Setting
up a business in China involves a lot of paperwork, as anyone who
has already done this will know. This though is the easy bit, maintaining
the legal entity you have set up starts from the moment you receive
your business license. There is no dormant status for companies in
China, once alive they are required to prepare accounts, complete
annual audits and file for taxes, even if nil filing when loss making.
Additionally, because companies are required to have a registered
office address and receipts to support, they have transactions from
day one as well. Maintaining a company can be a daunting task therefore
to any new business. This articles aims to provide an overview of
what is required and when it is requirement.
Accounting regulations
In
January 2001 the Ministry of Finance (MOF) introduced the Accounting
System for Business Enterprises (ASBE). The MOF intended the new System
adopted by all local large and medium sized enterprises and all foreign
invested enterprises (FIEs) in China except those in banking, insurance
other financial enterprises. The idea was to try and eliminating the
accounting distinctions based industries or on the form of business
enterprises that have existed in the past. The timetable for implementation
of this was staggered, with joint stock limited enterprises being
required to use it from 1st January 2001, all foreign enterprises
from 1st January 2002. ASBE was optional for small enterprises.
For
small-sized enterprises, either local or FIE, they are expected to
adopt "Accounting System for Small Business Enterprises"
(ASSBE) from 1st January 2005. However, if they have adopted ASBE,
they should not choose to adopt ASSBE. Small enterprises are defined
in terms of number of employees, turnover, total assets, etc. For
example, an industry entity with not more than 300 employees, annual
sales of RMB 30 million and total assets of RMB 40 million will be
classified as small enterprise.
The
good news was that ASBE brought the China accounting system much more
in line with International Financial Reporting Standards (IFRS). The
main problem with it though was that the Government did not change
the tax system, therefore creating in its wake a larger portion of
permanent adjustments. Significant however strides were made in July
2004, with the State Administration of Taxation (SAT) allowing the
following without prior approval:
1.Changing
method of depreciation: The straight-line depreciation method no
longer requires mandatory for prior approval Taxpayers no longer
need to obtain advance approval to elect to depreciate an acquired
used asset over its remaining life even though that period is shorter
than the minimum allowable period set under the rules. Previously
this was the only method allowable without prior approval. However,
taxpayers should report details of newly acquired assets, depreciation
method, reason, etc., for tax authority review after yearend. If
tax authority does not agree with the depreciation method, the tax
authority can do necessary adjustments.
2.
Bad debt expense deduction: As long as the requirements are met
to qualify as a bad debt expense (i.e. the debtor is bankrupt or
deceased, or the receivable has been outstanding for more than two
years), taxpayers are not required to obtain approval prior to claiming
a deduction. Taxpayers should provide detailed information to tax
authority's review when they do tax filing.
3.
Exemption on transfer of technology: Foreign companies and foreign
individuals are no longer required to apply for a business tax exemption
when transferring technology into China. Relevant documents should
be properly maintained for possible review from tax authority.
4. Spreading stock option gain over a six-month
period: Upon the exercise of stock options, if the amount of stock
option gain is relatively large, taxpayers may elect to spread the
amount of stock option gain over a six-month period for the purpose
of computing individual income tax, without submitting a request
for advance approval. Explanations on choosing this method should
be provided when tax return is filed.
Additionally,
approval requirements were also eliminated in eleven other areas,
including changing the inventory cost method, loss on an asset disposal,
changing the method of taxation of representative offices, enjoying
of an income tax exemption for the first two profit-making years by
qualified high-tech companies, management fees which are arms length
in nature, claiming deductions on various subsidies (i.e. rentals,
meals and other subsidies) against the taxable income of expatriates
when computing individual income tax and excluding the portion of
bonuses that are related to overseas employment from an expatriate's
taxable salary in China.
Audit
requirements in China
The
year-end of companies in China is set by the State and must be from
January 1 to December 31, regardless of that of the China company's
overseas parent. All foreign investment enterprises (FIEs) require
an audit and to submit their auditor's reports for year then ended
(together with other specified documents) to the relevant industrial
and commercial administrative bureau for the Annual Review by 30 April
each year. Any companies failing to do so may be penalized (i.e. in
the extreme case, may revoke their business license), it is possible
though to gain extensions with valid reason. The audit should be carried
out by a CPA firm, which is registered with relevant Chinese authorities,
who will then usually assist in filing various copies with the tax
bureau and Administration of Industry and Commerce for annual inspection
purposes.
Audited
financial statements are similar to those in other counties, required
an Auditor's report, Balance sheet, Profit and loss account, Cash
flow statement, and notes on the accounts, along with comparatives
for previous years. The audited accounts are to be in Chinese language,
however, FIEs may request an English translation of the financial
statements.
Foreign Currency Report
Companies
are required to engage a CPA to complete a foreign currency report
annually, which summarizes the foreign currency transactions during
the year. This filed with the State Administration of Foreign Exchange
by the end of April for the year past. FIE's will also come up against
SAFE when bringing funds into the country and sending funds out of
the country, though the later depends on the nature and size as to
whether SAFE approval is required.
Related Parties Transaction Report
This
is a new requirement with 2004 being the first year it is required
for completion. When related parties transactions (RPT) occur, the
taxpayer now has an obligation to submit a declaration form. The deadline
for this filing is the same as the annual audit and foreign currency
report, being the end of April for the year past.
Ministry of Statistics
Despite
having provided much of the same information already, The Ministry
of Statistics (MoS) has a package of forms for completion, requiring
much of the same information as provided for everyone else. MoS requires
these annually, however certain areas require monthly. Many firms
do not bother completing and the MoS is not the most diligent in chasing
or fining, however they are becoming more diligent in ensuring filing.
Tax
reporting and payment
There
are 13 types of Chinese tax applicable to FIE's. The major taxes applicable
to foreigners, "FIEs" and foreign enterprises ("FEs")
doing business in China are as follows:
Category |
Type |
Application
and filing Requirements |
Tax
on income |
Corporate
Income Tax ("CIT"):
15 ¨C 20% |
Provisional
payment quarterly within 15 days after the end of each quarter.
Final settlement within four months after the end of a year,
where an annual filing is required. |
Withholding
income tax ("WHT"):
10 ¨C 20% |
Charged on payments
to non-residents of China. Applicable to rental, royalty and other
income, as well as payments for services rendered in China where
the period is over that allowable by the respective taxation treaty. |
Individual
income tax ("IIT"):
0-45% |
Monthly basis for
local and expatriate employees, China income earning, within 7
days from month end. |
| Tax
on transactions (turnover tax) |
Value-added
tax
("VAT"):
13-17%
small company pays 6% on sales |
Monthly basis within
10 days after the end of month. Days basis of 3, 5, 10 or 15 days,
estimated instalments within 5 days after the end of period and
final settled within the first 10 days in next month. |
Consumption
tax ("CT"):
3-50% |
Luxury goods tax,
and levied on items such as consumer goods, including tobacco,
alcoholic beverages, ethyl alcohol, cosmetics, skin and hair care
products, jewellery, fireworks, etc. Payment is the same at with
VAT. |
Business
tax ("BT"):
3-20%, norm is 5% on services |
Payable monthly within
10 days after the end of each month, for a Representative Office,
payable on quarterly basis within 10 days |
Tax
on specific objective |
Land
appreciation tax:
30%
to 60%
|
Charged
on all gains realized from transfer of the real property and its
attachments, payable within 7 days after the contract issued. |
Tax
on resource |
Resources
tax
Rates varies according to type of resource |
Charged
on the natural resources per measurable unit of resource. Charged
on a monthly basis and should be paid within 10 days after the
end of month. As with VAT, it can also be levied on daily basis |
Tax
on property |
Urban real
estate tax: 1.2% of the original value with certain deduction
(10% to 30% is commonly offered by local governments) or 12% on
the rental value. |
A tax imposed
on the owners, users or custodians of houses and buildings. Payable
on a quarterly or semi-annual basis. |
Tax
on behaviour |
Vehicle
and vessel usage and license plate tax |
This is charged at a fixed rate either a yearly or quarterly
basis.
|
Motor vehicle
acquisition tax
10% on importation |
Paid within
60 days after obtained or imported date. |
| Stamp tax
0.005% to 0.1%. |
This is
charged on "specified documentation" such as contracts
and paid when occurred |
Tax
levied by the Customs |
Customs
dutiesRate varies by product |
Charged
on import or export goods. It is to be paid within 15 days after
the issuance of Customs Duties Tax Advise |
Tax
levied by finance department |
Deed tax:
3-5% |
Charged
on transfer of ownership of land use rights or real properties,
and is to be paid within 10 days after the transaction. |
The
responsibility for filing in China is with the tax payer. The tax
bureau does not send out tax returns as in many countries, it is for
the payer to collect the forms and file. The method of also filing
varies depending on location, with some cities using electronic filing
whilst others still require hand delivery. It is possible to obtain
extensions for some filing, such as yearend CIT, though application
for extension is not usually advisable as it can provide a red flag
to the authorities.
Keeping
of records
The
tax authority requires that accounting records and ledgers be set
up and kept properly and they require that details of the Accounting
System be filing with them. The chart of accounts is governed by the
Chinese accounting regulations and is the same of all companies. Accounts
must be prepared according to ASBE and not the regulations of headoffice.
The later have to be prepared separately. The accounting regulations
provide that the records must be in Chinese, however, practically,
the accounting software can be an English based software as long as
the supporting documentation such as journal vouchers are Chinese
and these can easily be cross referred back to the system. Actual
reporting to Government must be in Chinese and therefore the system
would need to be able to extract the information into the Chinese
reports, or have Chinese reports written to pull information for review.
Summary
Though
the red tape in China is burdensome, the key is to be organized, on
time and ensure proper supporting records should the taxman ever wish
to review. The regulations are continually changing, and generally
for the better, and overall life should become easier for foreign
firms going forward.
Russell
Brown, Managing Partner, LehmanBrown International Accountants
beijing@lehmanbrown.com
Telephone: +86 10 8532-1720
Fax: +86 10 6532-3270
This
article was published in the December 2004 edition of Eurobiz magazine.
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