China’s Annual Audit and Compliance Requirements
According to PRC Company Law and other relevant regulations, all Foreign Invested Enterprises (FIEs) in China, including Wholly Foreign Owned Enterprises (WFOEs), Joint Ventures (JVs), Foreign Invested Commercial Companies (FICEs), and Representative Offices (R0s), are required to comply with the statutory annual audit and other compliance processes.
What are the key areas in an annual audit?
For JVs, WFOEs and FICEs, accounts related to purchases and sales are usually the most vulnerable areas in an annual audit, and so more time would typically be spent reviewing these accounts and ensuring that the accounting data is genuine and accurate. This is done by comparing the transactions with the corresponding contracts, invoices, orders, and inventory changes.
In addition, it is quite common for FIEs new to China to conduct most of their transactions with affiliated companies overseas. For example, they would import from their foreign parent company and either sell the products domestically, or export products purchased from China to their overseas affiliates. These transactions can raise issues in transfer pricing and bring the foreign company into non-compliance with the Chinese tax bureau.
For ROs, because daily business operations are relatively simple compared to other types of FIEs, more attention will be paid on expense accounts and financial statements.
Why is the annual audit important to FIEs in China?
FIEs can only distribute and repatriate their profits or dividends back to their home country after completion of their annual statutory audits and settlement of all relevant tax liabilities. Failure to comply with the annual audit and compliance may result in extra expenses, penalties, or even revocation of business licenses.
When FIEs initially began setting up in China, many were not familiar with Chinese accounting standards and tax rules. This resulted in incorrect accounting treatments or tax filings becoming common, especially amongst small and medium sized FIEs. The annual audit is a good opportunity to enhance a company’s internal control systems. Through the annual audit process, auditors will help find mistakes in business operations, help FIEs Improve their financial reports In accordance with Chinese accounting standards, and ensure that accounting data is presented appropriately.
The Annual Audit Compliance Process for FIEs in China
China has various nuanced annual audit procedures that FIEs will have to follow in order to achieve full compliance. Here, we provide a step by step guide to these procedures, Including general requirements, key considerations, and materials to be prepared, with notes on regional differences and tips from experienced accountants and auditors.
Annual audit work for JVs, WFOEs and FICEs
For WFOEs, JVs, and FICEs, achieving annual compliance can be a long and complicated process. The work primarily involves producing a statutory annual audit report, a corporate income
tax (CIT) reconciliation report, making “existing right registration” for foreign currency reconciliation, and reporting to relevant government bureaus. However, there may also be additional region-specific requirements for a foreign company to fulfill. Firms should either contact a service provider or the local government to ensure that they’re aware of these.
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Originally published by Dezan Shira & Associates, a fellow LEA Global member.