China’s Annual Audit Regulations

All foreign invested enterprises in China 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 in China, whether they be foreign or domestic.

Foreign invested enterprises, including their legally responsible persons, must take full responsibility for the truthfulness, legitimacy and completeness of these financial statements. These documents must be completed ahead of the submission of consolidated accounts for tax purposes by the end of April every year, for the financial calendar year ending the previous December 31.

These statements will be used for computing the FIE's taxable and distributable profit. Accordingly, an annual audit by a firm of certified public accountants registered in China is required under Chinese law. In this issue of China Briefing, we take a look at the various audit requirements that FIEs need to fulfill, examine the corporate tax considerations that must be taken, and explain the individual income tax issues that affect foreigners working and living in the People's Republic of China

National audit documentation

In China, the following documents must be submitted:

• 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 Cooperation (BOFTEC), the Financial Bureau, Customs and Excise, the State Administration of Taxation (SAT), 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, authorized by a CPA firm by the end of April 2010. In this reporting package, a CPA firm shall verify all the taxes including value-added tax, business tax, consumption tax, corporate income tax and other taxes on the basis of the audit result.

Corporate income tax is obviously the most important issue to be disclosed in this report. The related taxable elements, and in particular items involved in CIT such as income, cost and expenses, are specified in detail, while the auditing firm shall make the CIT reconciliation between financial profit and taxable profit in accordance with PRC CIT 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 CIT, 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.

To read the full version of this article, please purchase the January/February 2010 issue of China Briefing, which can be found in the Asia Briefing Bookstore. Companies requiring assistance may contact any Dezan Shira & Associates' nine national offices at china@dezshira.com for advice or visit www.dezshira.com.