In the wake of ‘the Reform and Opening up policy’ carried on by Deng Xiaoping in 1979, China’s planned economy turned into a socialist market economy.
Consequently, China has gradually converged its few accounting standards to international standards. However, fully understand financial reporting and accounting practices in China is a challenging task for multinational companies as they may need to carry out reconciliations between Chinese GAAP and the IFRS (International Financial Reporting Standards which equals to U.S. GAAP) for purposes of consolidations of financial statements. Here is an overview of what you should know.
The fapiao system: fapiao as precious as cash
For newly incorporated companies in China, domestic bookkeeping can be a real headache. Most of the newcomers outsource accounting to professional and local tax and accounting firm.
The first thing to know: the fapiao, pronounced fapiao. All business transactions in China are required to be recorded on an official receipt, called in Chinese, fapiao. Without a fapiao for each transaction, it is impossible to declare expenses for reimbursement, tax deduction and refunds. Printed on a special paper, fapiao can only be purchased from the Tax Bureau and are ruled by quotas. The newly created company starts with 25 fapiao, each with a limit of RMB 100,000. However, one can ask the Tax authorities to obtain more fapiaos, up to 75.
This document allows the Chinese government to control and monitor the tax base and remains a proof of the reliability of any financial statements. As soon as a fapiao has been issued and received, the transaction is confirmed. No fapiao issued nullifies the transaction.In some extent, the fapiao system is a very convenient checking system. Thus, remember a fapiao as valuable as cash and must be kept preciously.
From the Business Tax to the Value-Added Tax
China has been moving progressively over the past years from a Business Tax (BT) system to a Value Added Tax (VAT) system in an attempt to streamline China’s indirect tax system with an objective to remove dual indirect tax system and to give Chinese business a better global competitive tax structure in order to boost the economy’s growth.
Now two classes of VAT Tax Payer exist under the B2V Reform:
|General Tax Payer (GTP)||• Tax payers providing VAT pilot services with annual turnover ≥ RMB 5M
• Tax payers providing VAT pilot services with annual turnover < RMB 5M but which voluntarily apply for GTP status.
|Small Tax Payer (STP)||• Tax payers providing VAT pilot services with annual turnover < RMB 5M|
And the new VAT rates in industries detailed in the VAT reform:
|Industry covered under VAT reform||VAT applicability|
|Domestic sales||Exemption/ Zero rating|
|Leasing of tangible movable properties||17%||Exemption applies|
|Transportation service industry (including road, water and air and pipeline transportation services)||11%||Zero rating VAT applicable for international transport|
|Research & development and technical services||6%||Zero rating VAT|
|IT services||6%||Exemption applies|
|Cultural and creative services||6%||Exemption applies; Zero rating VAT applies to design services|
|Logistics and ancillary services||6%||Exemption applies|
|Certification and consulting services||6%||Exemption applies|
|Basic telecom services||11%||Exemption applies|
|Value-added telecom services||6%||Exemption applies|
Main corporate tax and tax compliance deadlines
|Corporate Income Tax
– Small Scale
– High Tech
|Import Tariffs||14 days before the day of importation||State||0-270%|
|Export Tariffs||24 hours before the export of the good at the customs||State||0-40%|
|Value Added Tax||Monthly but before the 15||State||0-17%|
|Business Tax||Monthly but before the 15||Local||3%, 5%, 5-20%|
Article written by SJ. Grand, Tax and advisory in China, and edited by China Smei
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