At the end of each fiscal year on December 31, every company in China is required to complete the annual compliance procedures. The requirements are set by different government authorities to make sure companies are in good standing, and all taxes have been properly reported and paid up. Hence, it’s important to fully complete the annual compliance requirements before the deadlines.
The annual compliance process consists of 3 parts:
Every company needs to hire a certified China CPA firm to audit its annual financial report. This audit report should contain auditor’s opinion on whether the financial statements reflect a true and fair view of the financial position, operating results and cash flow in all material aspects. It’s also to ensure that the company meets Chinese financial and accounting standards, including proper use of Chinese GAAP.
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. Generally, it takes 2 months to compete the audit process and issue the report.
Annual Corporate Income Tax Filling
Companies file and pay Corporate Income Tax (CIT) on a monthly or quarterly basis per the numbers shown on the financial statement. Chinese tax laws regulated how CIT should be calculated, the calculation can be different from the numbers on the financial statement which is based on the accounting standard. Hence, the tax authority requires companies to submit an Annual CIT Reconciliation Report after 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 includes adjustment sheets to bridge the discrepancies between tax laws and accounting standards.
The deadline for the CIT filing is May 31, and companies may be asked to provide additional documents by the authorities, which may extend the process of annual compliance.
Annual Joint Inspection
After the Annual audit and annual tax filling have been completed, companies are required to publish information related to audit report, CIT filling and companies’ certificates and licenses to an online company registry database called Annual Publication Report. Several government authorities such as the Ministry of Commerce (MOFCOM), Administration of Industry and Commerce(AIC), State Administration of Foreign Exchange (SAFE) and Finance Authority need this information to be updated on a yearly basis. Since most of the information can be found in the first 2 steps of the annual compliance, many people think the annual joint inspection is just a formality. The deadline of the inspection is June 31.
Other Annual Issues
For companies that require special licenses in order to carry out their business, licenses such as environmental report, food and beverage distribution license; the renewal date on these special licenses need to be remembered. Companies have frequent transactions with related parties should prepare an Annual Affiliated Transaction Report on transfer pricing issues as a supplementary document to the Annual CIT Reconciliation Report.
Companies plan to distribute profits to overseas parent entities are eligible to do so after the Annual tax filling is completed. There are additional documents to be prepared showing business substance of the profits distribution, and this process will be monitored by the Foreign Exchange Control (SAFE).