How to manage tax risk in China

Companies, as well as private individuals, must manage their taxes in order to be able to identify and contain potential risks. The penalties for mistakes are harsh and fearsome. The Ecovis experts explain how tax risks can be managed in China.

The world of tax and audits in China not only involves the tax office. There is also a broad collaboration that includes the Ministry of Public Security, China Customs, the People’s Bank of China, the Supreme People’s Procuratorate and the State Administration of Foreign Exchange.

Risk prevention and control

Within a company, alongside the financial officer and legal representative, the shareholder(s), as well as those who write invoices and prepare the tax, are responsible for risk-prevention and control. To identify tax issues in a company, it is first necessary to understand how the tax audit procedure works.

In the context of big data, tax audit procedures follow a structured process. First, an electronic system automatically collects and analyses data, identifying potential tax risks. When issues are flagged by this system, the tax authority informs the taxpayer about these specific concerns. Following this notification, a tax audit or inspection is conducted to examine the taxpayer’s records in detail. Based on the findings, the taxpayer is required to file any outstanding taxes and pay late payment interest, if applicable. Finally, if the taxpayer disagrees with the audit result, they may seek administrative reconsideration of the decision.

Companies should ensure that all information on taxes and audits is consistent and logically linked. We can provide support with tax check-ups.

Pingwen Hu, Senior Partner and Certified Public Accountant, ECOVIS Ruide Certified Public Accountants Co., Ltd, Shanghai, China

How to identify potential tax problems

Based on our extensive experience, companies should:

• Evaluate their own operations: Assess whether there are any unusual business activities, and review the company’s growth and overall position within the industry (e.g., excessive profits or prolonged losses).
• Examine VAT invoices: Identify any discrepancies in input and output data, spot abnormal invoices, or note any inconsistencies between the goods received and invoiced amounts.
• Facilitate interdepartmental information sharing: Review information from various government departments and analyse bank statements alongside business data to ensure alignment and accuracy.

For further information please contact:

Pingwen Hu, Senior Partner and Certified Public Accountant, ECOVIS Ruide Certified Public Accountants Co., Ltd, Shanghai, China
Email: pingwen.hu@ecovis.cn