The Chinese Generally Accepted Accounting Principles (China-GAAP) are similar to the International Financial Reporting Standards (IFRS), but differ from the American accounting system (US-GAAP). Most foreign companies are unaware of these differences, and are, therefore, running the risk of non-compliance.
This article intends to offer you a brief introduction to the most basic Chinese accounting features, in order to help you make your China venture a complete success.
To be able to benefit from tax reduction and incentives, it is essential to adhere to Chinese accounting regulations. Besides, Chinese is the only accepted reporting language. Non-Compliance and mistakes can lead to severe penalties, large fines, and, in the worst case, deportation of foreign staff.
The main accounting principles in China
The vital points of accounting in China:
Do a correct bookkeeping
Adhere to Chinese GAAP rules
The financial year is set from the 1st of January to the 31st of December
Do your bookkeeping in Chinese
Chinese Yuan (RMB) as accounting currency
It is permitted to use a bookkeeping software, e.g. “MEGI”
It is permitted to create subaccounts
Despite significant efforts by the Chinese government, provisions and regulations still differ between different cities and regions. Due to the varying interpretation of laws, the non-compliance risks for investors are quite high. The best preparation is to get advice in advance. For this, contact an experienced tax consultancy or accounting firm like Ecovis.
For more information on the best accounting structure in China, read our detailed article on this subject.
Arrange and file documents and records chronologically. After each transaction, make a settlement billing print it out. After this, connect each settlement billing to be to the specific invoices and receipts (Fapiao). In China, it is common to use glue to paste Fapiaos on a blank DIN-A4-sheet and store them in a time-ordered sequence.
In China, you need to use special accounting formats. Authorities will reject any other format. Serial and Invoice numbers are fixed, too. For this, your business has to buy blank-invoices, so-called Fapiaos, from the tax authorities. The blank-invoices all have their distinctive serial invoice numbers. There also exists a database, where you can verify the Fapiao’s authenticity. Furthermore, companies need to purchase a special Fapiao printing machine, which is connected to the tax authorities and can print Fapiaos only for the services and products specified in the business license.
Since fapiaos are usually sold on the basis of business turnover, new enterprises often face the problem that during the first 6 months, the tax bureaus issue only a small amount of blank-invoices with a low value. If more is needed, a special authorization can be granted. This, however, involves a long bureaucratic process.
On each Fapiao, the issuing party of the invoice has to fill in the following info:
Name and Address of the Beneficiary
Kind, Quantity and exact description of the supplying products or services
Tax identification number (since 1. July 2017)
Special VAT Fapiaos
Companies can issue Special VAT Fapiaos. However, these can only be printed by general taxpayers, but not by small-scale taxpayers (see below for further information). Special VAT Fapiaos allow the buyer to deduct the input tax from future tax duties.
Compared to a normal Fapiao, which consists of only two copies, the Special VAT Fapiao has three. Since 1 July 2017, they have to show the following info:
Information of the buyer on the upper left side including the Chinese company name, tax identification number or the social security number, address, telephone number, bank name and account number
Commodity and service tax breakdown
Scope of services according to the actual transactions
The vendor has to stamp every Fapiao, both normal and Special VAT, with an invoice chop (for more information on the use of chops, read our article by ECOVIS Beijing). This validates the listed information and converts the invoice into a legally binding document.
Registration with the tax authorities
As soon as a company wants to establish an entity in China, it has to register with the local and the federal tax authority. The deadlines for registration are very narrow and the registration needs to be filed 30 days after receiving the provisional business license, although regional differences might exist.
Chinese financial statement
Taxable companies have to complete monthly, quarterly and annual tax filings.
Enterprises need to submit Corporate Income Tax filings 4 times a year. The deadline is the 15th day of the quarter’s last month (attention: local differences).
At begin of every year, your company has to submit the annual report for the previous fiscal year.
The annual report consists of:
Amount of initial capital
Cleared taxes or taxable loss carried forward
Information on closely related companies (i.e. subsidiaries)
Exact information on social contributions like rent, sickness benefit, social welfare, unemployment benefit, housing allowance, etc.
If applicable: evidence for tax exemption or tax reduction
The Value-Added Tax (VAT) is levied at both the provincial and the national level. Only small-scale taxpayers with a monthly revenue of less than 30 000 RMB do not have to pay.
Often, municipal governments and special economic zones try to attract foreign businesses with the promises of tax holidays or tax exemptions. In reality, however, local governments can only waive local administrative taxes. Consequently, promises like these are political offers and are legally not binding. If your company receives such an offer, consult tax experts to get the right legal protection.
General VAT Payer
General Tax Payers can issue Special VAT Fapiaos and deduct input taxes. VAT rates differ and depend on the product and service. Tax rates range from 6% to 17%.
Small-Scall Taxpayers can only issue general Fapiaos with a uniform VAT rate of 3%. The input tax is not deductible.
Attention: When you are setting up a company in China, you have to decide whether you want to register as a General VAT-Payer or a Small-Scale Taxpayer. Small-Scale Taxpayers cannot issue Special VAT Fapiaos by themselves but have to apply at the local tax bureau to issue these fapiaos. Some industries, such as the hospitality business, can also issue them on their own.
The following criteria matter:
Profit margin: as a rule of thumb: if the profit margin exceeds 20-30%, being a Small-Scale Taxpayer may be cheaper.
Customers: If a lot or most of your customers require Special VAT Fapiaos, you should register as a General VAT-Payer.
Suppliers: if you purchase many products from manufacturers or processing industries, it makes sense to ask for Special VAT Fapiaos in order to deduct them from your VAT tax bill.
Compliance: Tax authorities usually focus on General VAT Taxpayers due to their importance for fiscal income. General Taxpayers should pay attention to compliance issues and ask for professional help.
Input Tax for fixed assets: Input taxes for fixed assets can be deducted from the VAT liability.
Deadlines for VAT tax returns
General VAT Payers must file their VAT tax returns with the federal tax authorities until the 15th of each month. Small-scale taxpayers need to file on a quarterly basis.
VAT treatment for exports
How to deal with taxes for an export business depends on the company type. When the Chinese entity is producing goods and exporting them directly or via an agent from China, a VAT exemption might apply. If, however, the Chinese entity is buying goods in China and paying VAT for them and then processes it into to a new product to sell it abroad, the entity can deduct the input tax from the VAT of other inland sales. Should there be a surplus at the end, the company can apply for a refund.
If the Chinese entity is buying products in China and is mainly functioning as an export agent, the input tax is also deductible from the VAT. In the case of an input tax surplus, the deduction will be based on the whole amount of the surplus. However, for trading companies, different refund rates exist for different goods.
Tax authorities can grant exemptions or refunds only after the taxpayer submits a formal application within 30 days after the export approval. The application includes the following documents:
Original Tax Registration Form
Export Documents (issued by the tax office)
After the export and the tax office filing, the company can apply for tax deferral, tax refund or an exemption. Thus, please remember the deadlines: the application for the tax refund is between the 1st and the 15th of the month following the export.