Common Mistakes, and how to Avoid Them

Some of the most common mistakes our clients make, and how they can easily be avoided

While every case we deal with is unique, some mistakes are more common than others. We recently audited a client’s Chinese branch and found some very common, and avoidable, mistakes. Here are some of their mistakes, and how to avoid them

No accountability for fapiaos

This case occurred before the new fapiao regulations, but is still relevant. For reimbursement, having workers produce the fapiao alone isn’t enough. Make sure they have accompanying paperwork to avoid false fapiao claims. Keep a detailed log of this for both tax purposes, and your own internal accounting purposes.

Our audit found workers routinely submitting fake fapiao reports, cheating our client of thousands of CNY.

Social security calculations didn’t include bonus so was underpaid

While calculating the social security tax, make sure it is properly calculated to include the bonus. Our client paid workers’ social security bonus based only on their salary, and so underpaid their social security taxes.

Recorded sales wrong

Chinese accounting systems may vary. Our client was not using a professional CPA. We cannot stress enough how important it is to have a professional taking care of your accounts. Whether it is a local Chinese CPA, or an experienced firm like ECOVIS Beijing, make sure your Chinese subsidiary has a professional working for them

Our client’s accountant recorded sales through invoices alone. The accountant would be informed an invoice would be issued, and record it as revenue. They did not ensure that the product was delivered, check what accounting period the sales should be in, or detailed information such as the quantity, unit selling price, or description of goods.

This made it extremely difficult for our auditors to track sales. Make sure your Chinese subsidiary/partner is using, if not the same accounting system as you, at least one that you understand and can track.

Stamp duty

Make sure to pay your stamp duty! Our client didn’t pay for two years, and owed approximately 20,000 CNY in back taxes.

Wrong name on business license

Make sure the names on the business license (and all other paperwork) match, and that you have a copy of it. If there is a discrepancy between the name on the owner’s passport, and the name on the business license, that could cause some very unnecessary headaches, and should be fixed as soon as possible.

Board meeting

If your company is an LLC, then an annual board meeting is not legally mandated. If your company is not an LLC, you must have at least one meeting of the board of directors a year, and have a record of the minutes in both English and Chinese signed by all the directors. Keep a copy of these records on business premises.

Leave policy

Our client’s leave policy was not consistent with Chinese labor laws. You must grant all your employees, even those on their probationary period (which can only last a maximum of six months) leave. That said, you can still make it clear to the employee that any leave they take will play a role in the assessment of their performance during the probationary period

Overtime

Overtime guidelines are also clearly laid out in Chinese labor law. Companies must pay overtime for work arranged beyond office hours on weekdays, weekends, and official holiday under the standard working system. For weekend over time, you can give your employee days off during the week to compensate. Otherwise, you must pay them overtime.

Confidentiality

Non-confidentiality is an extremely important, and tricky, area for foreign companies. Our client had assigned a hefty financial penalty for any employee that shared proprietary information. Under Chinese law, employers can only claim actual losses caused by the sharing of this information, and the burden of proof is on them. Had our client taken its employees to court, it is very unlikely that they would have won.

Firing

Unsurprisingly, our client decided to clean house. It is extremely difficult to fire employees in China, and is often cheaper to pay out their contracts rather than engage in protracted legal battles.

Luckily for our client, the employees had already resigned, but our client was missing most of the resignation paperwork. Whenever a Chinese employee resigns, make sure to keep detailed records of their resignation letter, and all related documents.

Final Thoughts

While this list is by no means exhaustive, if you can avoid all of these mistakes while operating your business in China, you’re off to a pretty good start.

The most important thing to remember is that Chinese law, not your contract, is what matters. Even if your employee signs a contract, if it goes against Chinese law, then it is extremely unlikely that your contract will hold up in court. 

 

 Grace 150x225   Grace Shi

Grace Shi is a partner at ECOVIS Beijing China. She has over 12 years of experience in accounting, auditing, and tax advisory services in both international accounting firms and large Chinese corporations. She has an international MBA and a US Global Finance Master’s degree. Since 2001, she is a Chinese Certified Public Accountant (CPA) and, since 2002, a Chinese Certified Taxation Agent (CTA). Mrs. Shi is one of the founders of ECOVIS R&G Consulting Ltd. (Beijing). She has perfect skills in written and spoken English and Chinese. For more information, please contact:  grace.shi@ecovis-beijing.com

 

 

 

Ecovis Beijing is the trusted tax and legal advisor to several embassies and official institutions in China. It specializes in mid-sized international companies and is focused on tax & legal advisory, accounting and auditing. If you’re interested in finding out more about tax and legal, don’t hesitate to sign up to our Newsletter, give us a call +49 (0) 6221-9985639 or contact us directly via service@ecovis-beijing.com