Over the years, tax administration in China has converged significantly with international practices. Foreign investors will face similar annual compliance requirements in China as they will in their home country.
Companies that are registered before the calendar year end are required to file an annual Corporate Income Tax (CIT) return, as well as other documentation to satisfy the yearly Joint Inspection requirements with various government authorities.
Additionally, some businesses may also be required to conduct an annual audit and prepare a Related Party Transaction (RPT) report should they meet certain requirements.
It should be noted, unlike other countries, PRC GAAP states that the tax year is immutable from January 1st to December 31st. This means that enterprises nationwide and individuals who meet the criteria must be prepared to meet their China annual compliance requirements following the end of each taxation year.
Annual CIT Filing
China’s tax year begins on January 1st and ends on December 31st, with Corporate Income Tax filing and payment at the end of each quarter based on the current accounting income, if any. This results in enterprises in China pre-paying their taxes before the final taxable income is calculated at the end of the tax year.
The State Taxation of Administration (STA) requires that all China resident enterprises submit an annual CIT return together with a reconciliation sheet (from accounting income to taxable income) before May 31st of the following year to ensure tax liabilities are met according to the PRC tax law.
During the period between January 1st and May 31st, accountants will reconcile the taxable income and the accounting income and make the necessary adjustments to bridge the discrepancy between tax laws and accounting standards before final filing.
Additionally, businesses should pay any tax shortage or claim back any tax surplus before 31st of May.
Any tax losses incurred in the current year will be carried forward for the next five years following the year in which the loss was incurred.
Annual Related Party Transaction Declaration (RTP)
Under Article 43 of the Corporate Income Tax Law of the PRC, Foreign Invested Enterprises (FIE) in China who frequently engage in related party transactions must prepare an RPT report as supplementary information when filing the annual CIT return.
The RPT report includes information about the transaction amounts with related parties, and information on related parties and their relation to the company. Annual related party transaction reporting does not include detailed information on pricing or transfer pricing methodology.
However, it should be noted, according to circular 42 by the STA, enterprises that engage in related party transactions, regardless of the related party transaction amount, are required to prepare transfer pricing contemporaneous documentation at the time in which the related parties enter into the transaction (SAT [2016] No. 42).
This generally includes the intercompany agreements, and any other documentation to support pricing claims such as payroll records, employment contracts, purchase agreements, and other documentation to reasonably demonstrate the charges being made back to the parent company.
Annual Statutory Audit
Not all enterprises in China are required to conduct an annual statutory audit for compliance purposes. Below are situations where companies are required to conduct a statutory audit by a local Chinese Certified Public Accountant (China CPA), including;
- Company incurred substantial tax losses over the past years;
- Company meets certain revenue thresholds set by the local jurisdiction;
- Company belongs to an industry subject to additional scrutiny by tax authorities;
- Company wishes to offset losses carried forward from a previous year; and
- The relevant tax authority requests an audit report.
While generally not required for compliance purposes, companies may choose to conduct an annual audit at the end of the year as part of their CIT reconciliation process and for internal control purposes.
Since PRC Tax Laws and accounting practices (PRC GAAP) vary in some degrees, an accountant normally prepares the annual CIT reconciliation by using the previous year’s financial records as the basis for making year-end adjustments.
Annual audits would enhance the accuracy of the annual CIT reconciliation and help identify any accounting errors. The audit conducted by an independent third party also allows management to remove inefficiencies and strengthen their internal control processes.
Businesses may begin preparing their audit report after the year-end books are closed. Large enterprises or companies with large transaction volume may conduct a pre-audit, starting prior to the end of the tax year, in order to meet the CIT filing deadline.
Annual Joint Inspection
All companies in China are required to undergo an annual joint inspection by the MOFCOM, MOF, STA, AQSIQ, NBS, and SAFE. The inspection is to serve the information collection requirements of each government department and consist of general disclosures about a company’s status, including;
- Information regarding the company registration status;
- Information regarding investments in establishing companies or equity purchases;
- Information regarding the paid-in capital in the case the company is a limited liability company or a company limited by shares;
- Information regarding change in equity or transfer of equity of company limited by shares; and
- Information regarding the number of employees, total assets, total liabilities, total owners’ equity, total revenue, gross profit, net profit, total tax payable, and other financial information.
What should come as good news to businesses in China is the annual joint inspection is a relatively straightforward and simple process to complete. Relevant disclosures consist of a single online filing which companies need to complete and submit through the National Enterprise Credit Information Publicity System between April 1st and June 30th of the following year.
In the past, businesses had to complete the annual joint inspection and an additional AIC filing on an annual basis. Since 2019, the annual AIC filing has been combined with the annual joint inspection process to reduce the compliance burden business in China face on an annual basis.
Annual Individual Income Tax Reconciliation
Individual PRC Tax residents who meet certain criteria must also file an annual individual income tax reconciliation between March 1st and June 30th of the following year.
The criteria for individuals who must submit an annual IIT reconciliation are as follows:
- Taxpayer obtained comprehensive income from two or more sources and the total annual income minus itemized deductions is more than RMB 60,000;
- Taxpayer obtained one or more sources of comprehensive income from labor services, author’s remuneration, or royalties, and the total annual income minus itemized deductions is more than RMB 60,000;
- The amount of tax paid in advance within the tax year is less than the tax payable amount; or
- The taxpayer applied for a tax refund.
However, several exceptions to the criteria above exist to exempt individuals from needing to submit an IIT report. Individuals who meet the above criteria may conduct a self-review and if any of the following criteria are met, they are not required to complete an IIT filing:
- The amount of retrospective tax payment upon settlement does not exceed RMB 400;
- The annual prepaid tax amount is equal to the annual payable tax amount;
- The individual foregoes the tax refund.
Normally, individual income tax is required to be filed by the withholding agent, i.e. the employer or payroll agent, on a monthly basis. During the annual individual income tax filing, individuals must declare their comprehensive income if they are applying for a tax refund or if they need to make-up any tax shortage.
The annual IIT filing can be done online through a mobile app “个人所得税” (“Personal Income Tax” in English) – available for Android and iOS – or through the National e-Tax Website.
Chinese mainland residents can register using their Chinese ID (身份证) and mobile phone number within the app. Expatriates and those registering with a passport must physically visit the tax bureau to obtain a registration code before they can register an account on the individual income tax app and complete their filing.
If the aforementioned methods are not preferred, individuals can also carry out the annual IIT filing in person at the tax authority to which they pay taxes to or by courier.
