By Daisy Huang and Karen Liu, Corporate Accounting Services, Dezan Shira & Associates’ Guangzhou office
Annual tax reconciliation is an important compulsory annual reporting requirement in China, which requires the company registered in China to submit its annual reconciliation report to the tax authority in charge to analyze and settle its annual income tax obligations before May 31 every year.
To manage the tax costs and avoid potential tax risks, it is vital for companies to have a clear understanding of the calculation of annual taxable income, make the full use of relevant preferential tax policies, and properly reconcile the information with the tax authority.
In this article, we list out some frequently asked questions received by our tax experts at Dezan Shira & Associates when preparing the annual tax reconciliation for our clients in 2021. Below, we share our insights and best practices on how to handle each query.
A1: Yes. In general, the losses can be carried forward to the subsequent five years to be set off if the current year profit is not enough to make up the losses. For those industries that suffered significant losses in the pandemic or have been specially encouraged by the government, the carry-forward period is even longer, ranging from eight years to 10 years. Below, we summarize the conditions and treatment of losses suffered by different industries/enterprises.
For better understanding / more clarity, we have prepared two examples in the following table:
A2: The company needs to fill in the annual corporate income tax filling sheet named “Detailed List of Asset Loss Pre-tax Deduction and Tax Adjustment” and retain relevant supporting documents for future checking by the tax bureau.
Generally, the supporting documents includes contract, agreement, and the detailed description of related matters.
Besides, some specific materials are required under different circumstances.
We are a general taxpayer engaging in the wholesale business of medical supplies. We purchased a batch of masks at a price of RMB 100,000 (excluding tax) with an input tax of RMB 13,000. If we sell it externally, the price excluding tax is RMB 120,000 (VAT rate 13 percent). In response to the epidemic outbreak, we decided to donate the masks to designated hospitals, and obtained a donation acceptance letter issued by the designated hospital.
A3: We explain below:
Before: VAT=(RMB 120,000-RMB 100,000) ×13%=RMB 2,600
Note: Input VAT (RMB 13,000) cannot be deducted. Rather, it should be transferred out.
Before: Surcharges= RMB 2,600×12%=RMB 312
Note: Foreign-invested enterprises, foreign enterprises, and foreign individuals who are subject to VAT or CT are also subject to urban construction and maintenance taxes (UCMT), education surcharge (ES), and local education surcharge (LES). The total surtaxes amount to 12 percent of the total turnover tax liability (that is, VAT and CT) in urban areas, meaning that these taxes are levied on the amount of the turnover tax but not the total value of the transaction.
Before: Only the part within 12 percent of the total annual profit is allowed to be deducted before tax.
After: 100 percent deductible before tax.
Besides goods, cash donated through public welfare social organizations or people’s governments at or above the county level and their departments, is also allowed to be deducted in full when calculating taxable income.
A4: We have summarized the deductible items related to employee insurance as below:
A5. We discuss it case-wise below.
The employee took a business trip in December 2020 and occurred RMB 5,000 hotel fees. He returned to the company to reimburse his travel expenses in January 2021.
Question 1: How should the company deal with the reimbursement?
Question 2: Due to various reasons, the hotel fees were not recorded in 2020, how to deal with this case in 2021?
Question 1: If the tax authority finds that our company has not obtained invoices for the expenses deducted, what should we do?
The enterprise shall submit the invoice within 60 days from the date of notification. If the invoices cannot be provided due to special reasons, the enterprise shall provide other supporting documents that can verify the authenticity of the expenditure within 60 days instead.
To properly deal with cross-year invoices, DSA experts provides the below suggestions:
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at firstname.lastname@example.org.
We also maintain offices assisting foreign investors in Vietnam, Indonesia, Singapore, The Philippines, Malaysia, Thailand, United States, and Italy, in addition to our practices in India and Russia and our trade research facilities along the Belt & Road Initiative.
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