Preparing for China’s Annual CIT Filing: FAQs on Pre-Tax Deduction Vouchers
Pre-tax deduction vouchers are the basis for deducting eligible expenses when calculating taxable income for corporate income tax (CIT) purposes. Failure to obtain these vouchers in a timely manner or mishandling them can result in avoidable tax losses and penalties. Therefore, managing pre-tax deduction vouchers is considered a critical aspect that financial managers and auditors must prioritize during the annual CIT reconciliation process.
Pre-tax deduction vouchers are any documents that demonstrate valid expenses incurred in the process of generating income and are used to make pre-tax deductions when calculating the taxable income for corporate income tax (CIT) purposes.
The Administrative Measures on Pre-tax Deduction Vouchers for Corporate Income Tax (hereinafter, the “Measures on Pre-Tax Deduction Vouchers”) is the major legal document on pre-tax deduction vouchers and was issued by the State Administration of Taxation (STA) in 2018. The STA has noted in this document that failure to obtain pre-tax deduction vouchers in time may result in the disallowance of eligible expenses for pre-tax deduction purposes.
In this article, we summarize the frequently asked questions (FAQs) regarding pre-tax deduction voucher management and provide some on-the-ground insights.
Q1: What are the common pre-tax deduction vouchers and their corresponding application scenarios?
Based on the source of the vouchers, pre-tax deduction vouchers can be divided into two types: internal vouchers and external vouchers.
Internal vouchers are the original accounting vouchers that enterprises make for costs, expenses, losses, and other expenditures. These include but are not limited to accounting records (such as accounting books, statements, etc.) and internal documents (such as sales orders, warehouse receipts, various internal approvals, and so on) The preparation and use of internal vouchers should comply with relevant laws, regulations, and other related provisions of China’s accounting framework.
External vouchers refer to vouchers obtained by enterprises from other entities or individuals to prove that their expenses have occurred when engaging in business activities and other matters. These include but are not limited to, value-added tax (VAT) invoices (including paper and electronic invoices), fiscal vouchers, tax payment certificates, receipts, split bills, and so on.
In principle, external vouchers, especially VAT invoices, are stronger forms of proof for pre-tax deduction. But where external vouchers are not available, internal vouchers can be used as pre-tax deduction proofs in certain given scenarios. To be more specific:
- Where the expenditure incurred by an enterprise in China is subject to VAT, and the other party is a VAT taxpayer who has completed tax registration, the VAT invoice for the expenditure (including invoice issued by the tax authorities on behalf pursuant to the provisions) shall be the pre-tax deduction proof.
- Where the expenditure incurred by an enterprise in China is subject to VAT but the other party is an organization that is not required by law to complete tax registration or an individual who undertakes petty sporadic business transactions, the invoice issued by the tax authorities on behalf or payment receipts for the expenditure as well as the internal vouchers of the enterprise shall be the pre-tax deduction proof in terms of expenditure.
- Where the expenditure incurred by an enterprise in China is non-taxable, and the other party is a non-individual, the external voucher other than invoices issued by the other party shall be the pre-tax deduction proof; where the other party is an individual, the internal voucher of the enterprise shall be the pre-tax deduction proof.
- Where the expenditure incurred by an enterprise in China is non-taxable, but an invoice may be issued pursuant to the provisions of the STA, the invoice can be used as pre-tax deduction proof.
Q2: When should the enterprise obtain the pre-tax deduction certificate?
As per the Measures on Pre-Tax Deduction Vouchers, in principle, pre-tax vouchers have to be obtained prior to the expiry of the annual CIT reconciliation (also called the annual CIT filing) for the current year, which should be done before May 31 of the following year.
Q3: What are non-compliant vouchers and how to deal with them?
Non-compliant vouchers are VAT invoices that are privately printed, counterfeited, altered, canceled, illegally obtained by the issuer, falsely issued, or improperly filled out, or other external vouchers that do not comply with relevant national laws, regulations, and other related provisions.
Non-compliant vouchers cannot be used as pre-tax deduction vouchers.
If an enterprise fails to obtain a necessary invoice or external voucher or receives a non-compliant invoice or external voucher, but the expense is legitimate and has occurred, it should request the other party to replace or supplement the invoice or external voucher before the CIT reconciliation period for the current year. If the replacement or supplemented invoice or external voucher meets the required standards, it can be utilized as a pre-tax deduction voucher.
Q4: What should an enterprise do if it has incurred expenses, but the seller cannot issue/make up/replace an invoice due to special reasons?
If compliant invoices or external vouchers cannot be issued or replaced due to special reasons / exceptional circumstances, such as the other party’s deregistration, revocation, cancellation of business license in accordance with the law, or being recognized by the tax authorities as a non-normal taxpayer, the expenditure can still be deducted before tax if the following materials are submitted to prove the authenticity of the expenditure:
- Evidence detailing the reasons why invoices or other external vouchers cannot be obtained or replaced;
- Contracts or agreements related to the relevant business activities;
- Payment vouchers for non-cash payments;
- Proof of goods transportation;
- Internal vouchers for goods warehousing and delivery; and
- Enterprise accounting records and other materials.
The materials described in items (1) to (3) above are mandatory.
A registered taxpayer will be considered a non-normal taxpayer if they: 1) fail to file and pay taxes within the stipulated deadline; 2) fail to rectify the issue within the prescribed timeframe, after being ordered to do so by the tax authorities; and 3) the tax authorities conduct on-the-spot inspections and are unable to locate the taxpayer, and thus cannot get the taxpayer to fulfill their tax obligations.
Q5: Can foreign bills be used as pre-tax deduction vouchers?
Yes, the invoices or receipt vouchers related to expenses incurred by enterprises from purchasing goods or services from overseas suppliers can be used as pre-tax deduction vouchers.
Q6: What are the consequences if an enterprise fails to obtain necessary external vouchers or obtains non-compliant external vouchers, and the tax authorities discover this during an audit?
If during the annual CIT reconciliation, the tax authorities discover that an enterprise has failed to obtain the necessary external vouchers, or has obtained non-compliant vouchers, they will notify the enterprise. In this case, the enterprise must obtain a backdated or reissued invoice or other compliant external vouchers within 60 days of being notified to rectify the issue.
If the other party still cannot issue or replace the voucher due to special reasons as introduced in Q4, it should instead provide relevant documents that can prove the authenticity of the expenditure within 60 days of being notified, in accordance with what we discussed in Q4.
Q7: Can enterprises claim pre-tax deductions with unused vouchers from the previous year?
In situations where an enterprise fails to obtain compliant invoices or other external vouchers due to certain reasons such as purchase and sales contracts or engineering project disputes, and does not use them for voluntary pre-tax deduction within the prescribed time limit, the corresponding expenditure can still be allowed for pre-tax deduction retrospectively in the year in which the expenditure occurred. Additionally, the enterprise can receive a corresponding tax rebate when they obtain the compliant voucher. However, the period for retroactive deduction cannot exceed five years.
As mentioned in Q4, if compliant external vouchers cannot be issued or replaced due to special reasons, the corresponding expenditure can still be deducted retrospectively in the year in which the expenditure was incurred. However, this is subject to confirmation of the authenticity of the expenditure through other pre-tax deduction vouchers in subsequent years. It’s important to note again that the period for retroactive deduction cannot exceed five years.
Q8: What kind of pre-tax deduction vouchers should enterprises obtain from individuals?
As mentioned earlier, if an enterprise incurs expenditures subject to VAT in China, but the other party is an individual engaged in small-scale sporadic business operations, the enterprise can use invoices issued by the tax authority or payment receipts, as well as internal vouchers, as pre-tax deduction vouchers for the expenses incurred. The payment receipts must include information such as the name and ID number of the individual, the expenditure project, and the payment amount.
The criteria for determining small-scale sporadic business operations is that the sales volume of taxable projects conducted by an individual does not exceed the threshold specified in the relevant VAT policies.
If the STA has specific regulations on issuing invoices for taxable items, then the stipulated invoice or receipt shall be used as the pre-tax deduction proof.
Q9: What kinds of vouchers should be obtained for pre-tax deduction for utility expenses when renting property?
When an enterprise rents assets such as an office or production space and incurs utility expenses like water, electricity, gas, air conditioning, heating, communication lines, cable TV, and network fees, they can use the lessor’s invoices for taxable projects as pre-tax deduction vouchers. If the lessor uses a shared expense allocation method, the enterprise can use other external vouchers issued by the lessor, such as a utility bill, as pre-tax deduction vouchers.
The examination and management of pre-tax deduction vouchers are an essential part of the annual CIT reconciliation process in China.
To reduce their tax liability and avoid penalties or fines, companies must understand how to properly obtain, use, and retain these vouchers.
For companies not familiar with China’s pre-tax deduction voucher requirements, it is advisable to seek assistance from third-party professionals to ensure compliance and take full advantage of all available preferential tax policies.
Dezan Shira & Associates’ professionals understand the complexities involved in keeping our clients’ accounting practices compliant. We endeavor to ensure that our accounting and tax advisory services help clients reduce tax costs and concentrate on their core business operations. For more information regarding our service scope, please visit https://www.dezshira.com/ or contact China@dezshira.com.
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