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Accounting practices in China : profit tax Accounting practices in China : profit tax(0)

The Chinese Tax Bureau has different levels of scrutiny for different types of businesses. Some they monitor more than others. With China investment running apace ? the State Administration of Tax can?t keep up. So they prioritize and do the best they can. Who is under category one scrutiny ? You guessed it, those foreign investors.

If you are a foreign national or operating a foreign invested enterprise in China, you are under the highest level of scrutiny by the tax bureau. Especially if you are running a significant investment from which tax revenues are anticipated to be generated.

Next in line come listed companies. Third come Chinese domestic enterprises, and lastly, State Owned Enterprises. Well, they?re run by the State and are run properly of course, because they?re government owned. So that?s all right then.

Render Unto Caesar Or Get Fined

If you try and evade tax in China, or operate a business that is out of compliance (which usually means manipulation of tax revenues) then you will get caught and you will get into trouble. It is not a matter of if; it is a matter of when. Would you like to explain to your board why taxes were paid late and not only that, the China tax bureau want 5 times that amount due in late payment penalties as well ?

Foreign Company Tax Treatment vs. Chinese Company Tax Treatment

There are inequalities here too, and your manager may be used to the Chinese benefits of these, again causing cultural difficulties. As we have seen, foreign investors in China are at the highest level of scrutiny and are expected to pay everything that is due according to the law. There are legitimate ways to reduce tax exposure, imaginative transfer pricing, use of chargeable expenses from your parent and so on. But the tax bureau want you, and they want their money. After all, unlike Chinese domestic companies, you lucky foreigners have been able to obtain tax incentives ? 15% profits tax ceiling if located in a free trade zone (off limits to local companies) and tax holidays of usually five years (off limits to local companies). So it?s hardly surprising they want to get something out of you.

However, it?s not necessarily like that for Chinese companies. While they may not be able to access the low tax thresholds or holidays, they can obtain benefits in other ways.

Firstly, they may be able to negotiate a deal with the local tax bureau for payment of a fixed amount of tax every month or year. That saves the tax bureau the problem of having to deal with all those pesky audits and have to review them all. Which is great when you?re stretched, you just can?t get the staff these days?so often, deals are done for a fixed tax return. Obviously these are not entirely at the real level of tax that would actually be due if the business was properly audited and declared everything. We estimate instead of the 33% collection that should be due on profits from Chinese companies, many actually contribute @ 5%.

Which is a point to note if the SAT wish to widen their tax collection base.

To know more, the whole issue is available (after a free subscription) on China Briefing website with others archives
For more information on China’s legal and tax issues or to ask for professional advices in related matters, please write to

Common accounting practices in China : VAT Common accounting practices in China : VAT(0)

VAT is a liability to the tax bureau within a month of the sales invoice being issued. Typically 17% of the sales total, it is supposed to be settled at each month end. Fair enough. However ? when in China does anyone pay within 30 days ? Receivables run into months. There is risk of bad debt. So ? the mere fact of incurring a VAT liability means an immediate reaction to this ? often resulting in the following behavior:

1) Goods being shipped / delivered with no supporting invoices
2) Inventory discrepancies

So you are already out of whack between recorded sales and inventory management just there. Then, let?s assume payment for the goods is received in stages rather than immediate settlement, as is common in China with many businesses trying to cover up operational inefficiencies through manipulating cash flow. There is STILL a reluctance to issue the invoice and acquire the full VAT burden as full payment for the goods has yet to be received.

Common practice therefore is for the Accounting Manager, or General Manager, to open a private bank account, and for the customer?s money to be transferred to this account, instead of the company account. When the total amount of receivables has finally been transferred ? the manager then issues the official company invoice to the customer and transfers the monies in his accounts to the company (or should do), who can then in turn settle the VAT portion at the month end without risk. So ? here we uncover a quandary. Is this fraud ? Is it understandable? Does it cause financial / stock control problems? Does it cause audit problems? Is it in compliance ?

When assessing, either your own internal financial controls, or certainly when conducting due diligence on a Chinese business, the likelihood of uncovering such activity is extremely high. So ? what are the risks ?

VAT Cash Flow Risk versus Late Payment Risk

If you invoice upon delivery ? you either get in compliance with the tax regulations and settle at the month end ? and then swallow that burden until the client pays, or you delay payment of VAT. That carries the risk of late payment penalties. Or you enact the scenario above. These can be categorized:

VAT cash flow
I fund the tax bureau 17% until I can collect on the debt in full.

VAT late payment
I delay payment until the client settles. I risk getting into trouble and incurring late payment fines of up to a maximum of 5 times the amount due, plus the original VAT amount.

Chinese style management
I incorporate the system above to minimize 1 and 2, but create financial reporting and audit problems in doing so.

So ? now we begin to see the difficulties of being in compliance in China ? as well as start to understand some of the rationale behind Chinese style management accounting.

Next :
Common accounting practices in China : Profits tax

To know more, the whole issue is available (after a free subscription) on China Briefing website with others archives
For more information on China’s legal and tax issues or to ask for professional advices in related matters, please write to

Cultural differences in understanding chinese financial reporting Cultural differences in understanding chinese financial reporting(0)

In order to understand and appreciate the difficulties and problems international businesses face when hiring, managing, or acquiring financial reporting personnel in their China operations, it is important to be able to understand the differing backgrounds and circumstances in operating financial management systems between international reporting standards and those of China.

Although the finger of suspicion may fall upon an errant manager in terms of what may to the inexperienced observer be an obvious case of fraud, it is not always as clear cut as this. Corrupt staff do of course exist ? we will point out how and why the Chinese system produces this tendency. However, due to inefficiencies within China?s own financial reporting infrastructure, errant staff may also have been trying to legitimately assist the foreign investor by treading around some of China?s ineffective ? and in some cases entirely unhelpful ? tax and reporting regulations and laws that actively promote non-compliance. You need to understand the differences between the two.

Then there is incompetence, or the assumption that ?Chinese staff know their way around the China system?. They may well do. But if that system itself is out of compliance, what chance does your staff have of being able to protect your business from fraud, poor management, financial and audit problems ?

In this article we explore the intangible aspects of financial management, risk control and compliance issues, pertinent to both foreign invested enterprises, the due diligence assessments of Chinese operated companies, and deal with compliance issues.

Chinese Management Personnel

China is a developing country, and that impacts on many aspects of business, including the standards of staff. Although financial personnel may hold Chinese qualifications, this is not necessarily an indicator of awareness or experience in handling compliance issues for international companies. Financial managers in China, if qualified, (and they should be as a minimum) also need assistance, understanding, guidance and management from the foreign investor ? you ? if they are to be able to learn to appreciate their job function fully and to be able to report to the standards you expect. If this support is not forthcoming, you are exposing yourself to two major risks:

  1. Fraudulent behavior
  2. Erosion of your financial compliance standards

This is not to say that Chinese staff are bad. They are not. However they do require guidance and management controls to set them ? and your business ? on the right path towards financial and operational transparency. Why does this knowledge gap ? which can also be termed a cultural divide – exist ?

Next :
Common accounting practices in China : VAT

To know more, the whole issue is available (after a free subscription) on China Briefing website with others archives
For more information on China’s legal and tax issues or to ask for professional advices in related matters, please write to

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