CIT Filing and Annual Reconciliation in China: Corporate Income Tax Guide for Business

An introduction to CIT (Corporate Income Tax)

The necessity of filing CIT is not just a legal obligation but a fundamental component of corporate responsibility and financial transparency in China. CIT filing in China also serves as a significant source of revenue for the government, funding public services and infrastructure that benefit society at large. Moreover, it reflects a company's commitment to corporate responsibility and ethical business practices.

Contributing Advisor

Hannah Feng

Partner

The requirements for filing CIT in China encompass a broad spectrum of enterprises, ranging from resident companies deeply rooted in the Chinese market to non-resident enterprises that have established their presence through various business ventures. CIT reflects the total global income for resident enterprises, embodying their comprehensive financial footprint. In contrast, non-resident enterprises are required to file CITs based on their income generated within China, as well as income generated outside the territory of China but closely related to their establishments or premises in China. This distinction is crucial in understanding China's taxation system's breadth and inclusive approach towards domestic and foreign entities.

Key points about China's corporate income tax: 

• CIT is settled on an annual basis but is often pre-paid monthly and quarterly. The final calculation is based on a company's year-end financial result.
• There are two ways of calculating taxable income: the direct method and the indirect method.
• The amount of income tax payable may be adjusted from accounting profit through applicable tax exemptions, deductions, or income.
• The fundamental regulations on China's corporate income tax are the CIT Law and its Implementation Guidelines.

In the process of conducting the annual CIT filing, companies, both resident and non-resident, need to complete a range of procedures to determine their taxable income and tax payable. This includes preparing pre-tax deduction vouchers, ensuring compliance with audit and reporting requirements, dealing with book-tax differences, and applying any applicable preferential CIT policies. 

It is, however, important to note that requirements may vary from region to region, and companies are advised to consult the guidelines of their local tax jurisdiction. 

Understanding your tax obligations: How to determine your CIT

Which company is eligible for corporate income tax?

CIT applies to all enterprises (except individual proprietorships and partnerships), as well as all organizations that generate income in China. The CIT Law divides enterprises into resident and non-resident enterprises, each with its own set of tax obligations. 

Corporate income tax rates and incentives

The standard CIT rate is 25 percent, applicable to resident and non-resident enterprises with income-generating establishments in China.  

CIT rates could be lower based on:

• The entity type;
• Size;
• Sector; or,
• Location.

In the table below, we’ve provided the CIT rates for different types of enterprises, sectors, and regions.

Overview of the annual CIT reconciliation forms

Businesses are required to navigate through a series of 37 forms. These forms serve as a detailed record of a company's financial activities over the fiscal year.

This section provides a brief overview of the checklist containing the Annual Corporate Income Tax Return Package that is a part of the Annual Corporate Income Tax Return

of the People's Republic of China (Category A , 2017 Version), which companies must pay close attention to:

Tax due payment

Calculating your tax liability

Understanding your corporate income tax (CIT) liability in China is the first crucial step. The formula is relatively straightforward:

CIT Payable = CIT Taxable Income x CIT Rate - Tax Exemptions or Reductions

Here's what you need to know:

• CIT on profits: The tax is levied on the company's net income for the financial year after deducting legitimate business expenses and losses. It's a tax on profits.
• Payment frequency: While CIT is settled annually, payments are typically made quarterly. Any over or underpayments are adjusted in the following year after the year-end audit.
• Taxable income calculation: CIT taxable income is recorded on an accrual basis, with two main methods for calculation - the direct method and the indirect method.

The direct method

Formula

CIT Taxable Income = Gross Income - Non-Taxable Income - Tax-Exempt Income - Deductions - Allowable Losses from Previous Year

Components

• Gross income: Includes various forms of income such as sales, services, property transfer, equity investments, interests, rents, royalties, and other sources.
• Non-taxable income: This may include financial allocations like government subsidies.
• Tax-exempt income: Examples are interest on government bonds and certain equity investment gains.
• Deductions: Reasonable expenses related to income generation, charitable donations (up to 12% of gross annual profit), asset depreciation, and more. Note that certain caps apply to specific expenses like employee welfare and advertising.

The indirect method

Formula

CIT Taxable Income = Gross Profit (from Accounting Books) ± Adjustments for Tax Purposes ± Income/Profits to Offset Previous Year's Loss

Adjustments for tax purposes are necessary when there's a conflict between tax laws and the company's financial and accounting methods. Tax laws take precedence in such cases.

Payment methods

Various options are available for paying CIT in China:

• Online banking: A convenient and increasingly popular method.
• At a tax office: For businesses preferring or needing to conduct transactions in person.

Proof of payment and receipts

Keeping records of tax payments is not just good practice but essential for the purpose of:

• Proof of payment is crucial for audits or any discrepancies that might arise.
• Maintaining detailed records of all tax payments, including dates, amounts, and payment methods.

Notable taxable components

Gross income 

Gross income refers to income in currency and non-currency forms received by the enterprise from various sources, which include: 

• Income from the sales of goods;  
• Income from provision of services;  
• Income from transfer of property;  
• Equity investments, such as dividends and profit distribution;  
• Interests, rents, and royalties;  
• Income from gifts and donations; and 
• Other income. 

Non-taxable income 

The following income within the total income is deemed as non-taxable income:  

• Financial allocation (e.g., government subsidies to enterprises);  
• Administrative and institutional expenses and government funds lawfully collected and brought under financial administration; and  
• Other non-taxable income stipulated by the State Council. 

Tax-exempt income 

Tax-exempt income includes: 

• Income from interest on government bonds; 
• Gains from dividends, bonuses, and other income from equity investment between qualified resident enterprises; 
• Gains from dividends, bonuses, and other income from equity investment received from a resident enterprise by a non-resident enterprise with an establishment or premises in China, with which the income has an actual connection; and
• Income of qualified non-profit organizations. 

Deductions 

Deductions from gross income include:  

• Reasonable expenditure incurred in relation to an enterprise’s income, such as costs, expenses, taxes (except CIT and VAT), and losses with details as such:

• • Costs: Costs incurred in the sale of goods, provision of services, transfer of fixed assets, and intangible assets.
  • Expenses: Expenses related to sales, management, and finance.
  • Taxes: All taxes paid by the enterprise, excluding CIT and deductible VAT, including consumption tax, urban construction tax, customs duties, resource tax, land value-added tax, property tax, vehicle and vessel tax, urban land use tax, stamp duty, educational surcharge, and other applicable taxes and surcharges.
  • Losses: Losses incurred in the production and operation activities, including losses from inventory discrepancies, damage, and obsolescence, as well as losses from asset transfers, bad debts, natural disasters, and other uncontrollable factors.

• Reasonable depreciation of fixed assets;  
• Amortization of intangible assets;  
• Amortization of long-term prepaid expenses;  
• Inventory cost;  
• The net value of an asset transferred; and  
• Other deductions are stipulated by laws and regulations. 

Caps apply when deducting certain expenses from taxable income, such as follows: 

Non-deductible expenditures include: 

• Dividends, bonuses, and other income from equity investment paid to investors; 
• CIT; 
• Fines for delayed tax payment; 
• Penalties, fines, and confiscated property; 
• Expenditures in the form of donations and gifts that do not meet the deductible conditions;
• Sponsorship expenditures ; 
• Expenditures out of capital reserves, such as ;
• Asset impairment provision; and,
• Risk provision, which does not comply with the provisions of the Finance and Tax Departments of the State Council.
• Management fees paid between enterprises;
• Rent and franchise fees paid between internal business units;
• Interest paid between non-banking internal business units; and,
• Other expenditures are unrelated to income. 

Dealing with special situations

Businesses may encounter two critical situations that demand meticulous attention and a strategic approach: handling discrepancies in their tax filings and responding to tax investigations. Both scenarios require prompt action, a thorough understanding of tax regulations, and effective communication. The following are detailed strategies for managing these particular situations, ensuring your business stays aligned with the complexities of Chinese tax laws.

Handling discrepancies

If you discover in your CIT filing, it's important to act promptly and methodically:

• If there are errors in the quarterly filings, the annual filing is a way to correct them automatically.
• If errors have been identified for the past years, it is possible to make self-correction online.
• On a few occasions when online self-correction isn't feasible, the taxpayer shall inform the in-charge tax authority to correct the tax filings
• Engage with tax advisors or accountants experienced in Chinese tax law to understand the implications of the discrepancy.
• Document all communications and submissions related to the discrepancy for future reference.

Responding to tax investigations

Tax audits can be a routine part of business operations initiated by in-charge tax authority. Here's how to handle them effectively:

• Tax investigations in China can be triggered by various factors, such as random selection, discrepancies in filings, or specific criteria set by the tax authorities.
• Gather all relevant financial statements, tax filings, receipts, and other documentation that the auditors may request.
• Consult with tax professionals with expertise in audit handling. They can provide valuable guidance on navigating the process and representing your interests.
• Provide complete and accurate information to the tax officer/authority. Cooperation is key to a smooth audit process.
• Be aware of your rights during an audit, including the right to clarification on any findings and the right to appeal if you disagree with the audit conclusions.
• If the audit identifies areas of non-compliance, take prompt action to rectify these issues. Implement changes in your accounting or tax processes as recommended.

Seeking professional assistance

Seeking professional assistance becomes helpful and often essential for ensuring compliance and optimizing tax strategies.

When to seek help

There are several situations where the expertise of a tax professional is invaluable:

• Understanding CIT obligations from the start is crucial for new businesses in China.
• Tax regulations in China can change frequently. Professionals keep abreast of these changes, ensuring your business remains compliant.
• If your business involves cross-border transactions, the complexity of tax laws increases significantly.
• In cases of discrepancies in tax filings or if your business is selected for an audit, a tax advisor's guidance is required.

Finding tax advisors

Choosing the right tax professional or consultant is a critical decision. Here are some tips:

• Look for advisors with a deep understanding of Chinese CIT regulations.
• Consider firms with a proven track record and positive client testimonials.
• Ensure the advisor offers services tailored to your business's needs.
• Choose a consultant who communicates clearly and is responsive to your queries.

Partner with Dezan Shira & Associates for expert tax guidance

Our extensive experience in Chinese tax law stands ready to assist your business in navigating the CIT landscape. Our team of experts can provide personalized advice, ensuring your business not only complies with tax laws but also benefits from any available tax incentives and optimizations. Whether setting up a new venture, dealing with complex international transactions, or facing an audit, our professionals are equipped to guide you through every step.

Contact us today to ensure your business's tax strategy is as efficient and compliant as possible.

Conclusion

Understanding and managing Corporate Income Tax (CIT) in China involves a thorough knowledge of the responsibilities of resident and non-resident businesses. It requires careful consideration of the intricate procedures of annual filing, determining taxable income, and keeping up with the dynamic tax laws. This guide highlights the necessity of precise compliance, proactive handling in unique circumstances like inconsistencies and audits, and the essential contribution of professional tax consultants like Dezan Shira & Associates. Proficiency in China’s CIT is not merely about meeting legal obligations; it’s a vital part of business ethics and a significant input to the nation’s economic structure.

Additional documents

Refer to official Chinese tax authorities and resources for further information.