This informative article had been initially published at Axel Standard, a platform for cloud accountants and SaaS applications.
Business people have a tendency to concentrate their attention on economic statements that demonstrate their profitability and cashflow with pay less awareness of the information contained in the stability sheet. To the contrary, income tax authorities aim to the total amount sheet when they suspect foul play has taken place based on the economic reporting by the business enterprise.
The chinese tax authorities are now using key figures contained on financial reports to assess the probability a business is not in compliance with tax regulations with strengthening compliance with tax regulations being at the center of the reform taking place in China. It’s increasingly common for organizations in Asia to locate by themselves non-compliant as a consequence of poor quality methods that are accounting some of which have now been notably tolerated within the past.
Adjusting stability sheet items which have income tax dangers will frequently include tax liability that is additional. Nevertheless, this is certainly much better compared to those alterations are found during a tax audit. Then, not merely will the corrections be susceptible to extra income tax obligation in line with the adjustable quantity, nevertheless the company is supposed to be fined if you are found to be non-compliant.
To prevent such scenario, business people should discover ways to determine taxation risks by taking a look at the company’s balance sheet. To do this, we provide an inventory of six stability sheet things that usually have possible income tax risks to be able to self-diagnose your balance sheet and reverse those taxation risks prior to the taxation authorities achieve this in your stead.
Item 1: Inventory
Inventory/sales ratio continuously increases.
If stock balances enhance without a increase that is corresponding product sales income, it could suggest that some products are offered without acknowledging income or issuing VAT Fapiao. During a tax review, uncommonly high inventory to product sales ratio will probably lead the taxation officer to check on your real warehouse.
“Theoretical income” is a lot greater than real income.
With all the Golden Tax 3 system, income tax authorities estimate the income your online business should report according to numerous information sources. The taxation authorities are immediately 
alerted if a small business reports income that will be considerably less than the “estimated income” within a certain duration. Estimated income figures are determined utilizing the following formula;
Believed Revenue = (Inventory Opening stability + Purchases into the period – Inventory Closing stability) * (1 + Industry normal gross margin percent)
“Unused input VAT” may not be reconciled with all the stock balance that is closing.
Having a listing balance that is closing may not be reconciled along with your unused input VAT is an indication that you could have used the input VAT associated with inventory (unsold services and products) to offset production VAT of this offered items. In this instance, you have underreported your VAT and postponed your CIT liability, each of that are non-compliant with taxation legislation in China.
Item 2: Reports Payable
Input VAT Fapiao without actual payment or purchase.
Some organizations in Asia purchase input fapiaos as a means to overstate their costs, hence, reducing tax revenue and CIT payable. Because these costs will never be paid to virtually any vendors, the payables of these fake expenses stay pending and accumulated within the “Accounts payable” category on stability sheet, which makes it one of the primary places the income tax authorities look when taxation fraudulence is suspected.
Item 3: Accrued Expenses
Improperly accrued cost records.
Accounting legislation in Asia (PRC GAAP) calls for accountants to accrue costs without once you understand the value that is exact a balance sheet product specifically for accrued expenses. When the real value is known (fapiao received), the accrued expense has to reversed and proper values – as per fapiao – recorded in the stability sheet category associated with the type associated with the deal. This frequently leads to double or wrongfully scheduling, particularly when the accountant is certainly not knowledgeable about the business enterprise. As time passes, this could easily get extremely messy and during an CIT that is annual, accrued costs which have maybe not been reversed are addressed as non-deductible costs and incur one more 25% of CIT payable.
Item 4: Gotten Ahead Of Time
Income booked indefinitely as “received in advance”.
Whenever repayments are gotten by a business without a corresponding production VAT fapiao, numerous accountants simply book the amounts underneath the “Received in advance” category. Since only a few deals require a fapiao – such as items for export – accountants that recognize income on such basis as fapiao (Fapiao Accountants) usually usually do not recognize the revenue plus they stay underneath the “Received in advance” category indefinitly. If this training continues, the “Received in advance” balance becomes increasingly big as time passes, inevitably attracting the interest of this taxation authorities. The company is – whether intentional or unintentional – concealing its income and under reporting it’s VAT and CIT.