Companies operating in China are obliged to file annual audit reports, following three key steps. Getting things right is absolutely crucial, and that is why we’ve assembled detailed answers to the most frequently asked questions. From deadlines and requirements to tips and best practices, we’ve covered just about everything you need to know.
Who is required to submit the annual audit report in China?
Despite it being clearly stated in China’s Company Law, in some cities a company will not be required to submit the annual audit report. However, the accountants of the company, either in-house or outsourced, will still need to confirm they completed such a report during the annual reporting process with local tax authorities. Therefore, we strongly recommend that you conduct a proper annual audit report. According to the Company’s Law, failing to conduct this report can result in fines or even a revoked business license. It can also affect your company’s credit scoring in the national credit system, which, in turn, will affect your ability to do business in China.
What are the important steps and procedures required for foreign company compliance with China’s annual audit reporting?
Rules and regulations may vary between cities and provinces, but the main three processes to follow are: 1) Submitting the annual audit report by the end of April. 2) Filing the annual tax reconciliation report by the end of May. 3) Reporting to the relevant government bureaus by the end of June.
Foreign-owned entities in China, either WFOE or rep offices, are required to follow the above steps within the mentioned time frame.
What should be included in the annual audit report for foreign-owned companies in China?
The annual audit report in China must be prepared after the end of the fiscal year and completed before the end of April of the following year. The report should include a balance sheet, an income statement, a cash flow statement, a statement of change in equity, and a supplementary statement of financial indicators. It should be prepared by a qualified Chinese accounting agency and signed by two qualified CPAs.
What is the CIT reconciliation in China?
The Company Income Tax (CIT) reconciliation report, or the annual CIT filing, is part of the annual audit process any company doing business in China must submit before May 31st of the following fiscal year. As a general practice, companies operating in China are required to pay CIT on a monthly or quarterly basis. However, any CFO of a global company with a local entity in China should know that due to differences/discrepancies between China’s accounting standards and local tax laws, the actual taxable income usually differs from the total profit shown in the accounting books. This, of course, complicates the entire accounting procedure and requires proper local knowledge of how to comply with both accounting standards and tax laws in China.
China’s State Tax Authorities (STA) require companies to submit the annual CIT reconciliation five months after the end of the fiscal year to review and determine if all tax liabilities have been paid successfully. The good news is that this process does not always result in the company paying more tax, but with reimbursement for tax overpayment (may the odds be with you). Make sure you keep your books, year-out CIT tax payments and reports in check to avoid unwanted outcomes.
Who should file for CIT reconciliation in China?
All companies operating in China, whether engaged in production, service, or trading operations, including in the pilot stages, must comply with the annual CIT reconciliation process. This rule applies regardless of whether the company makes a profit or is in the process of closing down. Foreign-owned companies doing business in China might be able to enjoy preferential tax deductions due to the international nature of their business or the degree of usage of their registered capital.
What is the annual reporting process for foreign-owned companies in China?
The annual reporting process is the last and third step in the overall annual audit that companies doing business in China should conduct after the fiscal year has ended. This step, which includes reporting to multiple bureaus, should be completed before the end of June of the following year. The main goal of this process is to ensure that all company information is up-to-date at each government department, according to the company’s relevant business and operational scopes.
Starting in 2020, this process was made more efficient, and companies can now submit one report to the National Public Credit Information System (www.gsxt.gov.cn) instead of filing multiple reports. This upgrade was even given a memorable name – the “many-in-one” reporting.
How can companies keep up with changes in China’s annual audit process regulations?
If there is one thing companies doing business in China should bear in mind, it is the constant change in local and national level regulations. To keep up with the changes and ensure your WFOE accounting books and tax reports comply with local regulations, you should rely on a local accountant and not attempt to run things abroad. You should also keep a leeway for decision making and cashflow, to properly manage your local China entity. Sometimes, hiring your local in-house accountant isn’t enough either, as they might not have sufficient knowledge to advise in tax planning. Therefore, the recommendation is to hire a third-party accounting agency or tax consultancy to cover all your bases. Read more about Tax Incentives in China.
Which annual audits are required in China?
According to China’s Company Law, every company operating/doing business in China should conduct an annual audit. The audit has three steps – the Annual Audit report (based on the accounting books), the Company Income Tax (CIT) reconciliation report, and reporting to the relevant government bureaus (which can now be submitted as the “many-in-one” report). Companies may choose to conduct additional annual procedures such as operational audits, supply chain audits, IT and systems audits, data-compliance audits, and production audits. While these audits are not obliged by law, they help promote a clean and profitable business in China.
Read more about Operational Audit in China
If you’re running a foreign-owned company in China, we hope we’ve succeeded in providing you with essential knowledge about financial audits and reporting compliance. For more information, we invite you to check out our website’s blog and Financial Regulations Guide for Foreign Companies in China.
For assistance with your company’s financial management and accounting in China – or your sales operation in China – please get in touch with our experts.
