What might seem healthy and thriving to you might not be a healthy as it seems. If you own a business in China and want to know how healthy it is in regard to tax, where do you start? And what does it mean to have a healthy Chinese business? There are so many things at play that you probably didn’t even take into consideration.
Business owners are a unique and thorough type. Some might say they are narcissistic, but we prefer to say you have your finger right on the pulse. You are on top of your business and work tirelessly to make it succeed. Of course, you are obsessive about your company as that’s the only way to operate in the modern business world. So, why do you need a China company internal audit and tax health check? Let’s find out more?
The Basics
Checking the taxation health of your Chinese company is an integral part of ensuring future success. It’s a great way to safeguard the longevity of your business while ensuring you are keeping in line with domestic business protocols. Over the past several years, Chinese business authorities have begun to seriously enforce the collection of company and corporate taxes. If you have outstanding taxes, you can be fined up to five times more than that figure. The surcharges alone can reach 18% of the taxes owed per year. It’s a costly oversight to make.
Before we go any further, it’s only right that we calculate the risk management of failing to pay your business taxes on time. But what does it all really mean? What is the purpose and definition of China tax health checks?
Understanding the Purpose of Tax Health Checks
A China tax health check is essentially a process of internally auditing your own business to see if they adhere to Chinese tax regulations. It’s a review of all tax-related issues related to your business. The process is to identify risks or weaknesses in your company that arise from incorrect omissions that are directly linked to your accounts or company records. It’s also about finding any potential tax liabilities regarding your business.
The check/audit will report whether or not you are complying with Chinese regulations and tax laws. Please see the points below that will be an integral part of your China tax health check and why you need to perform one right away.
For Upcoming Tax Investigations
If you are expecting an upcoming tax investigation of your company accounts from the local tax regulatory body, performing an internal audit beforehand can save you some sleepless nights. By partaking in an internal tax health check, you are preparing properly for any pending or possible future investigation. The tax health check can assure you are currently paying the right amount of tax so you pass with flying colors.
Internal Control Processes
Your tax health check will help to conduct a full tax scan of your company on the internal control processes regarding paying taxes in China. The check can be either automatic or manual, and can then be used to set up a future tax plan that will take a proactive stance to manage your taxes going forward. If you are a relatively new company, this is a great way to understand your future tax projections.
In Preparation for Merges & Acquisitions
Are you currently in the process of merging with another company or acquiring another business under your umbrella? If so, performing a tax health check for due diligence is not just recommended, but an absolute necessity. Knowing your own company’s tax status before a merger or before acquiring another business is very important. You need to have your tax in check before you merge not only for you but also for your potential investors or current shareholders.
Absolute Clarity
If you want to ensure you can sleep better at night, it’s always good to have absolute clarity on the tax status of your business. This will also ensure that your tax returns will not have any wrong statements or estimates so things move swiftly and without any unexpected errors.
How Can Your Business Benefit from Audits?
It’s never easy to conform to pages of tax regulations that meander through vague terminology and legal jargon. If you’ve ever read official tax rules and regulations, they are hardly the easiest definitions to consume. It can be a nightmare to fully understand the procedures and processes you are expected to follow. You are a business owner, not a legal consultant. Here are some of the biggest benefits from performing a China tax health check:
- You can find out if your business is currently adhering to and complying with China’s tax
laws and regulations. - The report will highlight any potential issues relating to non-compliance so you can
make changes. - You can use the report to plan any corrective actions to fix current problems.
- The report can provide high-level solutions to fix any non-compliance issues.
- Identify the areas of your tax processes that need to be improved going forward to
improve your system.
What Tax Issues Do China Health Checks Focus on?
They always say that prevention is better than a cure and that is always true where paying your business taxes in China is concerned. If you are a foreign investment enterprise in China, you will be subject to lots of tax requirements. It’s a potential minefield you don’t want to be walking across without wearing mine-proof clothing if you know what I mean?
Below we have shortlisted some China tax requirements that foreign investment enterprises might need to follow. Because every business is different, you might not need to follow some of these, but your China tax health check will ensure you have all your ducks in line.
- Corporate income tax
- Real estate taxes
- Deep tax
- Business tax
- Withholding tax
- Stamp duty
- Personal income tax for employees
- VAT
- Customs tax and duty
- Consumption tax
- Land appreciation tax
Understanding Corporate Income Tax (CIT)
A China health check will focus on most forms of taxation. One of the most important taxes in business is the Corporate Income Tax (CIT). There are a couple of common mistakes that businesses make when they file their reports to the Chinese tax authorities. The two common mistakes are:
Be careful because there are some activities that you might not know are sales activities for business, so you might not account for that in regards to paying taxes. It’s very common for companies to miss reporting those activities when they file their CIT. We It’s also an easy mistake for a company when deducting all kinds of costs when they calculate the taxable income of the firm. Again, this might be an honest mistake, but that won’t exonerate you in the eyes of Chinese tax authorities. A good example would be when a firm makes some kind of loan agreement with a parent firm. In some cases, the interest expense of the loan might not be taken into account and might not get deducted because of varying limitations placed on interest rates by the tax laws.understand that the mistake is not out of anything sinister, but that’s your responsibility as a business owner to know that. A good example would be a company that decides to reward its employees by giving them something from the stock or inventory. In this instance, that action needs to be reported in your CIT report.
It’s also an easy mistake for a company when deducting all kinds of costs when they calculate the taxable income of the firm. Again, this might be an honest mistake, but that won’t exonerate you in the eyes of Chinese tax authorities. A good example would be when a firm makes some kind of loan agreement with a parent firm. In some cases, the interest expense of the loan might not be taken into account and might not get deducted because of varying limitations placed on interest rates by the tax laws.
Mistakes like the above two are easy ones to make, and they can slip through the net without a murmur. An internal audit or tax health check is in place to catch these potential issues before they evolve into real-world problems. You don’t want to be hit with massive fines because of mistakes that could easily be caught by an internal audit.
Do I Need an Internal Audit or China Tax Health Check?
If you are sensible and you want to sleep well at night, of course, you need to get a China tax health check. The audit is an effective tool to give you, your business, investors, and shareholders an in-depth overview of your current tax status. It will help you identify the problems early on and take the right corrective process moving forward.
As Chinese business markets rapidly evolve at breakneck speeds, it’s hard enough for an owner of a foreign investment enterprise to keep in line with the mountainous amounts of red tape and taxation regulations. The China tax health check is like having a tax expert on hand to give you friendly advice. Be tax compliant in China or it might cost you your business and your livelihood.
