Case Study 1: Accounting Review
Incorporated in Shanghai Free Trade Zone, the client has about 10 employees and its principal business is the provision of professional recruitment consulting services in China.
- Funds transferred from the client’s parent company could not be recognised as injected capital due to a non-compliant cross-border remittance procedure.
- Calculation and filing of social benefit contributions were non-compliant with local HR regulations, presenting a risk of disputes between employees and the company.
- Accounts prepared by the client’s local accountant could not be reconciled with bank statements and supporting documents were insufficient.
SBA Stone Forest (SBASF) reviewed the client’s accounts for the half year ended 31 December 2014, and provided solutions in the following areas:
- Compliance with PRC GAAP
- Accounting advisory on regulatory compliance for capital injection and shareholders loan in accordance with foreign exchange rules
- Completeness and accuracy of bookkeeping, including supporting documents
- Ensure full compliance with all relevant tax laws
- Preparing the accounts for audit purpose
The client successfully passed the annual statutory audit for 2014 using accounts prepared by SBASF.
Case Study 2: Financial Health Check
Incorporated in Shanghai Free Trade Zone (“FTZ”), the client’s principal business is the sale of high-end Western-style furniture to customers in Shanghai. Established since 2008, the company currently has an office in the FTZ and another in downtown Shanghai, with a total headcount of 30.
- The company’s individual income tax (IIT) filing base was inconsistent with the salary amount stated in employment contracts, resulting in under-reported IIT since the company was incorporated.
- Cash revenue was understated, resulting in under-reported corporate income tax (CIT) and value-added tax (VAT).
- Risk of challenges from the tax authority on applicable VAT rate
- Conduct on-site visit to client’s office and understand the company’s current business situation
- Financial health check
- Accounting health check for FY 2014-2015 and provide health check report and recommendations for required accounting adjustments
- HR health check for FY 2015
- Health check on internal workflow
- Improved internal control over workflow for bank account, cash management, staff claim, vendor payments and supply chain
- Improved inventory management, resulting in more accurate cost calculation
- Minimise risk of challenges from the tax authority
Case Study 3: VAT Transformation
The client is a company incorporated in Shanghai’s Jiading district. Its parent company in Germany designs and manufactures packaging and special machines worldwide for the pharmaceutical, life science, F&B, cosmetics, chemical and paper hygiene industries. With a presence in China since 2008, the company has a headcount of about 40 staff.
The Chinese Ministry of Finance (MOF) and State Administration of Taxation (SAT) jointly released two import circulars (Caisui Circular 110 and Caisui Circular 111) on 16 November 2011, which announced the implementation of a Value Added Tax (“VAT”) Transformation Pilot Programme. This pilot programme was implemented in phases and has covered all sectors since 1 May 2016.
The first phase of the VAT Transformation Pilot Programme focused on the transportation industry and certain modern service sectors, including the client, which provides its parent company with after-sales services. Consequently, the client is now subject to a VAT rate of 6% instead of a business tax rate of 5% previously. Looking for a way to maximise its profit under the new tax regime, the client approached SBA Stone Forest (SBASF) for assistance.
- Analyse the financial/tax burden impact on the client’s business model as a result of the change from a business tax to a VAT regime
- Review the tax terms in purchase/sales agreements
- Analyse the client’s pricing strategy in existing sales/purchase transactions, and identify ways to renegotiate the pricing structure so that it would be favourable for the client under the new tax regime
- Identify opportunities to maximise the company’s profit based on insights gained from the activities above
- Determine tax category for VAT
- Purchase tax and scan devices from tax authority on client’s behalf to compute VAT payable
- Purchase blank VAT invoice
- Monthly VAT filing (Including calculation of tax burden)
- Client successfully maximises profits under the new tax regime
- Peace of mind for the client over compliance with the new tax regime
Revised Formula to Calculate Taxable Income of Non-resident Enterprises
At the opening ceremony of the National People’s Congress (NPC) held on 5 March 2016, Premier Li Keqiang announced that with effect from 1 May 2016, Value Added Tax (“VAT”) would replace Business Tax (“BT”) in all sectors.
In line with this reform, the formulas for calculating taxable corporate income (only for non-resident enterprises based on revenue converted from operational expenditures) have been revised since 1 May 2016. The three revised areas are explained below.
1. The formula to calculate taxable income of representative offices of foreign enterprises stated in regulation “Guo Shui Fa  No.18” has been revised to:
Taxable Income = [Current Period’s Operational Expenditures / (1 - Deemed Profit Rate)] x Deemed Profit Rate
2. The formula to calculate taxable income of non-resident enterprises stated in regulation “Guo Shui Fa  No. 19” has been revised to:
Taxable Income = [Current Period’s Operational Expenditures / (1 - Deemed Profit Rate)] x Deemed Profit Rate
3. The formula to determine the annual revenue of non-resident enterprises for annual corporate income tax purpose as announced by the State Administration of Taxation in 2015 has been revised to: Revenue = Total Operational Expenditure / (1 - Deemed Profit Rate)
Differential Supervision Rules for Companies Listed on New Third Board
The National Equities Exchange and Quotations Limited Liability Company (also known as the “New Third Board”) recently announced that companies listed on the New Third Board would be classified into the Innovation and Basic categories and subject to differential supervision rules with effect from 27 June 2016. Companies in the Innovation category are normally of higher quality with greater potential.
The announcement stipulates the criteria that companies must meet to be listed under the Innovation category. Those that do not fulfil these requirements will be listed in the Basic category. It also stipulates the requirements for a listed company to maintain its position in the Innovation category.
During the annual inspection, any company in the Innovation category that fails to fulfil any of the requirements will be consequently listed in the Basic category.
New Law Governing Overseas NGOs
The Law on Administration of Domestic Activities of Overseas Non-governmental Organisations (“NGOs”) (“the Law”) has been promulgated and will take effect from 1 January 2017.
According to the Law, overseas NGOs refer to non-profit and non-governmental social organisations legally established outside the territory of China, including foundations, social organisations and think tank institutions, which are allowed to carry out any activities beneficial to the development of public welfare in fields such as economy, education, science and technology, culture, sanitation, sports and environmental protection. Overseas NGOs shall neither engage in or provide funding for profit-making or political activities within the territory of China, nor illegally engage in or provide funding for religious activities.
The Law also stipulates rules on areas such as registration and filing, operational activities, supervision and administration, and states the legal liabilities of NGOs.
Revision of Tentative Measures for Enterprise Annuities Regulation
To further improve the enterprise annuity system, the Ministry of Human Resources and Social Security has revised the Tentative Measures for Enterprise Annuities regulation promulgated in 2004 and drafted Provisions on Enterprise Annuities for public comments (the “Draft for Comment”), with a feedback period that will end on 6 July 2016.
The Draft for Comment clarifies that the expenses necessary for enterprise annuity shall be jointly paid by the enterprise and its employees. The enterprise annuity fund shall be in the form of complete accumulation, and an individual account shall be opened for any employee participating in the enterprise annuity scheme. The enterprise annuity fund may be used for investment and operations according to the regulations of the state. In addition, proceeds derived from the investment and operations shall be incorporated into the enterprise annuity fund. To establish an enterprise annuity system, an enterprise and its employees shall conclude a special collective contract, designate the trustee of the enterprise annuity and sign an authorisation management contract.
The Draft for Comment also states that to establish an enterprise annuity system, an enterprise and its employees shall, through collective negotiation, determine and formulate an enterprise annuity plan. The draft enterprise annuity plan shall be submitted to the trade union or to all employees for discussion and adoption.
Seven Locations in China Increase Statutory Minimum Monthly Wages
Seven locations in China, including Shanghai, Tianjin, and Shandong, recently announced increases in their respective local statutory minimum monthly wages for citizens. Some of the new minimum monthly wages are shown in the table below.
|Location||New Minimum Monthly Wage (RMB)|
Different locations have different policies regarding the statutory minimum monthly wage components. In Shanghai for example, the minimum monthly wage should not include the compulsory social benefit, overtime payment, high temperature allowances, transportation allowances, and various other allowances.
No Administrative Introduction Letter for Personnel File Transfer
The Ministry of Human Resources and Social Security recently issued a Simplifying and Optimising Personnel File Management and Services for Migrants circular (the “Circular”).
The Circular states that file management service institutions will no longer issue any administrative introduction letter when transferring personnel files, and shall not terminate storage and management of migrants’ personnel files that have been put under their custody for any reason, unless employers or migrants apply for file transfer.
The Circular also standardises charging principles by specifying that because the transfer of migrants’ personnel files is a public service, charging for such services should be in line with other similar public services. The fee shall be determined based on the number of files under custody and other factors.
To regulate charging for other services that require file transfer, file management shall not be linked to participation in social insurance schemes, evaluation of professional titles and other business activities, so as to completely eradicate unreasonable bundled and hidden charges. Fees for other services that require file transfer shall be collected in strict accordance with requirements and standards stipulated by the law, and based on the principles of openness and transparency.
SBA Stone Forest (SBASF) is a corporate advisory and public accounting group that focuses on serving foreign enterprises in China since 2001. Headquartered in Shanghai with offices in Beijing, Suzhou, Shenzhen, Chengdu and Hangzhou, we help help foreign investors set up in China smoothly, and thereafter support them in navigating China’s regulatory and business environment.
Our parent company — Stone Forest — is the largest accounting and business advisory group outside the Big 4 in Singapore, with a 30-year history. Discerning international businesses appreciate the advantages of our Singapore heritage, as it epitomises excellence, integrity and trust. We adopt the same systems, international standards, best practices and culture of our Singapore parent. You will work with a dynamic team with the Singapore hallmarks of quality service and delivery.
Together with our partner-owned public accounting practice, we offer quality, one-stop and seamless solutions to our clients. Working with us means you get the best of intimate local knowledge and technical know-how, delivered in the efficient and client-driven culture of international businesses. Our services include business assurance, accounting & advisory, payroll & HR advisory, tax compliance and advisory, risk management, corporate advisory and eDiscovery.
Tan Lee Lee (Ms), Director
T +86 21 6186 7602
Yeo Lee Soon (Mr), Director
T +86 10 8591 1900
Rita Boyle, Director
T +86 21 6186 7692