Audit Time

With the beginning of the year, Chinese authorities request for long (and often very unclear) list of legal and tax compliance procedures to be completed. It is, in fact, time for foreign-invested businesses in China to start thinking about preparing for the annual inspection that takes place each year between March 1 and June 30. Interestingly enough, the procedure has to follow the annual audit of the enterprise itself which, from the other side, is due by May 31st.

It does not take much to understand how easy it can be for companies to find themselves in delay and eventually out of compliance. The risk with the above situation is that although all the procedures have to follow a very strict path, most of the authorities do not make any effort to communicate to each other.

The “annual inspection” refers to examination of enterprises jointly conducted by relevant government departments, usually seven of them. The departments involved may vary depending on the location in which the enterprise is located, but in general they are the following:

Ministry of Commerce (MOFCOM)
Administration of Industry and Commerce (AIC)
Statistics Bureau
Finance Bureau
Tax Bureau
Administration of Foreign Exchange (AFE)
Customs

The examination is designed to ensure that foreign-invested enterprises (FIEs) conduct business in compliance with legal requirements and involves submitting the documents below to the authorities for checking and renewal. Some of these documents are required by more than one department and in multiple copies. Here is a list of such documents:
Annual (cooperative examination) report
Approval certificates of FIEs
Business license duplicate
Capital verification report
Tax registration certificate duplicate
Finance registration certificate duplicate
Audit report issued by CPA firm
Audit report of foreign currency issued by CPA firm
Annual financial statement (full set) of the business
Annual financial report
Statistical registration certificate
Customs declaration registration certificate
Foreign currency registration certificate of FIEs
For enterprises in encouraged industries, photocopy of encouraged project confirmation certificate
For advanced technology enterprises and export enterprises, photocopies of certificates for these two kinds of enterprises

Examination procedure
To begin the official procedure, companies should log onto the online annual inspection system website (for many cities/provinces, this website is www.lhnj.gov.cn) and register and fill out the necessary information. After that, a preliminary annual inspection will be conducted online. If the company passes this preliminary inspection, it can print out the relevant materials and submit them together with the above required documentation to a joint inspection location by early June to finalize the procedure. At the end of the inspection, an annual inspection seal will be affixed on the business license duplicate of the enterprise.
The procedures and requirements can vary depending on the region.

Representative Offices
While ROs are exempt from annual cooperative examinations, starting from 2011, ROs are also required to submit an annual report between March 1 and June 30 every year providing information on the legal status and standing information of the headquarters overseas, ongoing business activities of the RO, and an audited expenses report. The registration authorities will issue fines if the reports are issued late, or if they include false information. Fraud may also lead to license revocation.

QUESTION:
Dear Sir,
With regards to calculating individual income tax in China, what is considered as “taxable income” and what is non-taxable?

ANSWER:
For IIT purposes, “taxable income” refers to “wages, salaries, bonuses, year-end bonus, profit shares, allowances or subsidies or other income related to job or employment.”

Certain employment benefits for foreign individuals can be specifically treated as not being taxable under China’s IIT Law if certain criteria can be met. These include (with supporting invoices where applicable):

• Employee housing costs
• Reasonable home leave fares of two trips per annum for the employee
• Reasonable employee relocation and moving costs
• Reasonable reimbursement of certain meals, laundry, language training costs and children’s education expenses in China

// Dezan Shira & Associates is a specialist foreign direct investment practice, providing business advisory, tax, accounting, payroll and due diligence services to multinationals investing in China, Hong Kong, India, Singapore, and Vietnam. Established in 1992, the firm is a leading regional practice in Asia with twenty offices in five jurisdictions, employing over 170 business advisory and tax professionals.

//To contact the firm please email rosario.dimaggio@dezshira.com or visit www.dezshira.com.