I N F O. Compliance Special Edition 2017

Transcription

1 Compliance Special Edition 2017 Content: The Annual Compliance Review Important Deadlines and Dates Required Documents for the Annual Audit Annual Compliance Review for the WFOE/JV/FICE/RO Different Audit Types Within a survey of 10 consulting companies the German Institute for Service Quality (DISQ) announced ECOVIS as the Best Auditor for Medium- Sized Enterprises in Germany for 2013!

2 The Annual Compliance Review in China There have been several changes for foreign companies which are active in China due to the various newly introduced laws and regulations. For instance, the VAT reform has a big impact and positive effect on the tax burden of many companies as well as having a lot of practical implications. Also, foreign employees are now liable for social insurance. Therefore, every active business in China needs to draw more attention to the new regulations and be more in compliance with the relevant Chinese laws and regulations. However, it is not only about being in compliance. It is also equally important to be tax efficient. For many international companies it is easy to be tax efficient in their home country but it is not the same in China. One of the reasons is the continuously changing laws, that need to be adopted and the other reason is the lack of Chinese language skills and global thinking. We have seen many cases where companies are totally inefficient, have paid far too many taxes or have faced penalties for not being in compliance and have therefore struggled to operate their business in China. It is really key to have a smooth operation in place to make sure you are in compliance and tax efficient so that you can concentrate on what you do best: developing your business. As for the annual compliance review: it is not hard work but it needs to be done right. Do not see it only as an additional burden for your company. It is a great chance to do a small health check of your operations, to evaluate the tax burdens, the compliance status, the financial structure, the control mechanism etc. After a sophisticated annual audit you are in the position to optimize your structure in China. You can get ready for the upcoming year by implementing a better structure with better internal controls, tax optimizations, and financial transfer optimizations which will allow your business at the end to be more profitable. Below we will list some of the key elements for foreign companies, which help to facilitate the annual compliance review in China. We need to point out that there is one element that is of specific importance: TIME. It is very important to be aware of deadlines for the annual compliance review. Missing the deadline has serious consequences, such as additional costs, additional work and even more harsh penalties which arise when not processing the documents in time. Apart from the statutory requirements of doing an annual audit in China, it is also a good chance to review the company s financial processes. Are you doing it correctly? Are you paying taxes? Is your structure tax efficient? Do you make use of your international corporate structure to reduce costs? Do you have a control mechanism in place to avoid fraud? We can provide more value added advices regarding your tax status, internal control system, your corporate governance, your legal structure, etc. 2

3 Important Deadlines RO JV/WFOE/FICE Individual Deadline Annual audit Before the tax filing, the annual inspection and the group audit Annual tax filing May 31 st Annual FCI Filing September 30 th Annual Enterprise Information Publicity June 30 th Annual individual income tax declaration March 31 st 3

4 Required Documents for the Annual Audit I. Records: 1. Approvals on the tax preferential policy etc. 2. Declaration form of the enterprise income tax and annual liquidation report 3. List of employees salaries and payment list of the social insurance 4. Related insurance contracts of house, machine, and inventory 5. Updated rental contract if applicable II. Statements and Vouchers 1. Financial statements 2. Vouchers, sub-ledgers and general ledgers 3. Trial balance III. Financial Reporting 1. Balance sheet i. Cash and Bank balance 1. Bank statements and bank adjustment sheet ii. Accounts receivable, notes receivable and other receivables 1. Accounts receivable, other receivable lists (clients name, amount etc.) 2. Aging of the accounts receivable (including the explanation for the overdue receivables) 3. The receipt of the accounts receivable 4. Calculation for the bad debt of the accounts receivable and other receivables iii. Inventory 1. Detailed list of inventories as of 31 December 2. Aging of the inventory 3. Detailed list of slow-moving goods and the final confirmation results 4. Calculation of the provision on inventory 5. Related insurances on inventory files 6. Cost calculation sheet iv. Advanced payments, prepaid expenses and long-term prepaid expenses 1. List of such assets (related purchase contracts and invoices should be provided if the assets are materials) v. Fixed assets 1. Fixed assets list, related documents of valuable assets, such as invoices, contracts and certificates, etc. 4

5 2. Calculation of the depreciation and detailed list 3. Fixed assets related insurance files 4. Policy on the provision of fixed assets and related detailed list vi. Accounts payable, notes payable, advance payments by customer and other payable 1. List of such liabilities (name, amount etc.) 2. Aging of the accounts payable (including the explanation for the overdue payables) vii. Welfares payable 1. Detailed list, calculation and application range viii. Tax payable 1. List for the VAT, income tax and business tax 2. Declaration and payment documents ix. Loans 1. Loan contracts, interest calculation sheet and related payment record 2. Profit and Loss Account i. Income 1. Sales list by month and by product ii. Cost of Sales 1. Cost of Sales list by month and by product iii. Sales taxes, other operating result, selling expense, general and administration expense, finance expense, overhead, non-operating expense/income 1. Detailed lists of the above accounts (lists of selling expense, general and administration expense and overhead by month and items) 5

6 Annual Compliance Review for the WFOE/JV/FICE/RO 1 st level: Annual Audit Local Chinese GAAP The first round for the annual compliance review is the annual audit. All foreign invested companies whether Representative Office (RO), Wholly Foreign-Owned Enterprise (WFOE), Joint Venture (JV), and Foreign-Invested Commercial Enterprise (FICE), are required to prepare annual statements including balance sheet, income statement, and cash flow statement for the annual audit based on the Chinese GAAP. The annual financial statements and the relevant accounting records need to be audited by a Chinese licensed CPA firm. As you are running an international company in China, it is suggested to use a Chinese audit firm with international experience and which has a proven record in abiding by international quality standards. Only a CPA firm with international experience can provide you with a platform for an international financial structure. We have seen many problems arising during the annual audit. This is mostly the result of foreign companies in China underestimating the importance of a good monthly bookkeeping and accounting. The following points are the key issues, which CPA firms will have to pay a lot of attention to and keep an eye on audit adjustments which may arise from them: a. Sales and cost of goods (COGS) recognition In some cases, the finished product or merchandise has been delivered and the sales conditions have been fulfilled, but the sales and cost have not been recognized in the financial and tax report. As a result, the sales and COGS would be understated, and VAT/CIT payment would be delayed. That will lead the lead to tax surcharges and penalties. b. Cost calculation Certain companies have not adopted the correct cost calculation method. For instance the manufacturing costs have not been properly allocated into each product, the bill of material (BOM) has not been correctly defined, the unit price of the material has not been used correctly, etc. All these measures will lead to the wrong cost calculation. c. Evaluation of Inventory The evaluation of inventory is the key issue during the annual closing and audit procedure. Regarding the slow-moving inventory the proper devaluation should be considered according to the net realized value or other provision methods. d. Stocktaking of Inventory and Fixed Assets The existence and status of the inventory and fixed assets need to be checked during the annual closing. An overall stocktaking needs to be considered by the company and the auditor will make sample checks. The key purpose is to ensure the ending quantity and quality of the inventory and fixed assets. e. Proper expenses accrued According to the accounting policy, the relevant accrued expenses should be considered and recorded regularly in the periodical reporting to reflect the correct operating result. f. Deferred tax calculation Deferred tax calculation is a complicated process and it is sometimes overlooked by the company. In particular in China, there are many temporary and permanent differences between the accounting and the tax result. Therefore, the company needs to pay more attention to make the proper deferred tax calculation. 6

7 International GAAP For international companies the consolidated financial statements will be needed for the purpose of group consolidation. Therefore, the local WOFE/JV will need a special purpose audit of the financial statements as per December 31 st in line with the International Standards on Auditing (ISA). Moreover, the financial statements need to be prepared according to the internal accounting principles of the headquarters (according to IFRS, German-GAAP (HGB), US-GAAP, or HK-GAAP). The results of this audit will be reported in the standard format or within a reporting package as defined by the headquarters. 2 nd level: Annual Foreign Currency Filing The Foreign Currency Inspection (FCI) as of the period ending December 31 st doesn t need to be performed by an authorized CPA firms. The company can do the filing by itself. This report is necessary for the company to undergo the annual inspection by the State Administration for Foreign Exchange (SAFE) as required by the foreign exchange regulations in China. The responsibility of the company s management is to prepare, factually and completely according to the regulations of the SAFE, the Statement of Foreign Investors Equity of the foreign invested company. The FCI report will verify the Statement of Foreign Investors Equity of the company and confirm the accordance with the relevant regulations promulgated by the SAFE. 3 rd level: Annual Tax Audit and Clearance According to the requirements of the tax authorities, each foreign entity shall participate in an annual tax clearance. We need to draw your attention to the fact that taxpayers, whose Corporate Income Tax (CIT) is in the form of an audit collection and one of the following situations occurs, are required to submit a tax audit report: 1. Loss of corporate assets 2. Real Estate corporation annual CIT filing Taxpayers are required to submit a tax audit report if one of the following situations occurs: 1. Loss in the current year exceeds RMB 100, Making up for losses in the current year 3. Annual turnover exceeds RMB 30,000,000 It mainly includes the annual CIT clearance. The costs and profits will be listed to evaluate the taxable profit. If the CPA firm finds out that not all the taxes are paid as needed, the outstanding tax liabilities must be cleared. However, it is suggested to talk with the tax authorities about the amount and payment deadline if the difference can be justified. 4 th level: Report of Enterprise Information Publicity Each foreign company shall file a report of Enterprise Information Publicity. This is given to the same authorities that have approved 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 with its business scope and its operation and financial status etc. According to the newly issued Order of the State Council of the People's Republic of China No.654, all enterprises should submit the annual report for the previous year to the industrial and commercial administrative department via the enterprise credit information publicity system and publicize the same to the public. The report includes the confirming documents and the audit report. All of the credit records are public information and it is the responsibility of all enterprises to insure correctness of such information. If there is any non-correct record, relative penalty will be imposed. 7

8 A network in over 60 Countries ECOVIS Beijing is your local expert in China ECOVIS R&G Consulting Ltd. (Beijing) Richard Hoffmann Partner Grace Shi Partner China Desk in Germany Beijing Office Phone +49 (0) Phone +86 (0) (806) Mobile Mobile +86 (0) Mobile Follow Us on WeChat Internet Address German Centre Beijing DRC Liangmaqiao Address Lenaustrasse 12, Diplomatic Office Building, Tower D1, Heidelberg, Germany Office 1105, No. 19 Dongfang East Road, Chaoyang District, Beijing, PR China About ECOVIS R&G Consulting Ltd. ECOVIS is a leading global consulting firm originating from Germany. It has over 4,500 professionals in more than 50 countries. Its consulting focus and core competencies lie in the area of tax consulting, accounting & auditing, and legal advice. Furthermore, ECOVIS has been announced the best auditor for medium-sized enterprises in Germany. Our team at ECOVIS R&G Consulting Ltd. Beijing consists of highly qualified and experienced international and Chinese professionals, including Certified Public Accountants (CPA), Certified Tax Agents (CTA), and Attorneys at Law (LL.M.). Our expertise and competences ensures all around professional service for our international clients. As needed by clients our international staff speaks Chinese (Mandarin), English, and German. A member of ECOVIS International tax advisors accountants auditors lawyers in Australia, Argentina, Austria, Belarus, Belgium, Bulgaria, China, Colombia, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Great Britain, Greece, Hong Kong, Hungary, India, Indonesia, Ireland, Italy, Japan, Republic of Korea, Latvia, Lichtenstein, Lithuania, Luxembourg, Republic of Macedonia, Malaysia, Malta, Mexico, Netherlands, Norway, Poland, Portugal, Qatar, Romania, Russia, Serbia, Singapore, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Tunisia, Turkey, Ukraine, USA (associated partners) and Vietnam. ECOVIS International is a Swiss association. Each Ecovis Member Firm is an independent legal entity in its own country and is only liable for its own acts or omissions, not those of any other entity. ECOVIS R&G Consulting Ltd. (BJ) is a Chinese Member Firm of Ecovis International. Disclaimer The information provided in this brochure is of general nature, purely informative and does not address any individual or certain entity. We always strive to provide the most accurate and timely information but due to the nature of information we cannot guarantee it is accurate as of the date and know any future implications. Without professional advice and consultation the information shall not be used for decision making or be the decisive factor for any actions.