In our Financial Complexity Index 2018, China ranked as the most complex jurisdiction in the world for accounting and tax compliance. It is vital for companies entering or expanding in China to understand how they should set up their accounting and tax functions in full compliance with local requirements.
For growing companies with overseas aspirations, China seems like the perfect destination for expansion. But with lengthy bureaucratic procedures and an unfamiliar consumer environment awaiting those who try, having local advisors on hand to help navigate the complex market is crucial.
To be successful in launching your accounting and tax functions in China, we suggest considering these six main points. They will also help in the decision making process around whether to do this in-house or outsourced.
1. Business Location
China requires a physical business address before a company can be established, which means paying rent before you have even registered a company name! So, location is the first decision to be made – whether it is to be close to your vendor, partner(s), resources, or whether it is down to location costs and local government incentives. Many companies think Shanghai is too expensive but they also worry that they may struggle to find good talent in a lower cost city. There is no one solution for all businesses, it depends on the nature of the business activities and requirements.
2. Statutory reporting
China's statutory reporting requirements are a non-negotiable factor, meaning that if your company's financial year is different to China's fixed January to December year, you will be required to report twice. This could incur additional cost for compliance. Additionally, all accounting information is required to be presented in Chinese language and currency (RMB).
3. Accounting software
The local Finance Bureau specify their requirements about the accounting software used. An application and registration needs filing with them. Navigating this is something a local partner can advise upon.
4. Foreign Transactions
China has a strict and restrictive Foreign Exchange control, which is governed by the State Administration of Foreign Exchange (SAFE). All cross-border transactions are regulated and monitored by the People Bank of China and are executed by the local commercial bank.
5. The new VAT reform programme
In March 2016, new rules were issued for implementing VAT, which included a change in the tax rates, in sectors including construction, real estate, finance, and life service. Since then there have been further changes to the rules and regulations and now, the golden tax management system is being updated. Keeping abreast of the changes is challenging, so having a local knowledge source to maintain regulatory compliance is key.
6. Bureaucracy
Overseas firms often struggle with laws and regulations in China, with 31% of 338 respondents in a recent business survey listing bureaucracy as their number one concern when expanding into the country. Most common complaints revolve around obtaining the required licenses and permits, with many respondents bemoaning the laborious processes.
Administration, licensing, product approvals and many more operating tasks can leave managerial desks flooded in paperwork. Similarly, from an HR perspective, the costs involved in hiring talent and the even bigger cost and bureaucracy of hiring the wrong person.
For many firms, overcoming the bureaucratic hassle is the biggest task to successfully breaking the Chinese market. For more information about the challenges of doing business in China, click here.
Making the right decision between launching your accounting and tax functions in China in house as opposed to outsourcing them is crucial. If the decision is to invest in an in-house team, having a local partner to advise on such necessary points as the number of monthly transactions, complexity of month-end close, the time required from your controller to meet all the regulatory and bureaucratic requirements, would be beneficial.
On the other hand, outsourcing this to a partner would mean the cost of monitoring is brought to a minimum, the partner would provide access to existing accounting software, access to a team of professionals, low risk of fraud, full compliance with statutory requirements and policies and procedures would be standardised to support the rapid growth of your business.
China ranks first in our Financial Complexity Index 2018. Download the full report here.
Contact our local TMF Group experts
TMF Group has the local knowledge to help you identify the relevant compliance, tax and accountancy aspects in China and face any challenge or opportunity they may pose for your business. Whether you want to set up in China or want to streamline your operations there, we have 10 years of local knowledge to help. Talk to us today.
Learn more about TMF Group in China.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
