Strengthening tax health for foreign companies operating in China

Tax health refers to how well a company’s tax position holds up under review. It goes beyond whether tax has been paid and focuses on whether filings, records and practices reflect the underlying commercial reality of the business.

Authorities look at:

• Consistency across VAT, corporate income tax, withholding tax, and stamp tax
• Alignment between contracts, invoicing, accounting records, and tax filings
• The quality of internal processes and documentation
• A company’s historical compliance behaviour

A business with strong tax health is less likely to face frequent audits, penalties or challenges when undertaking transactions such as profit repatriation, restructuring or deregistration.

How tax authorities assess foreign companies

Tax oversight in China is coordinated by the State Taxation Administration and its local bureaus. Risk assessment is increasingly data-driven, with authorities comparing information across multiple reporting streams.

Key assessment areas include:

• Revenue and VAT consistency across periods.
• Profit margins compared to industry benchmarks.
• Related-party transactions and transfer pricing.
• Withholding tax treatment on cross-border payments.
• Accuracy of tax incentives or preferential treatments claimed.

Small inconsistencies, when repeated, can build a risk profile over time.

Core taxes that shape tax health

Foreign companies are usually exposed to several interlinked taxes. Weakness in one area often affects others.

Value-added tax (VAT)

VAT filings must align with invoicing, revenue recognition, and contract terms. Errors often arise from incorrect tax rates, timing mismatches, or incomplete fapiao management.

Corporate income tax (CIT)

CIT health depends on accurate profit calculation, appropriate cost deductions, and defensible positions on intercompany charges. Authorities pay close attention to recurring losses or unusually low profits.

Withholding taxes

Payments for services, royalties, interest, or dividends to overseas parties are closely reviewed. Inconsistent treatment or missing filings frequently trigger follow-up enquiries.

Stamp tax and ancillary filings

Low-value taxes and procedural filings are easy to overlook but can undermine an otherwise sound compliance record.

Building tax health from day one

Strong tax health is easiest to establish early. Foreign companies should ensure:

• Contracts clearly reflect the commercial substance of transactions.
• Tax treatment is considered when pricing services or goods.
• Accounting policies align with Chinese tax rules.
• Responsibilities for tax filings are clearly assigned.

Early misalignment often becomes difficult to correct later without attracting attention.

Maintaining alignment between business activity and tax reporting

One of the most common issues for foreign companies is drift between operations and tax filings.

Examples include:

• Business scope expanding beyond what is registered for tax.
• Services evolving while contracts and tax treatment remain unchanged.
• Intercompany charging models no longer reflecting actual activity

Regular reviews help identify gaps before they appear in audits.

Documentation and audit readiness

Documentation underpins tax health. Well-prepared companies maintain:

• Clear contracts supporting income and expenses.
• Transfer pricing documentation that reflects real activity.
• Reconciliations between accounting records and tax filings.
• Evidence supporting tax incentive eligibility.

This reduces disruption when authorities request information.

Managing audits and tax reviews

Audits are a normal part of the tax environment in China. A healthy tax position changes how they unfold.

Companies with strong records typically experience:

• Narrower audit scopes.
• Faster resolution.
• Fewer penalties or adjustments.

Preparation, consistency and clear explanations matter more than volume of paperwork.

Tax health during change events

Tax risk increases during periods of change. Events that commonly trigger review include:

• Profit repatriation.
• Capital increases or reductions.
• Business model changes.
• Mergers, restructurings or exits.

Addressing historic issues before these events avoids delays and unexpected liabilities.

Common tax health risks for foreign companies

Foreign businesses often encounter problems due to:

• Over-reliance on third parties without internal oversight.
• Treating tax as a year-end exercise rather than an ongoing process.
• Applying overseas tax logic to the China context.
• Incomplete understanding of local tax bureau expectations.

These issues are manageable with structured review and oversight.

Creating an ongoing tax health framework

A sustainable approach includes:

• Periodic tax health checks across all major taxes.
• Clear internal processes for new transactions.
• Regular communication between finance, operations and advisors.
• Early identification and correction of inconsistencies.

This approach reduces risk without increasing administrative burden.

How Woodburn supports long-term tax health in China

Woodburn works with foreign companies to build and maintain stable tax positions in China.

Support includes:

• Tax health reviews covering VAT, CIT, withholding tax and ancillary filings.
• Identification of historic gaps and risk areas.
• Alignment of contracts, accounting and tax treatment.
• Audit support and authority liaison.
• Ongoing advisory support during growth, restructuring or exit.

By focusing on tax health rather than isolated filings, businesses gain clarity, predictability and confidence in their China operations.