Here's why China's number one ranking for financial complexity is not as alarming as it may appear.
Since we released the 2018 edition of our Financial Complexity Index, there has been a lot of focus on China's top placing - that is - ranked as the most complex jurisdiction globally for financial compliance. I have personally helped multinationals meet local accounting and tax rules and regulations in China for 15 years, and I have seen a lot change in that time. It's important to put the country's ranking in perspective, and explain why it may not be as alarming as it may appear.
Firstly, a review of the main factors behind China's financial complexity ranking shows that many are not common to other markets.
- Setup of accounting and bookkeeping systems: accounting systems in China need to have Chinese-language capabilities and the ability to display and print accounting vouchers, now viewed as somewhat old-fashioned. Systems are also required to follow the standard local chart of accounts (COA), and related software must be registered with the local finance bureau.
- Accounting and tax compliance legislation: in China, this tends to be strictly enforced. For example, legal and finance representatives are required to visit the tax office in person to sign documents and validate their identification.
- The burden of compliance: compliance in China requires in-depth knowledge and a certain amount of caution. VAT invoices are subject to quotas and a high degree of scrutiny, and must adhere to pre-determined technologies and formats.
- Multiple authorities: depending on the nature of the business, the tax filing process can involve a number of different government agencies, including the tax bureau, finance bureau, statistics bureau and the State Administration of Foreign Exchange. Needless to say taxpayers can find the filing process tedious and time-consuming.
- Packed compliance calendar: companies in China face regular reporting obligations such as monthly turnover tax, quarterly corporate income tax and annual corporate income tax, as well as statutory audits and ad-hoc requests.
Importantly, individual branches of companies are subject to virtually the same level of compliance obligation as a local headquarters, even if they are not separate legal entities. Enforcement is also a concern. Directors are personally liable for the compliance of the company, and enterprises themselves are ranked in terms of the quality of compliance, with high scorers granted more flexibility and sub-standard companies more likely to attract the attention of tax authorities.
Add in the variable that, as a fast-developing country, China is constantly tweaking the accounting and tax system, and it is clear that there are a lot of moving parts for companies to consider. All of this combined contributes to China's top ranking for financial complexity.
A glass half full
All that said, it is important to understand that complexity has positive as well as negative implications. Chinese authorities have taken great care to develop a system of rules and regulations designed to bolster the integrity and stability of the local economy and investment landscape. This should be welcomed by local and foreign companies alike. Rules are applied equally and consistently, encouraging a level playing field and transparency in the collection and analysis of financial information.
The country is also striving for constant improvement. China is currently undergoing an ambitious transformation of the entire tax and accounting system, including unifying company identification; digitising the VAT monitoring system; issuing new regulations and updating old ones.
Talk to us
This pace of change and the intricacies of the existing regime mean firms often require the support of a partner with extensive experience on the ground to keep abreast of, and address, evolving compliance demands. With a solid partnership in place, compliance obligations can be met and China can confidently remain a place of exceptional business growth and opportunity.
Find out how your business can benefit from China's accounting and tax reforms on our on-demand webinar.
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.