Annual Audit in China: Not to be underestimated!

By Richard Hoffmann, ECOVIS Beijing China

The deadline for the Annual Audit is on the 31^st of May. Although it seems like a long time until the deadline is due, but a high amount of work needs to be done before the annual audit reports can be handed in.

There are two reasons for which time shall not be underestimated when preparing the annual audit and all required documents. First, the Tax Bureau takes the deadline serious and will not make any exceptions. Companies that do not manage to hand in their audit report in time will face fines. Second, the preparation of all documents is a very time consuming task. Additionally, the company should assign an authorized CPA firm in advance to prepare and finish the annual audit report.

Law requires the audit to be done by a Certified Public Accountant (CPA) because this ensures the compliance of all tax regulations. Therefore, it is of advantage for both – the Tax Bureau as well as the company itself since not being in compliance will result in penalties. The amount of the fines lies between 10,000 and 30,000RMB for RO’s and goes up to 200,000RMB for WFOEs. The second advantage of this requirement is the ensured tax efficiency for the company.

On the 31^st of May is the deadline for three different reports: 1. Statutory Annual Audit 2. Annual Foreign Currency Audit and 3. Annual Tax Audit and Clearance.

1. Statutory Annual Audit

This is the general audit for which balance sheet, income statement and cash flow statement prepared according to Chinese GAAP are necessary. To simplify and shorten the whole audit process, it is recommended to maintain a proper bookkeeping throughout the year.

1. Annual Foreign Currency Audit and Inspection

This special audit is for the State Authority of Foreign Exchange (SAFE). Within this report the Foreign Investor’s Equity is displayed and analysed. The Foreign Currency Audit also has to be prepared by an authorized CPA firm. Special Foreign Exchange regulations for this document apply.

1. Annual Tax Audit & Clearance

The purpose of this audit is to compute the taxable profit based on company’s turnover and cost. This also includes a separate corporate income tax audit report for companies who generate more than 30,000,000RMB turnover, more than 100,000RMB losses or want to use the previous carry forwarded loss  for the current year.

Although the annual audit seems like a burden, one should rather think of it as a “company health check”. The reports reveal the company’s performance and can be used to analyse the internal structure in regard to cost and tax efficiency.