Tax Optimization and Risk Management

Tax optimization in China can be tricky as the country’s tax framework differs from your home country. Choosing Dingxin’s tax optimization service for peace of mind!

How Crucial are Tax Optimization and Risk Management?

Tax optimization and risk management are some of the key challenges that all entrepreneurs should never ignore. In this rapidly evolving environment, business owners in China need to consistently meet the legal requirements regarding tax compliance to reduce tax risks while trying to optimize their structure for greater benefit margins. 

 

Dingxin can help you facilitate your operations in company by providing a one-stop tax business solution, covering the wide range of taxes in China, including income taxes, indirect taxes, and real estate-related taxes.

Common Tax Risk Factors for Companies in China

Tax risk monitoring and management is playing a significant role in standardizing corporate behavior, reducing tax costs, enhancing operational efficiency, and avoiding tax risks throughout the whole lifecycle of a company in China. In daily operations, businesses frequently deal with VAT, corporate income tax, personal income tax, stamp duty, deed tax, and land appreciation tax. VAT, corporate income tax, and personal income tax are the three most scrutinized taxes during tax audits.

Value-added Tax (VAT) Risks

  • Inauthentic or illegal invoicing: Discrepancies between the billing entity and the recipient, or between the goods listed on the invoice and those actually received.
  • Ineligible Deductions: Deductions taken for input taxes on collective welfare and personal expenses, purchased loan services, catering services, residential daily services, and entertainment services, or related to domestic passenger transport services that do not comply with regulations.
  • Unrecorded Returns or Sales Discounts: Failure to transfer out input tax amounts when returns are made or sales discounts are received.
  • Incomplete or delayed Revenue Recording: cases where cash receipts are not recorded as required, invoices are not issued to customers with corresponding revenues not recorded, or sales revenues are accounted for as receivables for an extended period without being transferred to income.

Corporate Income Tax Risks

  • Unrecorded Incentives and Subsidies: Failing to include various tax rebates, subsidies, and government awards in the taxable income as required.
  • Unadjusted Deemed Sales: Not making tax adjustments for deemed sales activities.
  • Use of Non-Compliant Invoices: Listing cost expenses using non-compliant invoices and vouchers.
  • Inflation of Costs: Inflating cost expenses using fictitious invoices.
  • Deductions Standards: Receiving and reimbursing various expenses exceeding prescribed standards.

Individual Income Tax Risks

  • Commercial Insurance: Personal income tax has not been withheld on commercial insurances purchased for employees that exceed the standard.
  • Excess Benefits: Personal income tax has not been withheld on over-standard payments for retirement, unemployment, and medical insurance, as well as on over-standard contributions to housing funds.
  • Non-Monetary Compensation: Personal income tax has not been withheld on non-monetary compensation (such as goods or services) paid to employees.
  • Employee Stock Options: The profit from exercising stock options has not been taxed as salary income under the employee stock option plan.
  • Gifts and Bonuses: Gifts or cash bonuses given to individuals at other units have not been withheld for personal income tax as required.

What is Included in Dingxin's Tax Optimization Services?

Corporate and Business Taxation Advisory

  • Seeking tax advantages: Identifying and pursuing numerous tax advantages, reliefs, or grants across China's provinces and cities to maximize tax savings.
  • Structural Advice for Tax Efficiency: We provide advice on local and cross-border structures to achieve tax efficiency while taking into consideration tax losses, group reliefs, and capital gains restrictions.
  • Contract Review for Risk Management: Examining contracts to improve tax risk management.
  • Managing transaction taxes, such as stamp duty.
  • Bilateral Tax Treaty Issues: Addressing issues of bilateral tax treaties between China and other countries.

Cross-border Taxation Advisory

As businesses expand into international markets, they face a complex and evolving landscape of global tax regulations, increasing both risk and cost. As international tax consultants, we add value by collaborating with clients to formulate global tax strategies, ensuring compliance, and providing practical tax advice and solutions.

  • Tax Advice for Domestic Investments: Advising on structures, financing, tax incentives, profit repatriation, and exit strategies.
  • Country-Specific Studies for Foreign Investments: Focusing on tax implications.
  • Cross-Border M&A: Tax due diligence pre-acquisition, planning, structural advice, and post-acquisition integration.
  • Support for Cross-Border Transactions: Includes tax-efficient structuring, permanent establishment issues, withholding tax impacts, application of tax treaties, and contract reviews.

Frequently Asked Questions

Still have a question? No worries! We are glad to answer!

How to optimize the company's tax structure to reduce corporate income tax burden?

Companies can optimize their tax structure by registering in regions with tax incentives, such as those eligible for the "High-Tech Enterprise" status, which offers a reduced corporate tax rate of 15%. Additionally, companies can reduce their tax burden by setting up in low-tax regions or countries with special tax policies. For R&D-focused companies, ensuring eligibility for R&D expense deductions can also significantly lower corporate income tax.

How to leverage tax incentive policies for tax optimization?

By obtaining "High-Tech Enterprise" certification, companies can benefit from a 15% corporate income tax rate. Additionally, companies should explore local government tax incentives, such as tax reductions or exemptions, which can further reduce tax liability. When applying for tax incentives, it is essential to provide comprehensive supporting documents, such as technical reports and financial audit statements.

How to optimize cross-border financing for tax and foreign exchange risk management?

When engaging in cross-border financing, companies should balance equity financing with debt financing to avoid excessive debt, which could attract scrutiny from tax authorities. In terms of foreign exchange management, companies must comply with China's foreign exchange policies to ensure that cross-border fund transfers are legitimate and avoid penalties for violating foreign exchange regulations.

How to ensure tax compliance and avoid tax risks?

Companies should conduct regular internal tax audits to ensure the accuracy of tax filings and financial records, particularly focusing on revenue recognition and expense accounting. All sales and purchase invoices should comply with regulations to avoid the risk of fraudulent invoicing. Additionally, companies should proactively cooperate with tax authorities during audits to prevent penalties for non-cooperation.