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Prepare well to improve your business

The annual compliance process in China

(PresseBox) (Munich, ) Plan ahead – to avoid headaches and improve your business
Due to new laws and regulations, 2012 was a year of change for foreign companies in China. During the annual compliance process, the Chinese authorities will check if you are in compliance with the requirements of your tax entity. But don’t look at it as just another burden on your company. Rather, it is a great chance to optimize your structure, save money and implement control mechanisms to avoid fraud. This article points out the main issues to consider for your annual compliance process in China.

1st level: Annual Audit Local Chinese GAAP

The first round in annual compliance is the annual audit. All foreign- invested enterprises (representative office, WFOE, joint venture or FICE) are required to prepare annual statements including balance sheets, income statements and cash flow statements for the annual audit, based on Chinese GAAP. The annual financial statements and the relevant accounting records need to be audited by a Chineselicensed CPA firm. Many problems occur due to incomplete monthly bookkeeping and accounting. Try to adjust your accounting before the audit.

International GAAP

International companies need consolidated financial statements for group consolidation. Therefore, the local Chinese entity should facilitate a special purpose audit of the financial statements in line with the International Standards on Auditing (ISA) by December 31, 2012. It should be prepared according to the internal accounting principles of headquarters (IFRS, US GAAP or HK GAAP). The results of this audit are reported in standard format or in a reporting package as defined by headquarters.

2nd level: Annual foreign currency audit and inspection

Every foreign enterprise in China needs to go through a “Foreign Currency Inspection” (FCI) for the period ending on December 31, 2012. This inspection is facilitated by an authorized CPA firm, and the findings are summarized in a report. This report is required for the annual inspection of the State Administration for Foreign Exchange (SAFE). Each company is responsible for preparing the Statement of Foreign Investors’ Equity of Foreign Invested Enterprise, according to the regulations of the State Administration of Foreign Exchange.

3rd level: Annual tax audit and clearances

According to the requirements of the tax authorities, each foreign entity must participate in an annual tax clearance. Its main component is the annual Corporate Income Tax clearance. The costs and profits are listed to evaluate taxable profit or loss. Outstanding tax liabilities must be cleared.

4th level: Annual combinative inspection

Each foreign entity must facilitate an annual combined audit from various authorities. These are the same authorities who approve the registration of the company (e.g. AIC, MOFCOM, Financial Bureau, Customs, Tax Authorities, etc.). Each of these authorities must confirm that the foreign company is in compliance. Upon relevant approvals, the foreign entity can proceed with its business in China.

Author
Richard Hoffmann, Partner Ecovis Beijing, China, richard.hoffmann@ecovis.com

ECOVIS AG Steuerberatungsgesellschaft

About Ecovis
Ecovis is a leading global consulting firm with its origins in Continental Europe. It has over 4000 staff operating in 40 countries. Its consulting focus and core competencies lie in the areas of tax consultation, auditing, legal advice and accounting and management consulting services. The particular strength of Ecovis is the combination of personal advice at a local level with the general expertise of an international and interdisciplinary network of professionals. Every Ecovis office can rely on qualified specialists in its back offices as well as on the specific industrial or national know-how of all the Ecovis experts worldwide. This diversified expertise provides clients with effective support, especially in the fields of international transactions and investments - from preparation in the client's native country to support in the target country. In its consulting work Ecovis concentrates mainly on mid-sized firms. Both nationally and internationally- from preparation in the client`s native country to support in the target country. In its consulting work Ecovis concentrates mainly on mid sized firms. Both nationally and internationally, its one-stop-shop concept ensures all-round support in legal, fiscal, managerial and administrative issues.

The name Ecovis, a combination of the terms economy and vision, express both its international character and its focus on the future and growth.