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Accounting in China: What one must discern regarding taxes and reports in the Celestial Empire

Publication date/update: 06.05.2024
The imposition of anti-Russian sanctions by Western partners is drawing Russian businesses closer to China. While many companies are merely procuring goods from Chinese suppliers, some are prepared to fully enter the Chinese market. What does this signify? It entails the comprehensive practice of accounting and tax management, albeit adhering to Chinese standards exclusively. What are these standards and regulations? We shall elucidate them in this article.

Accounting in China: Is there any proximity to Russia?

Russia has long fostered a close friendship with China, as evidenced by numerous business forums and collaborative projects jointly undertaken by our nations. What factors have contributed to this state of affairs?
  • China is geographically proximate to us; our countries share a common border.
  • With each passing year, China's influence on the global stage strengthens.
  • China boasts one of the most rapidly developing economies.
  • Russia and China are the largest countries in Asia.
It is noteworthy that the initial significant strides toward closer economic ties between the two countries were taken in 2005. An agreement was then signed on joint information sharing among tax inspectors on a wide range of issues. This encompassed the exchange of expertise. However, the main objective was to identify firms operating in both countries that were evading taxes.

Over time, China began to reform its accounting system, making it more transparent. To achieve this, all enterprises were mandated to transition to IFRS - International Financial Reporting Standards, a system that Russia also operates within.

Chinese themselves associate this decision with the onset of a new era in the development of China's accounting and auditing sector, which will drive the establishment of a modern economic model and facilitate investors in making more informed decisions. However, it is important to note that the new standards did not apply to all firms. Only companies listed on the stock exchange are required to prepare financial statements in accordance with IFRS requirements. Others can still operate under internal rules, but there is a desire to change this rule.

China: Accounting for Foreigners

Russian individuals can establish a Limited Liability Company (LLC) in China. This option is deemed most favorable for operating within the country, as Chinese individuals tend to be wary of anything foreign. Consequently, not all partners are willing to collaborate with Russian LLCs. What nuances should be taken into account in this regard?
  • Entering the Chinese market is a time-consuming process. Registration typically takes between 1 to 3 months. Initially, one must obtain preliminary project approval from the municipal department of market supervision and management, followed by submitting an application for registration along with a set of documents to the Ministry of Commerce. Upon registration, the company is issued a license to engage in commercial activities.
  • Advertising in the fields of medicine, fintech, and education is heavily regulated in China. For instance, when advertising medical products, it is prohibited to compare them with other medications. Advertising a foreign university is permissible only if it is accredited in China.
  • Negotiating with Chinese counterparts can be challenging, as the terms often change throughout the negotiation process.
  • Foreigners face prohibitions and restrictions when engaging in certain types of businesses, such as the automotive industry and agriculture.
  • To establish a business, one will require an M visa, as it specifically allows for commercial activities. While there is an F business visa available, it is suitable for conducting negotiations and attending exhibitions.
  • The standard corporate income tax rate in China is 25%. However, there are preferential rates for small enterprises: 5% for profits up to 1 million yuan per year and 10% for profits up to 3 million yuan per year. High-tech companies benefit from a reduced corporate income tax rate of 15%. Additionally, Chinese companies are subject to value-added tax (VAT) ranging up to 17% depending on the type of activity, employee social insurance contributions at 37.66%, and contributions to the accumulation fund at 14%.
Russian founders can establish one of three types of companies (business forms). This pertains to:
  • Companies with limited liability fully funded by foreign capital.
  • Partnerships with foreign investments are enterprises controlled by both foreign and Chinese participants.
  • Foreign representative offices are not permitted to engage in commercial activities; they can only conduct negotiations, research, and exchange technologies.
As for the tax burden, up until 2008, foreign firms felt comfortable and privileged in the Chinese market due to low tax rates. However, over the past 16 years, the corporate income tax rate for companies with foreign capital participation has risen from 15-24% to a fixed 25%, while for domestic companies it reached 33%.

Regarding foreign specialists working in China, the income threshold for paying taxes has been increased from 4000 yuan to 4800 yuan. This is significantly more favorable. Overall, the personal income tax rate in China is progressive: the higher the income, the higher the tax. Representatives of low-paying professions contribute 5% of their income to the budget, while the highest earners pay up to 20%.

Chinese Accounting: Means and Methodologies

It is important to note that initially, and to some extent even now, Chinese did not consider Western developments in income and expenditure accounting. Consequently, accounting was initially perceived as simplified. In recent years, Chinese authorities have been striving to integrate existing Chinese planning and control methods with the best Western methodologies, making them applicable to China's unique industrial and economic environment.

In general, accounting in China is classified into the following categories:
  • Asset Accounts. These are essential for recording the types of property owned by the enterprise and those in circulation. By law, this includes cash in the bank, accounts receivable, land, inventory, structures, bills receivable, merchandise inventory, and production supplies
  • Liability Accounts. An accountant would classify accounts payable and the company's debts to banks, the government, other firms, and employees under this category.
  • Founder's Equity Accounts. This pertains to the extent of the founders' participation in financing the company's assets. It includes share capital, retained earnings, and additional investments by the owner. The number of such accounts depends on the company's ownership structure.
  • Revenue Accounts. These pertain to the benefits accrued by the company from the sale of goods or services rendered. This includes income derived from the sale of assets, dividends, and interest on deferred payments.
  • Expense Accounts. These accounts record all resource expenditures that enable the generation of certain revenues in the reporting period.
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Taxes in China

What taxes need to be paid in China?
  • Value-Added Tax (VAT). Similar to Russia, it is levied on the sale of goods/services. Rates vary depending on the category of goods, ranging from 9% to 13%. In some cases, VAT is not applicable.
  • Profit Tax. Calculated on the profit earned by the company, typically around 25%. For small businesses with low turnover, it may be reduced to 5%.
  • Tax on Enterprises with Foreign Investments. Depends on the type of activity and the location of the company. In certain zones, tax incentives are provided.
  • Other taxes include property tax, consumption tax, as well as social and pension contributions.
Can tax burden be optimized in China? Yes, it can be achieved by:
  • Exploring all available incentives. Different regions and cities in China offer tax incentives to attract foreign investments.
  • Planning income and expenses.
  • Working with experienced tax consultants.
  • Thoroughly studying the Chinese market.

Potential penalties

If attempts are made to violate the law regarding the preparation of financial statements or tax payments, it's possible to face penalties. In China, companies can be fined for tax violations, including late or non-payment. The penalties can be severe, with fines reaching amounts with five zeros. Additionally, inspectors may prescribe the repayment of the principal debt.

If a company is caught blatantly violating the law, it may lose its license and assets. That's why if there are doubts about the correctness of your calculations, it's better to seek help from competent consultants. The funds spent on their services will be offset by savings on penalties. Apart from the fine, the company may face public disgrace, affecting its reputation and that of its owners.

To prevent companies from concealing revenue from the tax authorities, Chinese authorities have introduced a system of so-called invoice lotteries. Several times a month, inspectors conduct drawings of various prizes, which can be obtained if the invoice number matches the drawing number. Because of this, Chinese almost always demand receipts from sellers, forcing companies to operate transparently.

Moreover, China strictly monitors money laundering. In 2007, a corresponding law was enacted. Bribery is also among the crimes covered by this law. It allows tracking the movements of funds of officials who take bribes and suspending them from office.
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