French GAAP vs. IFRS: Understanding the Differences and Implications

(Continued from the previous article)

• Provision on bona fide acquisition of false special invoices

 

«Circular of the State Administration of Taxation on the Settlement for the Taxpayers Obtaining the False Special Invoice of Value-added Tax without Acknowledgement» defines what is “bona fide”.

It is stated in the Circular that the purchaser shall be deemed to have obtained the false special invoice in good faith if all the following conditions are met:

• a genuine transaction between the purchaser and the seller;
• the sale is made using the special invoices of the province (autonomous region, municipality directly under the Central Government, and cities listed in the plan) in which the purchaser is located;
• all the contents of the special invoices match with the actual ones, such as the name of the seller, the seal, the number of goods, the amount, and the tax amount; and
• no evidence that the purchaser knows that the special invoices provided by the seller were obtained by illegal means.

On the other hand, tax authorities of the purchaser’s location shall grant credit for input tax or export tax refund in accordance with the law, if:

• the purchaser is able to obtain again from the seller a legal and valid special invoice issued by the anti-counterfeit tax-control system; and
• the purchaser has obtained the certificate that the tax authorities in the place where the seller is located have conducted or are conducting an investigation and punishment on the seller’s false special invoices accordingly.

However, if the above conditions cannot be met, the input tax deducted or the export tax refund obtained by the purchasing party shall be recovered accordingly.

In addition, if the taxpayer has obtained in good faith a false special invoice that has been recovered and deducted in accordance with the law, then the taxpayer does not need to consider the provisions of Article 32 of the «Tax Collection Administration Law of the People’s Republic of China»: – If the taxpayer fails to pay the tax in accordance with the prescribed period, and the withholding agent fails to settle the tax in accordance with the prescribed period, the tax authorities shall, in addition to ordering the payment within the prescribed period, impose a late payment fee of five percent of the tax due on a daily basis. If the taxpayer fails to pay the tax in accordance with the prescribed period, the taxation authority shall, in addition to ordering the payment within the prescribed period, impose a late payment fee of five ten thousandths of the late payment of tax on a daily basis from the date of the late payment of tax. In other words, tax authorities will not add the late payment fee arising from the recovery of past taxes.

• Necessary documentation in case the tax inspection happens

Through the above layer-by-layer analysis, accountants of enterprises need to prepare the necessary financial documents to respond to tax inspection, while supporting themselves if they are bona fide purchasers, including but not limited to: –

• the original special invoice was identified as a false invoice
• purchase and sale contracts/business contracts or other contracts involving the invoice
• the goods involved in the incoming order, outgoing order, transfer orders, or transport documents
• relevant accounting documents
• bank payment voucher
• VAT declaration report for the month in which VAT is deducted, and CIT annual return
• statement of the entire business transaction and tax declaration

To sum up, enterprises do not need to be too panicky after receiving the Notice of Tax Inspection. Prepare the above list of supporting materials first and conduct self-inspection after communicating with the relevant tax officer to understand the situation. Companies that have evidence to prove they are bona fide invoice purchasers should actively respond to the tax authorities’ inspection and cooperate with the follow-up investigation. The enterprise will usually pass the tax inspection successfully if they respect all the conditions mentioned previously.

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

References:

 

«Circular of the State Administration of Taxation on the Settlement for the Taxpayers Obtaining the False Special Invoice of Value-added Tax without Acknowledgement»

http://www.chinatax.gov.cn/chinatax/n359/c448/content.html

China is now fully open! In order to better coordinate the epidemic prevention and control as well as the needs of economic and social development, and to facilitate the people-to-people exchange between China and foreign countries, the National Immigration Administration of PRC has decided to adjust the visa and entry policy starting as of Beijing time at 00:00 on March 15, 2023.

• Valid visas issued before 28 March 2020 by the Chinese visa authorities abroad will resume functioning.
• Foreigners may apply for all types of visas, including tourism and medical treatment.
• Port visas shall resume being issued in line with the relevant laws and regulations.
• The visa-exemption policy for Hainan, visa-exemption cruise policy for Shanghai, visa-exemption policy for foreigners to visit Guangdong from Hong Kong and Macao, and visa-exemption policy for ASEAN tour groups to Guilin, Guangxi shall resume operation.

In recent times, the immigration policies of many countries are updated in real-time. In addition to the reopening policy, other restrictions are listed below for your consideration.

Chinese embassies in many countries notice: From 15 March, antigen testing instead of nucleic acid testing.

According to the latest requirements of the Chinese government regarding the optimization of pre-trip testing measures for people traveling to China, starting from 15 March 2023, passengers flying directly from specific countries[1] to China are allowed to replace nucleic acid testing with antigen testing (including self-testing with kits). In order to facilitate the pre-trip preparation of travelers, the embassies concerned have issued guidelines on epidemic prevention and control.

1. Distal testing: Nucleic acid testing within 48 hours before boarding or self-testing with antigen kits, negative results before going to China, positive results please go to China after turning negative.
2. Customs declaration: After obtaining a negative test result, fill out the “Health Declaration Card of the People’s Republic of China” through the WeChat app “Customs Passenger Service” (“海关旅客指尖服务”), the Customs APP or the web version to make declaration.

• Airlines are not required to check pre-boarding nucleic acid test certificates and antigen test results.

1. In-flight epidemic prevention: Please insist on wearing a mask during the flight and do your personal protection to reduce the risk of infection.
2. Entry quarantine: Upon arrival at the port, complete the necessary customs clearance procedures with the customs health declaration code. Customs will test a sample of people with abnormal health declarations or fever and other symptoms in accordance with a certain percentage.

• passengers with positive test results, in accordance with the requirements of the notification letter, go home/living place for isolation, or medical treatment;
• passengers with negative test results, by the Customs and Excise Department in accordance with the “Frontier Health and Quarantine Law of PRC” and other laws and regulations to implement routine quarantine;
• passengers with normal health declarations and tests can pass the entrance.

1. Territorial epidemic prevention and control: Passengers should strictly comply with the requirements of territorial epidemic prevention and control after entering the country.

 

Policies vary from country to country, so it is recommended that you pay attention to the latest Chinese embassy and consulate notices in real-time before making travel arrangements, read them carefully, and follow them to avoid affecting your trip.

Should you have any further questions, please feel free to contact us.

 

 

Reference:

 

Further Adjustment of Visa and Entry Policy for Foreigners to China
Authority: National Immigration Administration

Date: 2023-03-14

https://www.nia.gov.cn/n897453/c1566449/content.html

 

Notice on Further Adjustment of Visa and Entry Policy for Foreigners to China

Authority: Embassy of the People’s Republic of China in the United States of America

Date: 2023-3-13

http://us.china-embassy.gov.cn/chn/lsfw/zj/qz/202303/t20230314_11040138.htm

[1] Currently, the following countries have issued this notice: France, Italy, Denmark, Spain, Georgia, Tanzania, Nepal, Mongolia, Vietnam, Iran, Greece, Brunei, Thailand, New Zealand, Malaysia, etc.

The difference between EBIT & EBITDA metrics and Net Profit is an ongoing concern for investors. So, what are the differences between them? In this article, we will analyze specifically this matter through case studies.

4. Differences

 

Net profit is the final result of a company’s operations and the main indicator of a company’s operating efficiency. The main difference between EBIT & EBITDA and Net Profit is that the former deducts the interest, income tax, depreciation, and amortization, which provides a direct insight into a company’s ability to generate earnings and cash flow.

For example, different companies in the same industry can come up with metrics like EBIT & EBITDA to better and more accurately compare earnings and cash flow capacity, regardless of the differences in income tax rates in their locations. Earnings and cash flow capacity of the same company can vary from period to period, and using metrics such as EBIT & EBITDA provides better comparability than simply measuring a company’s profitability in terms of net profit.

Many Chinese investors like to focus on the net profit of the company, but the net profit is confusing and to some extent the least meaningful financial data. Mainly because:

• Reason No. 1: net profits are affected by the capital structure of the firm.

For example, in the case of General Motors and Ford, the latter is valued higher than General Motors from the point of view of equity investors. One crucial factor is that GM has more debt than Ford, which affects the valuation of its equity value.

• Reason No. 2: net profits are affected by income tax revenue. Different income tax rates applied and pre-tax deductions enjoyed affect the net profit of a company.

It might be a one-sided view to use the price-earnings ratio (PE) and net profit to judge the investment value of these two companies without carefully checking their different tax policies.

• Reason No. 3: net profit is affected by the non-core and non-recurring business of a company.

When creditors and investors analyze the value of an enterprise, they usually do not take into account the income brought to the enterprise by some non-recurring and non-core businesses, such as selling fixed assets, obtaining government subsidies, and spending on administrative fines, which are not the core business of the enterprise.

Unlike net profit, EBIT and EBITDA indicators focus more on the main business of the enterprise.

If an enterprise’s net profit is profitable, but its main business items are losing a lot of money and it relies on government subsidies or selling assets to cash in, as an investor, investing in such an enterprise is obviously very risky.

5. Conclusion

In today’s internationalized and diversified world, as an investor, it is necessary to look at various indicators of a company in a multi-dimensional manner when investing in a company.

In addition to examining the company’s main projects/business model/volume of the company/future development of the industry/general environment and other factors, it is crucial to examine the EBIT & EBITDA indicators. What investors probably think about the most is how much EBITDA profit can be generated from each dollar of revenue. The EBIT & EBITDA metrics allow you to verify a company’s profitability and cash flow ability, and you can look ahead to the company’s future growth prospects.

6. Case studies

As a qualified investor, here are three companies, as an alternative to your investment project, whose relevant financial data are as follows, if you do not take into account the company’s main project/business model/company volume/future development of the industry/general environment, and other factors;

Items	Company A	Company B	Company C
Operating Incomes	10000.00	10000.00	10000.00
Operating Costs	3000.00	3000.00	3000.00
Administrative Expenses	1000.00	1000.00	1000.00
Of which: Depreciation	350.00	250.00	150.00
Of which: Amortization	50.00	0.00	50.00
Finance costs	500.00	500.00	500.00
Of which: Interest expense	150.00	180.00	0.00
Operating profit	5500.00	5500.00	5500.00
Income Tax Rate	25%	21%	16.50%
Income Tax Expense	1375.00	1155.00	907.50
Net Profit	4125.00	4345.00	4592.50

Currency in CNY

We will analyze each of the three companies:

Company A

 

The net profit of Company A at the end of the period was CNY 4125.00, and its income tax was 25%, which is the highest of the three companies, and its net profit in hand is also the lowest. The measured EBIT indicator is CNY 5650.00 and the EBITDA indicator is CNY 6050.00, which is the most active among the three companies and has good profitability and cash flow ability.

Company B

The net profit of Company B at the end of the period is CNY 4345.00 and its income tax is 21%. The measured EBIT indicator is CNY 5680.00 and the EBITDA indicator is CNY 5930.00, and after removing the effect of income tax, it can be seen that among the three companies, the ability of profitability and cash flow is in the middle level.

Company C

The net profit of company C at the end of the period is 4592.50 and its income tax is 16.50%. The EBIT indicator is 5500.00 and the EBITDA indicator is 5700.00. Although Company C has the highest net profit, this is based on the income tax rate, and after removing a series of effects, the profitability and cash flow ability is the weakest among the three companies.

Items	Company A	Company B	Company C
EBIT Indicators	5650.00	5680.00	5500.00
EBITDA Indicators	6050.00	5930.00	5700.00
Operating Incomes	10000.00	10000.00	10000.00
EBIT percentage	56.50%	56.80%	55.00%
EBITDA percentage	60.50%	59.30%	57.00%

Currency in CNY

So as an investor, which company would you choose to invest in?

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