With regard to the requirements of maintenance of accounting books and records for a Foreign Investment Enterprise (FIE) in China, there are a number of important regulations to observe and make reference to. The following is a summary of the basic requirements

All FIEs (whether Representative Office or Limited Company) in Xiamen are required to prepare annual financial statements, including balance sheets and income statements for their annual Chinese audit. Tax compliance is especially important because an FIE can only repatriate profits to foreign investors after the Chinese tax bureaus are satisfied that all applicable taxes have been paid up. While tedious, this process is a good opportunity for companies to conduct an internal financial health check and to optimize tax efficiency, financial structure and processes, as well as internal control mechanisms for fraud prevention. Accordingly, an annual audit by a firm of certified public accountants registered in the PRC is required under Chinese law.

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Accounting Books and Records

Books and records have to be maintained in accordance with the relevant regulations. It is a requirement under the Enterprise Income Tax Law for FIEs to retain their accounting records for at least 15 years.

Reporting Currency

RMB is the base currency for ledgers and financial reports. For enterprises using currencies other than RMB in their business transactions, one of these foreign currencies can be used as the bookkeeping base currency. However, the financial reports are required to be shown in RMB which is translated from such foreign currency.

Language

Accounting records have to be maintained in Chinese. Ethnic minorities may use their dialects whilst FIEs may choose to use Chinese solely or a combination of Chinese and a foreign language.

Accounting Period

The accounting period in China is stipulated from 1 January to 31 December. However, if a Chinese company is a subsidiary of a foreign group of companies whose balance day does not fall on 31 December, the Chinese subsidiary can choose to use another date as its balance day, subject to the approval of the relevant regulatory authorities.

Accounting Offices and Personnel

The PRC Accounting Law incorporates some provisions in relation to the appointment of accounting personnel, their responsibilities and qualifications. Businesses should set up their accounting office and designate an accountant in charge according to the needs of its accounting work. Small sized companies may entrust a qualified agent (for example, a CPA firm) with their accounting work. A cashier shall not be concurrently in charge of auditing, taking custody of accounting records or keeping the revenue, expenses or claims and liability accounts.

Accounting Software

In Hong Kong, a company can choose to use any accounting software with reference to the needs of the company. This, however, is not the case in China where the software has to be an approved one. In the event where a company intends to computerize its accounting system, that is, processing and recording all business transactions and generating financial reports by electronic means, it may purchase an accounting package off the shelf or develop a tailored-made one. In either case, the approval of the finance bureau must be obtained. It is also important to make sure the financial reports generated by the accounting software meet the requirements of the relevant regulatory bodies, such as the tax bureau and the administrative bureau for industry and commerce.

Financial Statements

An FIE should prepare balance sheet, income statement and statement of change in financial position (or statement of cash flows) and submit the same (on a quarterly and annual basis) to the finance and tax bureau.

Statutory Audit

An FIE is required to engage a Chinese CPA firm to undertake an annual statutory audit for its financial statements in accordance with the Chinese auditing standards. The annual income tax return supported by the auditor's report is due for filing with the tax bureau within four months after the year-end.

Representative Office

A representative office is in general not allowed to engage in direct business and receive business income. The accounting records are much simpler, containing cash and bank books, expense and asset accounts. For a representative office taxed on an expense basis, it is nevertheless required to engage a Chinese CPA firm for an expense audit report for tax reporting purpose.

General Requirements and Specific Sector Requirements

In addition to the regulations applicable to all types of businesses, there are specific accounting regulations for entities of different ownership and business activities. Entities categorized by ownership include state-owned enterprises, collective owned enterprises, domestic private enterprises, FIEs and joint stock limited companies. By business activities, companies are categorized as manufacturing enterprises, agriculture enterprises, and transportation (general) Enterprises, transportation (railway) enterprises, transportation (aviation) enterprises, postage and telecommunication enterprises, financial institution enterprises, insurance enterprises, tourism and catering enterprises, foreign economic cooperation enterprises, merchandising enterprises, construction enterprises, real estate development enterprises and group structured companies. Take a manufacturing FIE as an example. It is required to comply with the requirements stipulated in the Companies Law if it is a limited company or a joint stock company in addition to the relevant business, accounting and financial management laws and regulations applicable to FIEs. Meanwhile, it is required to adopt accounting and financial systems and regulations applicable to manufacturing businesses. If the provisions of these regulations are in conflict, in practice, specific accounting and financial laws and regulations will prevail over general accounting and financial laws and regulations. For instance, Article 18 of the PRC Company Law stipulates that the law applies to FIEs with limited liabilities. However, if there are specific laws and regulations applicable to FIEs, these laws and regulations shall prevail.

Xiamen Foreign Investment Enterprise Bookkeeping & Auditing - Annual License Renewals
Besides an FIE annual audit in Xiamen, Limited Companies, such as Wholly Foreign Owned Enterprises, Foreign Invested Commercial Enterprises and Joint Ventures (NOT Representative offices) also have to submit a range of other documents and licenses to the authorities for checking and renewal if necessary. The so-called annual renewal is a bureaucratic process, but also a good time to take stock and ensure all your paperwork is up to date. The Audited Financial Report, the Foreign Exchange Audit Report, and the Annual Report must be submitted to seven government departments. These documents must be submitted before June 30th each year.

Xiamen Foreign Investment Enterprise Bookkeeping & Auditing - Annual Tax Declaration
Every year, FIEs have to make annual tax declaration for annual audit in Xiamen. FIEs will also need to submit to both the national tax bureau and local tax bureau the Annual Taxation Consolidation Reporting Package, authorized by a CPA firm by the end of April each year. In this reporting package, a CPA firm shall verify all the taxes including VAT, Business Tax, Consumption Tax, Foreign Enterprise Income Tax (FEIT), and other taxes on the basis of the audit result.

Xiamen Foreign Investment Enterprise Bookkeeping & Auditing – Process of Annual Audit in Xiamen

Prepare Audit Report
All FIEs (including wholly-foreign owned enterprises (WFOE), joint ventures (JV) and foreign-invested commercial enterprises (FICE)) are required to hire external accounting firms to conduct an annual audit of the company’s financial reports. The audit report must be signed by a Xiamen-qualified Certified Public Accountant. The objective of a statutory audit is to ensure that companies meet Chinese financial and accounting standards, including proper use of Chinese GAAP.

Prepare Corporate Income Tax (CIT) Reconciliation
In Xiamen, CIT is paid on a monthly or quarterly basis in accordance with the figures shown in the accounting books of the company; companies are required to file CIT returns within 15 days from the end of the month or quarter. However, due to discrepancies between the accounting standards and tax laws in Xiamen, the actual CIT taxable income is usually different from the total profits shown in the accounting books. Meanwhile, CIT calculation should be in compliance with tax law, not the accounting standards. As such, the State Administration of Taxation (SAT) requires companies to submit an Annual CIT Reconciliation Report within five months from the previous year’s year-end to determine if all tax liabilities have been met, and whether the company needs to pay supplementary tax, or apply for a tax reimbursement. Generally, the Annual CIT Reconciliation Report must include adjustment sheets to bridge the discrepancies between tax laws and accounting standards.

Annual Inspection
FIEs in Xiamen are required to undergo an annual cooperative inspection jointly conducted by several governmental departments of the State Council. These inspections are designed to ensure that FIEs conducting businesses in Xiamen are fulfilling the legal commitments they make to each of the departments. Each year from March to the end of June, the annual inspection is jointly hosted by the following governmental departments:
Ministry of lCommerce (MOFCOM)
lMinistry of Finance (MoF)
Administration of Industry land Commerce (AIC)
lState Administration of Taxation (SAT)
State lAdministration of Foreign Exchange (SAFE)
lStatistical Bureau

Profit Repatriation
Companies distributing profits should complete the reconciliation procedure in advance to leave sufficient time for shareholder companies to prepare for CIT compliance before the May 31 deadline. The submission of additional documents may also be required. In Shanghai, for example, a company should apply for a Letter of Notice for Profit Distribution of Domestic Enterprise issued by the local tax bureau after finalizing its CIT reconciliation. The company receiving the profits will need to attach this letter to its own CIT reconciliation report.

Verification of the documents and tax assessment will be conducted within 15 days after the STB receives these documents. Beijing STB explains that Announcement 40 does not change the tax withholding obligation, but merely simplifies the outbound payment procedure. Companies or individuals who are found to not have fulfilled their tax obligations or filing and registration requirements could face fines ranging from 50 percent to 500 percent of the unpaid tax.