How to Efficiently Conduct Tax Health Check - Chapter I: Sales Recognition

Along with the development and upgrade of Golden Tax System in China, tax compliance has become a key concern of the taxpayer to conduct business in China. A well functional tax health check to screen the tax related transactions on regular basis and identify the weakness or potential risk in the accounting system, would help the taxpayers to efficiently monitor the tax compliance quality and be prepared for any potential tax audit.

Starting from this issue of Newsletter China, we will publish a series of 4 articles to introduce some typical tax risks that a regular tax health check shall focus on, as well as the most common tax practice and industry-specific tax risks.

As sales recognition generally could be the taxable basis of Value Added Tax (“VAT”) and Corporate Income Tax ( “CIT”), the correctness and completeness of sales recognition would be the foundation of the tax compliance. Below are some typical tax risk areas which usually would be the focus of health check:

It is worth noting that the sales revenue in the monthly financial statements does not necessarily to be completely the same as the revenue declared in monthly VAT return. Nevertheless, in practice the discrepancy can be monitored in the golden tax system and tax risk notice alert will be triggered accordingly. When the discrepancy can be reasonably clarified with supporting documents, such as consignment sales, construction projects with percentage of completion method, sales promotion, selling of used fixed assets etc., the alert would be released without further challenge.

A health check on sales recognition can start with the cautious monitoring of discrepancy in the monthly financial statement and tax return, followed by check of VAT invoicing of current month by referring to VAT Law and regulations, review of business transactions with due professional acumen to ensure the correctness and completeness of tax matters treatment. With regard to business model change or adoption of a new type of business transaction, the tax consequence analysis and respective treatments from both accounting and tax perspectives are recommended to be conducted internally, and when necessary, to seek for advisory from external tax consultants.