Tax Planning for Small-scale and Low-profit Enterprises during the 2019 Year-end Closing

On 17 January 2019, the State Taxation Administration (“STA”) and the Ministry of Finance (“MOF”) released a new announcement regarding the tax reduction policy for Small-scale and Low-profit Enterprises (“Cai Shui [2019] No. 13”). Cai Shui [2019] No. 13 is valid from 1 January 2019 to 31 December 2021.

In this newsletter, we have summarized the tax reduction policy stipulated by Cai Shui [2019] No. 13 for your reference, as well as our suggestions about the issues to be considered during your year-end closing.

1. Background

According to Cai Shui [2019] No. 13, during the period of 1 January 2019 to 31 December 2021, a small-scale and low-profit enterprise can compute its taxable income at a reduced rate of the taxable profit before applying the 20% enterprise income tax rate. To be specific, if its revenue does not exceed RMB 1 million, the taxable income is computed at 25% of the taxable profit (i.e., the effective tax rate is 5%). If the revenue exceeds RMB 1 million but does not exceed RMB 3 million, the taxable income is computed at 50% of the taxable profit (i.e., the effective tax rate is 10%).

The above-mentioned “small-scale and low-profit enterprises” are defined as those entities that having taxable profit no higher than RMB 3 million, staff no more than 300 person and assets no higher than RMB 50 million.

2. Issues to be considered during your 2019 Year-end closing

Referring to the tax reduction policy mentioned above, we suggest you take the following actions to check whether your accounts have been properly kept for 2019 and whether you are eligible to claim the tax reduction policy as a small-scale and low-profit enterprise:

  • Check and ensure the accruals have been properly booked (e.g. Dec reimbursement, unpaid audit fee for 2019, unpaid salary & annual bonus for 2019, etc.);
  • Check the retained earnings and ensure the amount agree with last year’s audited report;
  • Follow up the inter-company reconciliations;
  • Ensure the financial accounts of inventory agree with physical inventory list;
  • Ensure the goods in transits can be tied with the commercial invoice sent by head office in the latest months;
  • Obtain the bank statements and check with the trial balance (during year-end closing, suppose no reconciliations);
  • Check the foreign exchange valuation for monetary assets and liabilities;
  • Check the long-aging receivables and liabilities and confirm with clients. If it is necessary to charge to P/L, please make adjustment;
  • Accrual of enterprise income tax and prepare the supporting filing documents;
  • Ensure no revenue cut off mistake;
  • Relevant supporting documents for year-end accruals shall be obtained in order to present a true and fair financial statement.

3. Summary

To summarize the above, in order to claim the tax relief stipulated by Cai Shui [2019] No. 13 on a timely basis, all small-scale and low-profit enterprises need to pay more attention to their year-end closing to make sure the revenue and expenses are properly accounted in order to justify the claim of the tax relief policy.

If you have any questions regarding the above, please feel free to contact us.