Compliance Special Edition

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Content:

! The Annual Compliance Review

! Important Deadlines and Dates ! Required Documents for the Annual Audit

! Annual Compliance Review for the

WFOE/JV/FICE/RO ! Different Audit Types

Within a survey of 10 consulting

companies the German Institute for

Service Quality (DISQ) announced

ECOVIS as the Best Auditor for Medium-

Sized Enterprises in Germany for 2013!

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Client logos The Annual Compliance Review in China

There have been several changes in 2013 for foreign

companies, which are active in China due to the vari-

ous newly introduced laws and regulations. For in-

stance, the VAT reform has a big impact and positive

effect on the tax burden of many companies as well

as has also aroused a lot of practical implications and

foreign employees are now liable for social insurance.

Therefore, every active business in China needs to

draw more attention to the new regulations and be

more in compliance with the relevant Chinese laws

and regulations.

However, it is not only about being in compliance. It

is also equally important to be tax efficient. For many

international companies it is easy to be tax efficient in

their home country but it is not the same in China.

One of the reasons is the continuously changing laws,

that need to be adopted and the other reason is the

lack of Chinese language skills and global thinking.

We have seen many cases where companies are to-

tally inefficient, have paid far too many taxes or have

faced penalties for not being in compliance and have

therefore struggled to operate their business in China.

It is really key to have a smooth operation in place to

make sure you are in compliance and tax efficient so

that you can concentrate on what you do best: devel-

oping your business.

As for the annual compliance review: it is not hard

work but it needs to be done right. Do not see it only

as an additional burden for your company. It is a

great chance to do a small “health check” of your op-

erations, to evaluate the tax burdens, the compliance

status, the financial structure, the control mechanism

etc. After a sophisticated annual audit you are in the

position to optimize your structure in China. You can

get ready for 2014 by implementing a better structure

with better internal controls, tax optimizations, and fi-

nancial transfer optimizations which will allow your

business at the end to be more profitable.

Below we will list down some of the key elements for

foreign companies, which help to facilitate the annual

compliance review in China. We need to point out

that there is one element that is of specific im-

portance and that is TIME. It is very important to be

aware of deadlines for the annual compliance review.

Missing the deadline has serious consequences such

as additional money, which will be spent, additional

work and even more harsh penalties that arise when

not processing the documents in time.

Apart from the statutory requirements of doing an

annual audit in China, it is also a good chance to re-

view the company’s financial processes. Are you do-

ing it correctly? Are you paying taxes? Is your struc-

ture tax efficient? Do you make use of your interna-

tional corporate structure to reduce costs? Do you

have a control mechanism in place to avoid fraud?

We can support you to provide more value added

advices regarding your tax status, internal control

system, your corporation governance, your legal

structure, etc.

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Client logos Important Deadlines

RO JV/WFOE/FICE Individual Deadline

Annual audit ✔ ✔ Before the tax filing, the

annual inspection and

the group audit

Annual tax filing ✔ ✔ May 31, 2014

Annual FCI inspec-tion ✔ May 31, 2014

Annual combinative inspections ✔ June 30, 2014

Annual individual in-come tax declaration ✔ March 31, 2014

We are the

trusted partner

of several

embassies and

governments.

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Client logos Required Documents for the Annual Audit

I. Records:

1. Approvals on the tax preferential policy etc.

2. Declaration form of the enterprise income tax and annual liquidation report

3. List of employees’ salaries and payment list of the social insurance

4. Related insurance contracts of house, machine, and inventory

5. Updated rental contract if applicable

II. Statements and Vouchers

1. Financial statements

2. Vouchers, sub-ledgers and general ledgers

3. Trial balance

III. Financial Reporting

1. Balance sheet

i. Cash and Bank balance

1. Bank statements and bank adjustment sheet

ii. Accounts receivable, notes receivable and other receivables

1. Accounts receivable, other receivable lists (clients’ name, amount etc.)

2. Aging of the accounts receivable (including the explanation for the overdue receiv-

ables)

3. The receipt of the accounts receivable

4. Calculation for the bad debt of the accounts receivable and other receivables

iii. Inventory

1. Detailed list of inventories as of 31 December 2013

2. Aging of the inventory

3. Detailed list of slow-moving goods and the final confirmation results

4. Calculation of the provision on inventory

5. Related insurances on inventory files

6. Cost calculation sheet

iv. Advanced payments, prepaid expenses and long-term prepaid expenses

1. List of such assets (related purchase contracts and invoices should be provided if

the assets are materials)

v. Fixed assets

1. Fixed assets list, related documents of valuable assets, such as invoices, con-

tracts and certificates, etc.

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Client logos 2. Calculation of the depreciation and detailed list

3. Fixed assets related insurance files

4. Policy on the provision of fixed assets and related detailed list

vi. Accounts payable, notes payable, advance payments by customer and other payable

1. List of such liabilities (name, amount etc.)

2. Aging of the accounts payable (including the explanation for the overdue paya-

bles)

vii. Welfares payable

1. Detailed list, calculation and application range

viii. Tax payable

1. List for the VAT, income tax and business tax

2. Declaration and payment documents

ix. Loans

1. Loan contracts, interest calculation sheet and related payment record

2. Profit and Loss Account

i. Income

1. Sales list by month and by product

ii. Cost of Sales

1. Cost of Sales list by month and by product

iii. Sales taxes, other operating result, selling expense, general and administration expense,

finance expense, overhead, non-operating expense/income

1. Detailed lists of the above accounts (lists of selling expense, general and admin-

istration expense and overhead by month and items)

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Client logos Annual Compliance Review for the WFOE/JV/FICE/RO

1st level: ANNUAL AUDIT

Local Chinese GAAP

The first round for the annual compliance review is the

annual audit. All foreign invested companies whether

Representative Office (RO), Wholly Foreign-Owned

Enterprise (WFOE), Joint Venture (JV), and Foreign-

Invested Commercial Enterprise (FICE), are required

to prepare annual statements including balance sheet,

income statement, and cash flow statement for the an-

nual audit based on the Chinese GAAP. The annual fi-

nancial statements and the relevant accounting rec-

ords need to be audited by a Chinese licensed CPA

firm. As you are running an international company in

China it is suggested to use a Chinese audit firm with

international experience and which has proven to work

on international quality standards. Only a CPA firm

with international experience can provide you with a

platform for an international financial structure.

We have seen many problems arising during the an-

nual audit. This is mostly the result of foreign compa-

nies in China underestimating the importance of a

good monthly bookkeeping and accounting. The fol-

lowing points are the key issues, which CPA firms will

have to pay a lot of attention to and keep an eye on

audit adjustments which may arise from them:

a. Sales and cost of goods (COGS) recognition

In some cases, the finished product or merchandise

has been delivered and the sales conditions have been

fulfilled, but the sales and cost have not been recog-

nized in the financial and tax report. As a result, the

sales and COGS would be understated, and VAT/CIT

payment would be delayed. That will lead the lead to

tax surcharges and penalties.

b. Cost calculation

Certain companies have not adopted the correct cost

calculation method. For instance the manufacturing

costs have not been properly allocated into each prod-

uct, the bill of material (BOM) has not been correctly

defined, the unit price of the material has not been

used correctly, etc. All these measures will lead to the

wrong cost calculation.

c. Evaluation of Inventory

The evaluation of inventory is the key issue during the

annual closing and audit procedure. Regarding the

slow-moving inventory the proper devaluation should

be considered according to the net realized value or

other provision methods.

d. Stocktaking of Inventory and Fixed Assets

The existence and status of the inventory and fixed as-

sets need to be checked during the annual closing. An

overall stocktaking needs to be considered by the

company and the auditor will make sample checks.

The key purpose is to ensure the ending quantity and

quality of the inventory and fixed assets.

e. Proper expenses accrued

According to the accounting policy, the relevant ac-

crued expenses should be considered and recorded

regularly in the periodical reporting to reflect the cor-

rect operating result.

f. Deferred tax calculation

Deferred tax calculation is a complicated process and

it is sometimes overlooked by the company. In particu-

lar in China, there are many temporary and permanent

differences between the accounting and the tax result.

Therefore, the company needs to pay more attention to

make the proper deferred tax calculation.

International GAAP

For international companies the consolidated financial

statements will be needed for the purpose of group

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Client logos consolidation. Therefore, the local WOFE/JV will need

a special purpose audit of the financial statements as

per December 31, 2013 in line with the International

Standards on Auditing (ISA). Moreover, the financial

statements need to be prepared according to the inter-

nal accounting principles of the headquarters (accord-

ing to IFRS, German-GAAP (HGB), US-GAAP, or HK-

GAAP). The results of this audit will be reported in the

standard format or within a reporting package as de-

fined by the headquarters.

2nd

level: Annual Foreign Currency Audit and In-

spection

The Foreign Currency Inspection (FCI) as of the period

ending December 31, 2013 needs to be performed by

the authorized CPA firms. This report is necessary for

the company to undergo the annual inspection by the

State Administration for Foreign Exchange (SAFE) as

required by the foreign exchange regulations in China.

The responsibility of the company’s management is to

prepare, factually and completely according to the reg-

ulations of the SAFE, the Statement of Foreign Inves-

tors’ Equity of the foreign invested company. The FCI

report will verify the Statement of Foreign Investors’

Equity of the company and confirm the accordance

with the relevant regulations promulgated by the SAFE.

3rd

level: Annual Tax Audit and Clearance

According to the requirements of the tax authorities,

each foreign entity shall participate in an annual tax

clearance. We need to draw your attention to the fact

that taxpayers, whose Corporate Income Tax (CIT) is

in the form of an audit collection and one of the follow-

ing situations occurs, are required to submit a tax audit

report:

1. Loss of corporate assets

2. Real Estate corporation annual CIT filing

Taxpayers are required to submit a tax audit report if

one of the following situations occurs:

1. Loss in the current year exceeds RMB 100,000

2. Making up for losses in the current year

3. Annual turnover exceeds RMB 30,000,000

It mainly includes the annual CIT clearance. The costs

and profits will be listed to evaluate the taxable profit. If

the CPA firm finds out that not all the taxes are paid as

needed, the outstanding tax liabilities must be cleared.

However, it is suggested to talk with the tax authorities

about the amount and payment deadline if the differ-

ence can be justified.

4th

level: Annual Combinative Inspections

Each foreign company shall facilitate an Annual Com-

binative Inspection from various authorities. These are

the same authorities that have approved the registra-

tion of the company (e.g. AIC, MOFCOM, Financial

Bureau, Customs, Tax Authorities, etc.). Each of these

authorities must confirm that the foreign company is in

compliance with its business scope and its operation

and financial status etc. The Annual Combinative In-

spection shall be done within the first five months of

the following year. All the confirming documents and

the audit report shall be submitted the relevant authori-

ties. Upon the approvals from the authorities the for-

eign company can proceed with its business in China.

Disclaimer

The information provided in this newsletter is of general nature, purely informative and does not address any individual or certain entity. We always strive to provide the most accurate and timely information but due to the nature of information we cannot guarantee it is accurate as of the date and know any future implications. Without professional advice and consultation

the information shall not be used for decision making or be the decisive factor for any actions.

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Client logos A member of ECOVIS International tax advisors accountants auditors lawyers in Argentina, Austria, Belarus, Belgium, Bulgaria, China, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Great Britain, Greece, Hong Kong, Hungary, India, Indonesia, Ireland, Italy, Japan, Republic of Korea, Latvia, Lichtenstein, Lithuania, Luxembourg, Republic of Macedonia, Malaysia, Malta, Mexico, Netherlands,

Norway, Poland, Portugal, Qatar, Romania, Russia, Serbia, Singapore, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Tunisia, Turkey, Ukraine, USA (associated partners) and Vietnam. ECOVIS International is a Swiss association. Each Ecovis Member Firm is an independent legal entity in its own country and is only liable for its

own acts or omissions, not those of any other entity. ECOVIS R&G Consulting Ltd. (BJ) is a Chinese Member Firm of Ecovis International.

ECOVIS − Over 4,000 employees in more than 50 countries Tax advisors − Auditors − Accountants − Lawyers

Your contact in Beijing

Richard Hoffmann Grace Shi

Partner Partner Phone: +86 (0)10-65616609 (811) Phone: +86 (0)10-65616609 (806) Mobile: +86 (0)18601318781 Mobile: +86 (0)18610805757 Fax: +86 (0)10-65616501 Fax: +86 (0)10-65616501

E-Mail: richard.hoffmann@ecovis.com E-Mail: grace.shi@ecovis.com Internet: www.ecovis.com/beijing

ECOVIS R&G Consulting Ltd (BJ) Room 10820, Building A, Galaxy Soho, No.7A Xiao Pai Fang Hutong, Dongcheng District, Beijing, 100010 P.R.China

About ECOVIS R&G Consulting Ltd.

ECOVIS is a leading global consulting firm originating from Germany. It has over 4,000 professionals in more than 50 coun-tries. Its consulting focus and core competencies lie in the area of tax consulting, accounting & auditing, and legal advice. Furthermore, ECOVIS has been announced the best auditor for medium-sized enterprises in Germany.

Our team at ECOVIS R&G Consulting Ltd. Beijing consists of highly qualified and experienced international and Chinese professionals, including Certified Public Accountants (CPA), Certified Tax Agents (CTA), and Attorneys at Law (LL.M.). Our expertise and competences ensures all around professional service for our international clients. As needed by clients our in-ternational staff speaks Chinese (Mandarin), English, and German.

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