (FICE)) are required to hire external accounting firms to conduct an annual audit of the company’s financial reports. The audit report must be signed by a China-qualified Certified Public Accountant. The objective of a statutory audit is to ensure that companies meet Chinese financial and accounting standards, including proper use of Chinese GAAP.

The requirements for the audit report vary by region. 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. Usually, accounting firms start preparing an annual audit report in January, right after the company has closed the previous year’s accounts. The audit procedure takes about two months, and the audit report should be completed before the end of April in order to meet the May 31 tax reconciliation deadline.

Step 2: Prepare Corporate Income Tax (CIT) Reconciliation

In China, CIT is paid on a monthly or quarterly basis in accordance with the figures shown in the accounting books of the company; companies are required to file CIT returns within 15 days from the end of the month or quarter. However, due to discrepancies between the accounting standards and tax laws in China, the actual CIT taxable income is usually different from the total profits shown in the accounting books. Meanwhile, CIT calculation should be in compliance with tax law, not the accounting standards. 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. Generally, the Annual CIT Reconciliation Report must include adjustment sheets to bridge the discrepancies between tax laws and accounting standards.

FIEs that conduct frequent transactions with related parties should also prepare an Annual Affiliated Transaction Report on transfer pricing issues as a supplementary document to the Annual CIT Reconciliation Report. For companies declaring losses of more than RMB5 million, an audit report conducted by an external accounting firm is required to be attached to the CIT Reconciliation Report. Local tax bureaus release a guideline on CIT reconciliation every year around March. Taxpayers should carefully study the guideline because the specific requirements can differ by both year and region.

Step 3: Annual Inspection

FIEs in China are required to undergo an annual cooperative inspection jointly conducted by several governmental departments of the State Council. These inspections are designed to ensure that FIEs conducting businesses in China are fulfilling the legal commitments they make to each of the departments. Each year from March to the end of June, the annual inspection is jointly hosted by the following governmental departments:

Ministry of Commerce (MOFCOM)
Ministry of Finance (MoF)
Administration of Industry and Commerce (AIC)
State Administration of Taxation (SAT)
State Administration of Foreign Exchange (SAFE)
Statistical Bureau

Certain parts of the cooperative annual inspection are just a formality, with the first 90 percent of annual compliance work involving annual reporting package preparation, and the last 10 percent involving submission at a one-stop service location where all relevant government departments check and approve the annual reporting package.

Note that the annual inspection required by the SAT is only a review of the tax registration certificate, and is different from the CIT reconciliation. The inspections of AIC and SAFE (see below) are usually more complicated than others and may require additional separate procedures being conducted. Regional variances also exist. WFOEs with branches should pay special attention to ensuring that their branches also undergo annual inspection.

The relevant documents required for the annual inspection are:

Annual inspection report
Audit report issued by external accounting firm
Financial statements of the previous year
Certificate of approval for FIEs
Business license
Capital verification report
Industry-specific license or permit
Financial registration certificate
Tax registration certificate
Other forms or documentation required by relevant government departments

Step 4: Profit Repatriation

Companies distributing profits should complete the reconciliation procedure in advance to leave sufficient time for shareholder companies to prepare for CIT compliance before the May 31 deadline. The submission of additional documents may also be required. In Shanghai, for example, a company should apply for a Letter of Notice for Profit Distribution of Domestic Enterprise issued by the local tax bureau after finalizing its CIT reconciliation. The company receiving the profits will need to attach this letter to its own CIT reconciliation report.

Previously, when remitting more than US$30,000 in funds abroad, banks required the provision of a tax clearance certificate to prove that the correct amount of taxes has been paid before the funds can be remitted abroad. However, this requirement was cancelled under the Announcement on Issues Concerning Tax Filings for Outbound Payments under Services Trade (Announcement 40) issued by SAFE in conjunction with the SAT in July 2013.

Under this records filing system, instead of having to apply for a tax payment certificate before they can make payments overseas, companies will only need to fill out a filing form and provide valid contracts or other relevant transaction documents (Chinese translation required) to the STB. The STB will affix a seal to the filing form, and companies will be able to remit funds outbound by submitting to banks the filing form and relevant transaction documents. Under the Guidelines for the Administration of Foreign Exchange under Service Trade and its detailed implementation regulations (Huifa [2013] No. 30, Guidelines) issued in conjunction with Announcement 40 by SAFE, such documents include:

Annual financial audit report issued by a CPA firm
Board resolution on profit distribution
Applicant’s most recent capital verification report

Verification of the documents and tax assessment will be conducted within 15 days after the STB receives these documents. Beijing STB explains that Announcement 40 does not change the tax withholding obligation, but merely simplifies the outbound payment procedure. Companies or individuals who are found to not have fulfilled their tax obligations or filing and registration requirements could face fines ranging from 50 percent to 500 percent of the unpaid tax.

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