China Implements New Annual Reporting System

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SHANGHAI – Business owners across China are breathing a sigh of relief this week following an announcement by the State Administration for Industry and Commerce (SAIC) on February 19 that the country’s decades-old system of annual business inspections will be replaced by an annual reporting system. The reform, announced alongside several others in “The Plan for Reforming the System of Listing Registered Capital” (hereafter “the Plan”), was put into effect promptly on March 1. Overall, the Plan seeks to shift the burden from the once-per-year governmental inspections to a broader notion of public accountability.

Grievances with the old annual inspection system were numerous. Each year, between a window of March 1 to June 30, business owners were required to apply to SAIC for inspection. One source described the bureaucratic nightmare this could pose for business owners (particularly small businesses), who were required to prepare nearly 20 types of documentation to apply for an inspection, including a copy of their business license, auditing reports, financial seals, and rental agreements. Under these requirements, even a small oversight could result in penalties to business owners. Another complaint was frequent backlogs in the inspection bureau created through the huge volume of inspection applications combined with government understaffing.

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The new system of annual reporting differs in terms of both its logistics and target. Where the inspection system previously targeted the accuracy of companies’ registered capital, it held little importance for evaluating a company’s business practices. The Plan aims to remedy this by focusing instead on companies’ social standing through a system of publicly accessible annual reporting. Failure to submit a report within the stipulated window will result in a company being listed as “abnormal” in a publicly accessible database, and consecutive failure of 3 years will result in public blacklisting.

Inspections have not been entirely removed from the system; rather, the universal inspections of the old system have been replaced by random inspections. As further incentive for companies to submit reports, those with long-standing good reputations will receive fewer inspections than new market entities. This, it is hoped, will remedy the overburdening of the inspection bureau and incentivize business owners to maintain high standards of accountability and transparency.

Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam in addition to alliances in Indonesia, Malaysia, Philippines and Thailand as well as liaison offices in Italy and the United States.

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