China’s tax system is complicated and can be quite difficult for foreign investors and individuals to comply with. In particular, the process of dealing with a tax audit in China requires a high level of expertise. Corporate Tax Audits are generally focused on the appropriateness or validity of tax treatments on specific items that may result in a “material” tax impact. Some of the typical examples are:
- Taxability of an income item
- The appropriateness of transfer pricing for related party transactions
- The deductibility of material expenditure and the eligibility for preferential tax treatments
In order to develop an effective strategy for handling a tax audit, understanding precisely the motive and underlying agenda that the audit is directed towards and determining what sort of information and documents should be submitted to the officials, is a high priority.
The tax audit report in China would typically contain:
- Management’s responsibility section
- Auditor’s responsibility section
- Opinion section
The Introductory paragraph sets out the areas covered for auditing. The Management’s Responsibility paragraph sets out the preparation and fair presentation of financial statements; the Auditor’s Responsibility paragraph sets out the principal audit work and procedures carried out and the results. The opinion paragraph sets out whether the accounts have been prepared in accordance with the relevant laws and regulations.
Any reservations in the Opinion Section paragraph needs to be detailed specifically. In some instances different government bureaus may stipulate their own requirements as to what certified public accountants should give their opinion on. Sometimes additional requirements have not been agreed with the Ministry of Finance or the CICPA and they fall beyond the expertise of what is normally expected of a certified public accountant. In some circumstances these requirements issued by other government bureaus have been retracted.
In addition tax audits are important from an internal perspective as they ensure that you and your company are meeting strict governmental requirements, and highlight inefficiencies to be removed from your tax structure. From an external perspective, they tell the world that your company is efficient and effective; it has a grip over what is going on and that the profits it reports are to be trusted. Where trust is such a valuable asset in today’s rapidly changing market, this should never be undervalued.
You can appoint a professional from Acclime as a tax representative to stand in on your behalf and handle your business during a tax audit. We provide representatives who you can trust to do a thorough and honest job, which can be beneficial to both your current operations and future stability.
At Acclime we offer access to tax specialists who have extensive experience in dealing with China’s tax officials to help you prepare for a tax audit and handling queries from tax officials. We can also help in a more proactive way, offering a tax-risk assessment of your foreign invested enterprise or representative office (RO). In doing so, you will be able to identify tax risk areas to correct prior to a tax audit.
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Acclime is a premier provider of professional formation, accounting, tax, HR & advisory services in China. We focus on providing high-quality outsourcing and consulting services to our international clients in China and throughout the region.