Meaning
The statutory obligation of companies with foreign ownership is to compute and report their tax liabilities in strict accordance with the tax laws of the People’s Republic of China. Achieving foreign-invested enterprise tax compliance involves filing quarterly and annual tax returns for corporate income tax and value-added tax. This process is monitored by the State Taxation Administration and requires adherence to specific transfer pricing regulations.
Transfer Pricing
Transactions between a foreign-invested enterprise and its overseas affiliates must follow the arm’s length principle. The local tax office reviews these cross-border transactions to ensure that profits are not artificially shifted out of the Chinese jurisdiction.
Annual Audit
Firms must undergo an annual tax audit conducted by a registered Chinese certified public accountant before submitting their final annual corporate income tax reconciliation. This audit verifies the legitimacy of all business expenses, depreciation methods, and tax incentives claimed during the fiscal year. Taxpayers must resolve any discrepancies and pay outstanding balances by the end of May of the following year.
Failure to complete this process leads to administrative penalties and a reduction in the firm’s tax credit rating, which affects its customs clearance speed.
Repatriation Boundary
Profits cannot be distributed or repatriated to foreign parent companies until all current and historical tax liabilities have been settled. The local bank will refuse to process the dividend wire transfer without a tax clearance certificate from the tax bureau.
