Now! China May 2025 - Strengthening Internal Controls Amid Rising Risks

In June 2024, a Japanese listed group disclosed material weakness in its internal controls, revealing that its internal control over financial reporting was ineffective. This led to inflated consolidated sales being recorded. Fortunately, the company identified the issue and initiated a timely self-correction, thereby averting negative consequences for shareholders and its stock price. 

Against a backdrop of global economic volatility, China is also making progressive strides in corporate governance, particularly for listed companies. The revised Company Law of the People’s Republic of China, effective 1 July 2024, introduces significant changes to corporate governance structures. Notably, it mandates clearer frameworks for the establishment and functioning of audit committees. These revisions are designed to strengthen internal oversight, streamline supervisory mechanisms and align China’s corporate governance more closely with international standards.

In tandem, regulatory scrutiny is intensifying. Supervision authorities have enhanced their enforcement mechanisms targeting internal control deficiencies. In 2022, the China Securities Regulatory Commission (“CSRC”) disclosed 20 cases involving significant internal control weaknesses, systemic failures and fraudulent activities identified during routine inspections.

Beyond domestic enterprises, multinational companies operating in China, particularly Foreign-Invested Enterprises (FIEs), are placing greater emphasis on strengthening  internal control systems within their local subsidiaries. With the rapid transformation of China’s economy and ongoing restructuring of global supply chains, companies now face increased complexity and operational risk. In response, many are leveraging technology and data analytics to facilitate real-time decision-making and maintain oversight across increasingly diverse and dynamic business functions. 

Traditional internal control objectives remain central:

1. Efficient operation of business activities
2. Safeguarding of assets
3. Prevention and detection of fraud and other unlawful acts
4. Accuracy and completeness of financial records
5. Timely preparation of financial statements

For example, a FIE manufacturing company faced a fraud-related incident concerning waste disposal. This prompted a gap analysis on key processes as a preventive measure. We assisted the company in evaluating the effectiveness of waste disposal procedures and, given its size (over 400 employees), identified ways to enhance the efficiency of its internal control system.

In another engagement, we supported a FIE manufacturing company that lacked an internal audit function. At the request of its U.S.-based board, we conducted periodic internal control reviews over a three-year period covering eight key business cycles. Our involvement included establishing standard operating procedures (SOPs) for vendor selection and monitoring the ongoing effectiveness of those controls.

Our Value Proposition

We offer tailored solutions designed to:

• Enhance control effectiveness
• Streamline business processes
• Minimise operational slippage
• Eliminate wastage
• Maximise revenue potential
• Improve overall profitability

In addition to traditional internal audit services, our offerings include:

• Outsourced internal audit solutions
• Internal audit function performance reviews
• Assistance in building internal control frameworks
• Internal audit training programs

Leveraging deep industry knowledge and cultural insights, we assist multinational companies design and implement localised internal control systems that align with group policies. Our support includes continuous auditing, proactive recommendations and performance monitoring, ensuring that internal controls remain robust, relevant and strategically aligned. 

China Updates

Accounting and Taxation

Certificate of Chinese Residency for Tax Purposes

• Announcement [2025] No.4 of the State Taxation Administration (STA)

To further support high-level opening-up and facilitate taxpayers in claiming tax treaty benefits and conducting cross-border business, the STA released Announcement [2025] No.4. This announcement outlines updated guidelines for the application and issuance of the Certificate of Chinese Residency for Tax Purposes. The key points are as follows:

Eligibility to Apply

Enterprises or individuals (collectively as the "applicant") who qualify as Chinese tax residents in any Gregorian calendar year may apply for the Certificate of Residency for Tax Purposes with the relevant tax authority.

Application Procedures for Specific Entities

Some entities cannot directly apply for the certificate but may do so via associated parties:

• Domestic and overseas branches: The head office in China must apply on behalf of its branch.
• Individually owned businesses registered in China: The Chinese resident owner applies through the local tax authority.
• Sole proprietorships: The Chinese resident investor submits the application.
• Partnerships: The Chinese resident investor submits the application.

 Required Documents 

1. For the domestic or an overseas branch of a Chinese resident enterprise, such enterprise's head office in China shall apply for the issuance of a Certificate of Residency for Tax Purposes by the competent tax authority of the head office.
2. For a domestic individually owned business, its Chinese resident owner shall apply to the competent tax authority at the place of business management of the domestic individually owned business for the issuance of a Certificate of Residency for Tax Purposes.
3. For a domestic sole proprietorship, its Chinese resident investor shall apply to the competent tax authority at the place of business management of the domestic sole proprietorship for the issuance of a Certificate of Residency for Tax Purposes.
4. For a domestic partnership, its Chinese resident partner shall apply to the competent tax authority of such Chinese resident partner for a Certificate of Residency for Tax Purposes.

An applicant applying for the issuance of a Certificate of Residency for Tax Purposes shall submit the following materials to the competent tax authority:

• Application form for the Certificate of Chinese Residency for Tax Purposes;
• The following materials shall be provided for different application purposes:
  • To apply for the issuance of a Certificate of Residency for Tax Purposes for the purpose of claiming benefits of treaties, the applicant shall submit the contract, agreement, resolution of the board of directors or shareholders' meeting, relevant payment proof and other supporting documents relating to the proposed income for claiming tax treaty benefits.
  • To apply for the issuance of a Certificate of Residency for Tax Purposes for a purpose other than enjoying tax treaty benefits, the applicant shall submit the relevant documents that can prove the authenticity of the purpose of its application, such as an official instrument issued by a government regulator certifying that the applicant is required to provide a Certificate of Residency for Tax Purposes, or the relevant legal basis and other documents that can prove the authenticity of the purpose of its application.
• If the applicant is an individual and falls under any circumstance specified in Article 2 (2) to (4) hereof, the following documents shall be provided:
  • If the applicant has domicile in China, supporting materials for habitually residing in China due to household registration, family or economic interests, including ID information and a statement of domicile, shall be provided.
  • If the applicant has no domicile in China and whose cumulative number of residing days in China in the current year of application meets relevant provisions on individual residents, he/she shall provide supporting documents for actual residing time in China, including entry/exit information, etc.
• If the applicant is a head office in China, and needs to state its relationship with a domestic or overseas branch in the remarks column of the Certificate of Residency for Tax Purposes, it shall provide the registration documents of the head office and the branch.

Matters Relating to the Optimisation of Services and Standardisation of Administration for Exports of Goods subject to Domestic Taxes

In order to further optimise the business environment and promote the high-quality development of foreign trade exports, the State Taxation Administration, the Ministry of Finance, the Ministry of Commerce, the General Administration of Customs and the State Administration for Market Regulation jointly issued an announcement on 25 March 2025, on the management of export services for goods subject to domestic taxes (hereinafter referred to as “taxable goods”). The key points of the announcement are as follows:

• Taxpayers exporting taxable goods shall, in accordance with the current relevant regulations, be levied value-added tax (“VAT”) and consumption tax (“CT”) as if the goods were sold domestically.
• Taxpayers engaged in self-operated export or entrusted export of taxable goods shall declare and pay value-added tax (VAT) and consumption tax in accordance with the unified regulations applicable to the sale of goods within China. The applicable scope of taxation policies, calculation of tax payable, and other relevant matters shall be governed by the provisions of Articles 7 and 8 of Caishui [2012] No. 39.
• Taxpayers exporting taxable goods shall, upon the first occurrence of tax liability, complete tax-related procedures including the confirmation of registration information with the tax department. Tax returns must be filed truthfully in accordance with statutory deadlines and requirements.
  • If a taxpayer entrusts the export of taxable goods, the entrusting party shall apply to the competent tax authority for the Certificate of Entrusted Export of Goods from the date of export declaration and the tax declaration period of the following month, and transfer it to the entrusted party.
  • The entrusted party will then apply to the competent tax authority for the Certificate of Agent Export Goods using the above certificate.
• Taxpayers exporting or entrusting the export of taxable goods shall go through customs formalities in accordance with regulations and accurately complete the export declaration form. Registration information confirmation must be completed at the tax bureau through the electronic tax portal or tax service centre.
• Taxpayers shall apply for tax cancellation with the tax authority before applying for business deregistration with the market supervision department. The application to the market supervision department must include the tax clearance certificate.
  • Taxpayers exporting taxable goods, customs brokers, customs declarants, and other relevant entities or individuals are prohibited from forging, altering, or trading customs declaration forms. They shall not fabricate export transactions or falsify the value of exported goods.
• Enterprises exporting taxable goods shall calculate and pay corporate income tax in accordance with the law.
• This announcement will come into effect on 25 March 2025.

Human Resources

Implementation Opinions on Accelerating the Vocational Skill Level Certification of Elderly Care Service Skilled Talents

On 14 April 2025, the Ministry of Civil Affairs and the Ministry of Human Resources and Social Security of the People's Republic of China jointly issued the Implementation Opinions on Accelerating the Vocational Skills Level Certification Work for Skilled Personnel in Elderly Care Services. The document aims to expedite the certification process for skilled workers in elderly care and implement a vocational skills level system with a focus on elderly care practitioners.

Key highlights include:

• The implementation of the vocational skills level system, specifically for elderly care-related occupations (trades)
• Introduction of a structured “eight-level worker” vocational skills sequence:
  • Above senior technician: positions of special technician and chief technician;

• • Below junior worker: establishment of apprentice worker roles. 

The implementation opinions clearly state that by the end of the 15th Five-Year Plan, the proportion of elderly care workers who have obtained vocational skills level certificates will exceed 80%, and the number of other skilled personnel in elderly care services obtaining such certificates will also significantly increase.

The implementation opinions put forward seven key tasks, including comprehensively promoting the vocational skills level system, advancing the construction of vocational skills level assessment institutions; standardising the organisation, implementation, and issuance of certificates; establishing a regular assessment and certification mechanism; strengthening vocational research and the construction of standard teaching materials; promoting the combination of assessment results with training, deployment, and remuneration; and expanding the career development pathways for highly skilled talents.

Corporate Governance

Announcement of the National Medical Products Administration (NMPA) on Further Adjusting and Optimising the Production of Imported Medical Device Products in Chinese Enterprises

On 18 March 2025, the NMPA published the Announcement on Further Adjusting and Optimising Matters Related to Domestic Production of Imported Medical Device Products. The Announcement clarifies that foreign-invested enterprises, either established by the registrant of imported medical devices or under the same actual controller, may independently produce Class II and Class III medical device products for which registration certificates have already been obtained. Registration applicants shall submit original registration materials, provide proof of the actual controller and authorisation documentation, commit to not changing the main raw materials and production processes, and submit a self-inspection report of the quality management system. Domestically produced innovative imported medical device products can be prioritised for registration.