After establishing a company in the Chinese mainland, the company must complete several initial tax formalities before moving into routine tax compliance. One of these is the Filing of Financial and Accounting Systems and Accounting Software, known in Chinese as the 财务会计制度及核算软件备案报告.
The filing is normally handled during the company’s initial tax-registration process. In practice, an outsourced accountant or the company’s in-house finance team usually prepares and submits it through the local Electronic Tax Bureau.
For a straightforward company, this is generally a routine filing. However, the information reported describes how the company will maintain its statutory accounting records in China. Some entries therefore depend on decisions about accounting standards, depreciation, inventory costing, accounting software and the relationship between the China finance function and the overseas headquarters.
Headquarters does not ordinarily need to manage the submission itself, but it should understand and confirm the accounting and systems decisions behind it.
What is the filing of financial and accounting systems and accounting software?
Companies engaged in production or business operations must report their financial and accounting systems, accounting treatment methods and accounting software to their competent tax authority.
The filing generally covers:
- the financial and accounting standards applied by the company;
- the amortisation method for low-value consumables;
- the depreciation method for fixed assets;
- the inventory valuation or cost accounting method;
- the name and version of the accounting software; and
- the financial statements prepared by the company.
The filing is an information-reporting requirement rather than an application for the tax authority to approve the company’s accounting policies or software. The company remains responsible for the truthfulness, legality and consistency of the information submitted.
When should the filing be completed?
The filing forms part of a wider set of bookkeeping and tax-compliance obligations that arise shortly after incorporation.
Under Article 22 of the Implementation Rules of the PRC Tax Collection and Administration Law (“Implementation Rules”), a taxpayer engaged in production or business operations must establish accounting books within 15 days after receiving its business licence or becoming subject to tax. These books include the general ledger, subsidiary ledgers, journals and other supporting books.
Article 24 further requires a taxpayer to file its financial and accounting system or accounting treatment methods with its competent tax authority within 15 days after obtaining its tax-registration documentation. If the company uses computerised accounting, information about its accounting software, user instructions and related materials must be filed before the system is used.
China’s integrated business-registration system means that a newly established company generally uses its unified social credit code for tax purposes rather than obtaining a separate tax registration certificate in the traditional form. In practice, the filing is normally addressed during the company’s post-incorporation tax-information confirmation and initial tax-registration work.
The precise electronic filing interface, supporting documents and administrative procedure may differ between local tax authorities. The company’s accountant should confirm the deadline and filing process with the competent tax authority where the company is registered.
Who normally handles the filing?
The filing is normally handled by:
- an outsourced accounting provider;
- an external bookkeeping agency; or
- the company’s in-house accountant.
Headquarters is not usually expected to complete the form or communicate directly with the tax authority. The local accountant should be familiar with the filing interface and the information expected by the competent tax authority.
However, the accountant should not be left to make group-level decisions without confirmation. Headquarters may need to provide information about the intended business model, accounting system, group reporting requirements and internal controls.
A sensible approach is for the local accountant to recommend the appropriate entries, while China management and headquarters confirm the underlying facts and reporting arrangements.
What information is reported?
Applicable financial and accounting system
The company identifies the accounting system or standards used for its statutory accounts in China.
Depending on the company’s nature and eligibility, this may include:
- the Accounting Standards for Business Enterprises;
- the Accounting Standards for Small Enterprises; or
- another accounting system applicable to the company.
This entry concerns the company’s local statutory accounts. It should not be selected merely by copying the accounting framework used by the overseas parent.
For example, the group may prepare consolidated financial statements under IFRS, US GAAP or another overseas reporting framework. The China subsidiary must still maintain accounting records that comply with the accounting requirements applicable in the Chinese mainland.
Where the local and group frameworks differ, the company may need:
- a separate group reporting package;
- a mapping between the local and group charts of accounts;
- consolidation adjustments; or
- reconciliations between statutory and group reporting figures.
The company should select an accounting system that reflects its legal status, scale, activities and applicable regulatory requirements. The local accountant should explain the recommended selection and its effect on financial reporting.
Amortisation method for low-value consumables
The filing may ask how the company accounts for low-value consumables. The prescribed filing form refers to methods such as:
- immediate write-off;
- staged amortisation; and
- the 50/50 amortisation method.
The practical relevance depends on the company’s activities. A small consulting company may have few items in this category, while a manufacturer, retailer or laboratory may need a more detailed policy.
The policy should distinguish low-value consumables from fixed assets, inventory and ordinary operating expenses. The method reported should also be applied consistently in the company’s accounting records.
Depreciation method
The company reports how it will depreciate its fixed assets. The straight-line method is commonly used, but the method selected should reflect the applicable accounting requirements and the expected consumption of the assets’ economic benefits.
The decision may affect:
- the timing of expenses in the statutory accounts;
- the fixed-asset register;
- the configuration of the accounting system;
- the reconciliation between accounting and tax depreciation;
- group reporting adjustments; and
- deferred tax calculations, where applicable.
The depreciation method reported in the filing does not by itself determine whether the resulting expense is deductible for corporate income tax purposes. Accounting treatment and tax treatment may differ, and the company may need to make tax adjustments when preparing its corporate income tax filings.
Cost accounting method
The company describes how it will value inventory or calculate the cost of finished and semi-finished products.
For a trading company, this may concern the method used to assign costs to inventory. For a manufacturer, the policy may need to address:
- direct materials and direct labour;
- allocation of production overhead;
- work in progress;
- standard or actual costing;
- treatment of abnormal production costs; and
- reconciliation between operational and financial records.
A service company without material inventory or production activity will generally have a simpler cost-accounting arrangement.
The method reported should reflect the company’s actual business model. A generic selection made at the beginning may become unsuitable if the company later begins manufacturing, holding substantial inventory or undertaking project-based work.
Accounting software
Where the company uses computerised accounting, it reports the name and version of its accounting software.
Article 24 of the Implementation Rules requires information about the software and related materials to be filed before the software is used. It also requires the company’s computerised accounting system to comply with the relevant rules and to account correctly and completely for the company’s revenue or income.
The system may be:
- a local Chinese accounting package;
- the group’s enterprise resource planning system;
- an outsourced accountant’s bookkeeping platform; or
- a combination of local and group systems.
For headquarters, the software decision may be more significant than the filing itself. The company should consider whether the proposed system can support:
- Chinese-language accounting records;
- the applicable statutory chart of accounts;
- local tax and financial reporting;
- VAT invoice and transaction-level reconciliations;
- fixed-asset and inventory records;
- retention and retrieval of accounting records;
- group reporting and consolidation mappings; and
- suitable system access and approval controls.
A group ERP may support management and consolidation reporting but may require localisation or additional configuration for China statutory accounting. Some companies therefore maintain their statutory books in a local accounting system and transfer or map the resulting balances into the group reporting system.
This arrangement can work, provided the company regularly reconciles the systems and controls manual adjustments.
Financial statements
The filing identifies the financial statements the company expects to prepare. These may include:
- balance sheet;
- income statement;
- cash flow statement; and
- relevant supporting schedules.
The applicable formats and reporting requirements will depend on the financial and accounting system selected.
The selection should be made carefully because the accounting system recorded with the tax authority may affect how the company subsequently submits its financial statements through the local tax system.
Language and record-retention requirements
Under Article 27 of the Implementation Rules, accounting books, accounting vouchers and financial statements must be prepared in Chinese.
A foreign-invested enterprise or foreign enterprise may use a foreign language in addition to Chinese, but the foreign language does not replace the Chinese records.
Headquarters may therefore request an English or bilingual reporting package for internal use while the China company maintains its official accounting records in Chinese.
This requirement should be considered when selecting accounting software. A system designed solely for an overseas group may not be suitable for China statutory accounting unless it can produce the necessary Chinese-language records and reports.
Article 29 of the Implementation Rules provides a general ten-year retention period for accounting books, vouchers, statements, tax payment documents, invoices, export documents and other tax-related materials, unless another law or administrative regulation provides otherwise.
For core accounting records, the more specific Measures for the Administration of Accounting Archives impose longer minimum periods. The applicable periods include:
| Accounting record | Minimum retention period |
|---|---|
| Original vouchers and accounting vouchers | 30 years |
| General ledgers, subsidiary ledgers, journals and other principal accounting books | 30 years |
| Monthly, quarterly and semi-annual financial reports | 10 years |
| Annual financial reports | Permanent |
| Bank statements and bank reconciliation statements | 10 years |
| Tax returns | 10 years |
The retention period generally begins on the first day following the end of the relevant accounting year. These are minimum periods rather than automatic destruction dates.
Records connected with unsettled debts, pending matters or other continuing obligations may need to be retained beyond the prescribed period. Records should only be destroyed after the required appraisal and approval procedures have been completed.
The company should therefore apply the retention period prescribed for each category of accounting archive rather than adopting ten years as a general retention policy.
Electronic records require appropriate controls
The Measures for the Administration of Accounting Archives (“Measures”) recognise electronic accounting archives, subject to specified conditions.
Among other requirements, the relevant systems must be able to receive, read and export complete accounting information. The company must also establish controls to:
- preserve the accuracy and completeness of the records;
- prevent unauthorised alteration;
- maintain connections between related accounting records;
- establish effective backup arrangements;
- protect records against accidents and human interference; and
- ensure that electronic records remain accessible throughout the applicable retention period.
The software decision should therefore consider the full retention period of each record, including permanent retention where required. This is particularly relevant when:
- changing outsourced accountants;
- replacing accounting software;
- migrating data to a group ERP;
- restructuring the China company; or
- closing and deregistering the company.
If an outsourced accountant maintains the company’s records, the company should not assume that the service provider will automatically retain all records for the complete statutory period.
Article 26 of the Measures requires a company using an external bookkeeping agency to address accounting-archive management requirements and responsibilities in its written engagement agreement. The agreement should clarify ownership, access, storage, backup, transfer and preservation responsibilities.
Why should headquarters be involved?
The outsourced accountant or local finance team can normally complete the filing with limited administrative input. Headquarters should nevertheless confirm the decisions affecting the group’s reporting and control environment.
Local statutory and group reporting must be distinguished
The China company’s statutory books serve local accounting, tax, audit and regulatory purposes. They may not follow exactly the same recognition, classification or presentation rules as the group accounts.
Headquarters should decide how the differences will be managed. Common approaches include:
- maintaining local statutory accounts and preparing a separate group reporting package;
- configuring the group ERP to support both local and group reporting requirements; or
- maintaining local books in a China accounting system and mapping them to the group chart of accounts.
The selected approach should allow the group to reconcile local statutory figures to consolidation figures without losing the underlying transaction history.
Accounting policies should reflect the planned business
A newly established company may initially have few transactions, employees or assets. Its operations may later expand to include inventory, manufacturing, import and export, intercompany services, research and development or domestic sales.
The initial accounting policies should reflect the company’s reasonably expected operating model. If the business changes materially, the company should review its accounting policies, software configuration and filed information.
The software decision affects internal controls
Selecting accounting software is also a financial-control decision. The system determines who can enter, approve, modify and extract accounting data.
Headquarters and the China finance team should agree on:
- system ownership and administrator access;
- user roles and approval authority;
- closing procedures and reporting deadlines;
- controls over manual journal entries;
- supporting-document requirements;
- bank, invoice and ledger reconciliations;
- backup and data-retention arrangements; and
- mapping to the group chart of accounts.
These arrangements usually have a greater long-term effect than the filing form itself.
The filed information should match actual practice
The company should retain a copy of the filing and periodically compare it with its actual accounting arrangements.
If the company reports one accounting system, depreciation method or accounting software but uses another in practice, inconsistencies may arise during financial reporting, statutory audit, tax review or internal control testing.
The accountant should review the filing when the company:
- changes its statutory accounting system;
- replaces or materially upgrades its accounting software;
- begins holding inventory or manufacturing;
- adopts a materially different costing method; or
- otherwise changes the accounting arrangements previously reported.
The company should seek confirmation from its local accountant on whether an updated filing is required.
Questions headquarters should confirm
Before the filing is completed, headquarters should confirm:
- What activities will the China company undertake during its initial stage?
- Will it hold inventory, manufacture products or use project-based costing?
- What fixed assets does it expect to acquire?
- Which accounting standards will apply to its China statutory accounts?
- Which software will maintain the statutory books?
- Will the company use the group ERP, a local system or both?
- How will local accounts map to the group chart of accounts?
- What reporting package must the China company provide to headquarters?
- Who will approve journal entries and changes to accounting records?
- How will the company preserve its Chinese accounting records and supporting documents?
- What accounting-archive responsibilities will be assigned to the outsourced accountant?
- Who will review whether the filing needs to be updated when the business or systems change?
A routine filing within a wider accounting framework
The Filing of Financial and Accounting Systems and Accounting Software is a routine part of the initial tax-registration process. It is normally prepared and submitted by the company’s outsourced accountant or in-house finance team.
Headquarters does not need to treat it as a major implementation exercise. It should, however, understand what the local accountant intends to report and confirm that the answers are consistent with the company’s planned operations, statutory accounting obligations and group reporting model.
A brief review at the outset can help the company establish accounting records that remain suitable for tax compliance, statutory audit, management reporting and group consolidation as its business in the Chinese mainland develops.