Accounting, Financial Reporting, and Audit in China

• Prevention of tax evasion: Each fapiao is either issued using authorised invoice forms or generated through the tax authorities’ secure digital system. The system enables the authorities to monitor and verify transaction information.
• VAT administration: Fapiao documents are central to the administration of value-added tax (VAT). A purchaser may generally claim an input VAT credit only if it holds a qualifying VAT invoice, such as a Special VAT Fapiao, and meets the applicable statutory requirements.
• Monitoring cash transactions: The system encourages businesses to document transactions, including low-value sales, helping to reduce the scope of the shadow economy.
• Recognition of business expenses: A valid fapiao is an important supporting document for business expenses claimed for Enterprise Income Tax purposes.
• Mitigation of fraudulent expenses: Auditors and tax authorities may verify fapiao details using the official verification system, including QR codes where available. Recording expenses supported by forged or improperly obtained fapiao may constitute a violation and result in penalties.

If a company controls one or more other entities, it is required to prepare consolidated financial statements in accordance with the Accounting Standards for Business Enterprises (ASBE).

The consolidation requirement applies irrespective of whether the subsidiaries are located in China or overseas.

When preparing consolidated financial statements, intragroup transactions and balances must be eliminated. These include intragroup sales, outstanding balances, dividends, income and expenses, so that the financial statements present the results of the group as a single economic entity.

The Annual Enterprise Income Tax Return (中华人民共和国企业所得税年度纳税申报表) is a key component of China’s tax reporting system.

Filing the return involves an annual tax reconciliation (汇算清缴), during which the company’s final tax liability for the reporting year is calculated. This procedure is necessary because Enterprise Income Tax is paid in advance during the year. At year-end, the company must recalculate its tax liability based on its actual income and expenses, applicable tax incentives, carried-forward losses and other adjustments prescribed by Chinese tax law.

Who must file: All companies registered in mainland China, regardless of whether they have conducted business or generated profits, as well as non-resident enterprises operating in China through a permanent establishment, where required under the applicable tax legislation.

Filing deadline: Within five months after the end of the tax year, i.e. by 31 May of the following year.

If a company ceases operations, is liquidated or undergoes a reorganisation before the end of the tax year, the taxpayer must submit the relevant tax returns and complete the final tax settlement within 60 days of the cessation of operations or the occurrence of the relevant event.

Filing procedure:

1. Preparation of annual financial statements in accordance with Chinese accounting standards.
2. Completion of a statutory audit of the financial statements, where required by law.
3. Calculation of the taxable income for Enterprise Income Tax purposes by adjusting the accounting profit to reflect tax rules, including tax differences, incentives, carried-forward losses and other adjustments.
4. Preparation and completion of the Annual Enterprise Income Tax Return through the Electronic Tax Bureau (电子税务局).
5. Submission of the return to the State Taxation Administration (STA), payment of any additional tax due or application for a refund or credit of any overpaid tax, where applicable.

If a company has not conducted any business, generated any income or incurred any tax liability in respect of a particular tax during a reporting period, it is generally required to file a nil tax return (零申报).

A nil return confirms that there was no taxable amount for the relevant period. It is filed using the same procedure and within the same deadlines as an ordinary tax return.

Even if a company has no business activity, it is still required to maintain accounting records.

Prolonged filing of nil tax returns may attract the attention of the tax authorities and lead to a tax inspection.

Following the entry into force of the Foreign Investment Law of the PRC, the separate annual reporting requirement to the Ministry of Commerce (MOFCOM) was abolished.

Foreign-invested enterprises (FIEs) are required to provide information about their ownership structure. Such information is currently submitted as part of the annual corporate report through the National Enterprise Credit Information Publicity System (NECIPS) and transmitted to the competent government authorities through inter-agency information exchange.

Under the laws and regulations of the PRC, certain categories of companies are subject to reporting and other compliance obligations involving the State Administration of Foreign Exchange (国家外汇管理局).

These may include:

• foreign-invested enterprises;
• Chinese companies making outbound direct investments (ODI);
• andcompanies conducting certain cross-border foreign exchange transactions.

Depending on the nature of their activities, companies may be required to provide information on overseas investments, foreign exchange transactions, capital flows and other matters prescribed by China’s foreign exchange regulations.

In many cases, companies interact with SAFE through their servicing banks, which act as foreign exchange control agents and submit the required information to the competent authorities. Some information is also provided to SAFE through inter-agency data exchange.

В соответствии с Законом КНР о статистике юридические лица обязаны представлять статистические сведения государственным органам статистики в случаях и порядке, предусмотренных законодательством.

Under the Statistics Law of the PRC, legal entities are required to provide statistical information to government statistical authorities in the cases and in accordance with the procedures prescribed by law.

The scope of statistical reporting depends on the company’s business activities, size, industry and other criteria established under the national statistical reporting system. In practice, reports are submitted primarily electronically through specialised information systems operated by the National Bureau of Statistics of China, NBS (国家统计局) or its local branches.

Companies conducting transactions with related parties are required to disclose information about those transactions as part of their annual Enterprise Income Tax return. Where the thresholds prescribed by law are met, they must also prepare transfer pricing documentation (a Master File, Local File and/or Special Issue File). This documentation is retained by the taxpayer and submitted to the tax authorities upon request.

For certain categories of public companies, the board of directors is required to prepare an annual Internal Control Self-Assessment Report (内部控制评价报告). The report discloses the results of the company’s assessment of the effectiveness of its internal control system, risk management and compliance with legal requirements. Where required by law or stock exchange rules, the report is accompanied by a separate auditor’s report on internal control.

Employers registered in China are required to calculate and pay contributions under the mandatory social insurance system, which covers pension insurance, medical insurance, unemployment insurance, work-related injury insurance and maternity insurance. They must also make contributions to the Housing Provident Fund (住房公积金).

During the year, employers generally submit information about their employees, payroll and social insurance contributions on a monthly basis through the electronic systems of the tax authorities or social insurance authorities.

In addition, employers in many regions of China are required to complete an annual adjustment of the social insurance contribution base (社保年度申报). As part of this procedure, the company reports the actual payroll for the preceding year, which is used to recalculate the contribution base for the following contribution period. Following the transfer of social insurance contribution collection and administration functions to the tax authorities, the State Taxation Administration (STA) automatically cross-checks the submitted information against the data contained in Individual Income Tax (IIT) returns.