China tax - "Health Check" on the China entity

A health check review on a China entity is like conducting a detailed "body checkup" on the entity. It reports on whether the China entity is complying with the China business, foreign exchange and relevant tax laws and regulations. In view of the recent tightening on tax collection by the China tax authorities, the hefty penalties (a maximum 5 times the amount of outstanding taxes) and surcharges (about 18% per annum on the amount of outstanding taxes) that could be imposed for failure to pay taxes and the possibility of the business licence being cancelled for non-compliance with the business regulations, health checks are popular and important for risk management purposes.

How does an entity benefit from a China health check?

To ensure that the current operations of the China entity substantially comply with the relevant China tax laws and regulations;
To highlight the potential consequences in relation to the non-compliance practices for the period under review so as to facilitate the future corrective actions;
To provide high-level suggestions to rectify non-compliance issues; and
To identify areas whereby the overall tax efficiency of the current operations of the China entity may be improved.

A health check review would normally focus on the following types of China taxes:

Corporate income tax
Withholding tax
Business tax
Value added tax
Consumption tax
Customs duty

Real estate tax
Deed tax
Stamp duty
Individual income tax for employees
Land appreciation tax (where applicable)

This list basically covers the major types of taxes that a foreign investment enterprise (including a wholly foreign owned enterprise, equity or cooperative joint venture) would be subject to. Depending on the needs of the entity concerned, this list could be shortened or lengthened to include the review on the compliance status with respect to the business and foreign exchange laws and regulations.