[ By the Dezan Shira & Associates Corporate Accounting Services team ]
All foreign invested enterprises (FIEs) are required to prepare annual financial statements, including balance sheets and income statements for their annual Chinese audit. Such accounts must be in accordance with the Chinese “Accounting Standards for Business Enterprises” – there are now no differences between standards for domestic and foreign enterprises. FIEs including their legally responsible persons, must take full responsibility for the truthfulness, legitimacy and completeness of these financial statements.
China uses a calendar fiscal year to impose statutory audits, so those for 2006 are nearly due and must be filed by April 2007 at the latest. So you have about three months to get everything prepared, organized, audited and presented to the government - the clock is ticking !
These statements will be used for calculating the FIE’s taxable and distributable profit. Thus, an annual audit by a firm of Certified Public Accountants registered in the PRC is required under Chinese law.
FOREIGN INVESTED ENTERPRISE ANNUAL AUDIT REQUIREMENTS 2007
AUDIT REQUIREMENTS FOR WHOLLY FOREIGN OWNED ENTERPRISES, FOREIGN INVESTED COMMERCIAL ENTERPRISES AND JOINT VENTURES IN CHINA
[ By Edward Ma, Manager, Dezan Shira & Associates Beijing office ]
Broadly, the audit system for foreign businesses in China operates as described below, apart from some minor regional differences in audit practice for WFOEs and Joint Ventures that we will identify.
National Audit Principles
In China, the following audit requirements exist :
- submission of the Audited Financial Report
- the Foreign Exchange Audit Report
- the Annual Report
These need to be prepared and submitted to seven different government departments, namely the Bureau of Foreign Trade and Economic Co-operation (BOFTEC), the Financial Bureau, Customs & Excise, the State Administration of Taxation, the local tax bureau, the Administration of Industry and Commerce (AIC), and the State Administration of Foreign Exchange (SAFE).
FIEs may also need to submit to both the national tax bureau and local tax bureau the Annual Taxation Consolidation Reporting Package, authorised by a CPA firm by the end of April 2007. In this reporting package, a CPA firm shall verify all the taxes including VAT, Business Tax, Consumption Tax, Foreign Enterprise Income Tax (FEIT), and other taxes on the basis of the audit result.
The FEIT is obviously the most important issue to be disclosed in this report. The related taxable elements, and in particular items involved in FEIT such as income, cost and expenses, are specified in detail, while the auditing firm shall make the FEIT reconciliation between financial profit and taxable profit in accordance with PRC FEIT regulations.
If the audited taxes are different from the taxes paid by the FIE, the FIE shall discuss the variation with the tax bureau. For example, should the audited tax figure be lower than the figure paid, the FIE will need to apply for a tax rebate or tax reduction for the fiscal year in question. Accordingly; should the audited tax figure be higher than the paid FEIT, once the FIE submits the report, it would have to pay the balance due to the tax bureau. Your auditors should be competent to handle such rebate issues.
Additionally, there are some regional reporting variations.
FIEs in Shenzhen
Shenzhen FIEs are exempted from the requirement of providing an additional Annual Tax Final Declaration Report authorised by a local CPA firm to tax bureaus, although authorities in other Pearl River Delta cities do require it.
And similar to the situation in Shanghai, FIEs in Shenzhen need to complete the annual audit and obtain two auditor reports, a general one and one addressing foreign currency issues. Only after the local CPA firm has performed the audit for your FIE can you submit the documents to the seven government authorities. All submissions should be completed before the end of May 2007.
Furthermore, as part of year end closing formalities, FIEs also need to complete the final EIT declaration and final VAT “exemption, reduction, refund” declaration in order to satisfy the tax bureau’s requirements.
