AUDIT SEASON IS STARTING: Don´t underestimate Annual Audits in China

by Grace Shi

The deadline for the Annual Audit in China is on the 31^st of May. Although it seems there is still a long time until the deadline is due, there is an incredible huge amount of work that needs to be done before the annual audit reports can be handed in.

The deadline for the Annual Audit in China is on the 31^st of May. Although it seems there is still a long time until the deadline is due, there is an incredible huge amount of work that needs to be done before the annual audit reports can be handed in.

There are two reasons for which time should not be underestimated when preparing the annual audit and all required documents. First of all, the Chinese Tax Bureau takes the deadline serious and will not make any exceptions. Companies that can’t manage to hand in their audit report in time will definitely face fines. Second, the preparation of all documents is a very time consuming task. Additionally, the company has to assign an authorized CPA firm in advance to prepare and finish the annual audit report.

Law requires the audit to be done by a Certified Public Accountant (CPA) because this ensures the compliance of all tax regulations. This can be seen as an advantage for both – the Tax Bureau as well as the company itself, since not being in compliance will result in penalties. The amount of the fines lies between 10,000 and 30,000 RMB for RO’s and goes up to 200,000RMB for WFOEs. The second advantage of this requirement is the ensured tax efficiency for the company.

On the 31^st of May is the deadline for handing in the reports of the following three different audits: 1. Statutory Annual Audit 2. Annual Foreign Currency Audit and 3. Annual Tax Audit and Clearance.

Statutory Annual Audit

1. This is the general audit for which balance sheet, income statement and cash flow statement, prepared according to Chinese GAAP, are necessary. To simplify and shorten the whole audit process, it is recommended to maintain a proper bookkeeping throughout the year.

Annual Foreign Currency Audit:

1. This special audit is for the State Administration of Foreign Exchange (SAFE). Within this report the Foreign Investor’s Equity is displayed and analysed. However this currency audit can be filed by the enterprise itself. It is not necessary to get it done by an authorized CPA firm. However, Special Foreign Exchange regulations for this document apply.

Annual Tax Audit & Clearance

1. The purpose of this audit is to compute the taxable profit based on the company’s turnover and cost. This also includes a separate corporate income tax audit report for companies who generate more than 30,000,000 RMB turnover, more than 100,000 RMB losses or want to use the previous carry forwarded loss for the current year.

Although the annual audit seems like a burden, one should rather think of it as a “company health check”. The reports reveal the company’s performance and can be used to analyse the internal structure in regard to cost and tax Efficiency.

For further information you can also download our brochure Compliance Special Edition. If you require further information or have any questions regarding Audit in China, please contact: grace.shi@ecovis.com