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Accounting in China: Standards & compliance requirements for businesses.

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Accounting in China: Standards & compliance requirements for businesses

A firm grasp and adherence to Chinese Accounting Standards (CAS) are crucial for foreign enterprises’ success and smooth operations in China. These standards diverge from the more familiar International Financial Reporting Standards (IFRS), presenting a unique challenge requiring a proactive approach.

This article provides a comprehensive overview of the accounting standards, regulatory frameworks, compliance obligations, and common challenges businesses in China face.

Key takeaways

  • Businesses operating in China must adhere to Chinese Accounting Standards (CAS) and comply with regulatory requirements, including tax laws and reporting obligations.
  • Companies in China must maintain accurate financial records, submit monthly financial statements, and comply with tax reporting requirements, including issuing VAT invoices (fapiaos) and performing VAT calculations within China’s Golden Tax System (GTS).
  • Businesses face challenges such as mapping financial accounts for group reporting, navigating differences between tax law and CAS, managing intercompany transactions, and ensuring compliance with foreign exchange rules and payment restrictions.

Accounting standards and regulatory environment in China

Businesses operating in China must adhere to the Chinese Accounting Standards (CAS), also known as the Chinese Generally Accepted Accounting Principles (China GAAP). CAS is based on two primary standards:

  1. Accounting Standards for Business Enterprises (ASBEs): Introduced in 2006, ASBEs are closely aligned with International Financial Reporting Standards (IFRS). All listed companies in China must comply with ASBEs for financial statement preparation. Additionally, most foreign-invested entities (FIE) also follow these standards.
  2. Accounting Standards for Small Business Enterprises (ASSBEs): ASSBEs are specifically designed to assist small businesses in complying with accounting standards and tax laws in accordance with Chinese regulations. Small businesses, defined as those with annual revenues under CNY 20 million or 300 employees, can benefit from the support provided by ASSBEs.

Entities in China should adopt the accrual basis of accounting in performing recognition, measurement, and reporting. These statements will be used to compute the company’s taxable income and distributable profit.

ASSBEs reference ASBEs and offer simplified tax calculation methods, allowing small companies to choose between them based on their needs.

Chinese Accounting Standards vs. International Standards (IFRS, GAAP)

While CAS demonstrates significant convergence with IFRS, several notable differences exist:

  • Fiscal year: In China, the fiscal year always aligns with the calendar year, whereas under IFRS, companies can have different fiscal year-end dates.
  • Tax filings: Chinese companies submit financial statements monthly, while returns can be filed quarterly or bi-monthly under IFRS.
  • Expense classification: CAS allows expenses to be classified by function. These typically include selling and distribution, manufacturing, general and administrative, and financial expenses. In contrast, IFRS suggests classifying expenses by nature. For example, warehouse and administrative employees’ salaries are categorised as personnel expenseswhile depreciation of assets like warehouses and administrative buildings is recorded as depreciation expenses.
  • Fixed assets valuation: CAS mandates the historical cost method for evaluating fixed and intangible assets, while IFRS permits historical cost and revaluation methods.
  • Presentation currency: The Chinese Yuan (CNY) is the base currency for financial reports. While transactions in foreign currencies are allowed, financial reports must be presented in CNY.

Regulatory bodies overseeing China’s accounting practices

Several key bodies oversee the regulatory landscape in China:

  1. Ministry of Finance (MoF): Develops CAS and regulates accounting standards.
  2. China Securities Regulatory Commission (CSRC): Oversees financial markets and securities-related regulations.
  3. State Administration of Taxation (STA): Administers tax laws and ensures tax compliance.

These regulatory bodies play important roles in formulating and implementing accounting regulations, administering macroeconomic policies and enforcing compliance within the business sector.

Determining the financial year-end

In China, fiscal year-end strictly follows the calendar year without exceptions. The company’s fiscal year aligns with the calendar year, starting on 1 January and ending on 31 December. This standardisation simplifies reporting processes and ensures consistency across businesses.

Accounting compliance requirements

Bookkeeping and monthly financial statements and reporting requirements

Chinese regulations mandate that companies compile and submit financial statements monthly. The State Administration of Taxation (STA) sets the reporting timeline, typically requiring submissions by the 15th of each month.

Financial reports must be denominated in CNY, although foreign currencies can be used in business transactions and as the primary currency for bookkeeping purposes.

Accounting records must be maintained in Chinese. Foreign-invested enterprises can choose between using Chinese exclusively or combining Chinese and another language.

Records and books must be preserved for a minimum of 10 years. All businesses operating within China, regardless of industry, must comply with the CAS.

In mainland China, all businesses must issue VAT invoices (known as fapiaos), perform VAT calculations and comply with tax reporting requirements within China’s Golden Tax System (GTS). The GTS software system enables authorities to monitor invoices and taxes nationwide. A fapiao, which serves as both a legal receipt and tax invoice, is essential for documenting purchases of goods and services.

Some low-cost providers simplify accounting practices by recognising revenue and expenses based on the issuance or receipt of a VAT fapiao rather than adopting the accrual basis of accounting. However, this approach can lead to distorted reporting and increase the risk of audits, VAT debts and potential penalties and fines.

Annual filings

Annual tax reconciliation & clearance

Tax authorities are responsible for determining the final amount of taxes to be paid or refunded in the current year, following relevant tax laws, regulations, rules and corporate income tax provisions.

This calculation is based on the monthly or quarterly prepaid amount of income taxes. Subsequently, taxpayers are required to complete annual enterprise income tax return forms, file an annual enterprise income tax return to the competent taxation authority, provide necessary material as requested by the taxation authority and settle the amount of enterprise income taxes for the entire year.

Annual inspection

All foreign-invested enterprises must declare their business activities for the previous year annually by the end of June. This process involves updating company information and submitting a consolidated annual report through the yearly online inspection system.

Common accounting compliance challenges in China

Mapping for group reporting

Accountants must carefully consider the differences between the accounting standards used in China and those adopted by the headquarters (HQ) when preparing group reports. This involves mapping financial report accounts to the target accounting standard and aligning entry codes for consistency.

Differences between tax law and CAS

While financial records comply with CAS and Chinese accounting and tax regulations, discrepancies between these and PRC tax laws prioritise the latter. This can significantly impact financial operations, especially revenue and cost recognition methodologies. After the conclusion of a calendar period, any additional revenue for that month cannot be recognised, and fapiaos related to commercial transactions must be accounted for in the month of issuance.

Intercompany transactions

While intercompany transactions in China generally follow OECD guidelines, strict regulations under China’s foreign exchange rules govern fund movements in and out of the country.
Those payments should be legitimate claims with related supporting documentation to prove that the service is authentic, beneficial to the recipient, and compliant with the arm’s length principle.

Additionally, service fees are subject to both VAT and withholding tax. For outbound payments, if the income is deemed China-sourced (which is often the case), the FIE may have to withhold CIT (usually 5-10%), VAT (usually 6%) and surtaxes on behalf of the parent company to ensure compliance with regulations.

Payments on behalf

Unlike practices common in many countries, companies in China cannot collect revenue or make payments on behalf of other companies. This restriction is especially strict for outbound cross-border transactions. Banks will reject these transactions and include them in taxable income during the annual CIT filings.

When a foreign-owner enterprise intends to transfer funds to a related company, it must enter into a separate service contract with each company and carefully structure it.

Conclusion

This article highlights the importance of strictly following China’s Accounting Standards (CAS) to ensure accurate financial reporting and regulatory compliance. The Golden Tax System mandates monthly financial submissions and VAT invoicing as key compliance requirements.

China’s accounting environment presents challenges, including managing intercompany transactions, aligning group reporting, and navigating complex tax laws. Businesses that successfully address these challenges will maintain financial integrity and achieve regulatory compliance. Companies can mitigate risks and seize growth opportunities by mastering China’s accounting standards and regulatory framework.

How Acclime can help

Simplify your business operations in China with Acclime. We handle record-keeping and ensure hassle-free accounting compliance. Our accounting team will maintain your financial records, provide accurate reports, and meet all compliance requirements. Whether you are a local company or expanding into China, rely on our expertise for reliable accounting management.


Contact our teams for expert support and further information about accounting & tax requirements in China to ensure you are compliant in the market.

Christophe Marquis, Director, Shanghai, y.shi@acclime.com
Mei Qian, Accounting Services Director, q.mei@acclime.com
Emily Shi, Partner, y.shi@acclime.com


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