This service is a core module of China Compliance Risk Review™, designed to support the overall compliance infrastructure for China operations.

Assessing Whether Your China Compliance Position Is Defensible When Questioned

Value-Added Tax (VAT) Compliance Risk Assessment in China

In China, many tax risks arise not from underpayment, but from VAT logic that cannot be clearly explained

VAT is one of the most mature, system-driven, and deeply scrutinized taxes in China. For many foreign-invested enterprises, VAT risks do not stem from intentional non-compliance, but from:

• VAT rates or calculation methods that no longer fully align with business substance

• Subtle but persistent inconsistencies between invoices, accounting records, and filings

• Input VAT deductions that are formally complete but substantively weak

• Gradual accumulation of differing practices across periods and personnel

These issues may appear manageable in routine filings. However, during tax inspections, system risk controls, or targeted reviews, they are often quickly escalated into high-exposure compliance issues that are difficult to explain.

The VAT Compliance Risk Review is designed to address precisely these foundational yet highly exposed risks.

What Is VAT Compliance Risk

VAT compliance risk typically manifests as:

• Misalignment between applied VAT rates or methods and the actual business model

• Discrepancies between invoice content, accounting treatment, and filing positions

• Input VAT deductions that meet formal requirements but lack substantive support

• Historical VAT practices that have been repeatedly applied without clear justification

Such issues are often directly flagged as key areas of concern through system cross-checks or manual tax reviews.

Key Areas Covered in the Review

1 | Alignment Between Business Substance and VAT Treatment

• Whether applied VAT rates properly reflect the nature of the business

• Whether legacy VAT methods are still appropriate under current operations

• Whether multiple business activities are improperly treated under a single VAT logic

2 | Consistency Across Invoices, Accounting Records, and VAT Filings

• Whether invoice information supports the applied VAT treatment

• Whether accounting records accurately reflect invoiced transactions and business substance

• Whether VAT filings can be reasonably reconciled with accounting and invoice data

3 | Input VAT Deduction Chain Risk

• Whether deduction documentation is complete and valid

• Whether deduction logic aligns with underlying business activities

• Whether there are deductions that are formally compliant but difficult to substantiate

4 | Risk Exposure from the Perspective of Tax Inspections and System Controls

• Which VAT treatments are most likely to be flagged as abnormal by tax systems

• Which areas are most frequently questioned in manual reviews

• Whether certain issues could trigger a broader, comprehensive review once identified

Typical Risk Scenarios

• Tax authorities request justification for a specific VAT rate or deduction treatment

• System cross-checks identify inconsistencies among invoices, filings, and accounts

• Tax audits require comprehensive explanations of VAT treatment logic

• Headquarters or auditors raise concerns regarding China VAT practices

In such cases, even when risks are ultimately manageable, the cost of explanation and management burden can be substantial.

What This Review Does Not Include

To avoid misunderstanding, this service does not include:

• Routine VAT filing or agency services

• Execution of VAT rate changes or deduction adjustments

• Representation in tax inspections or audits

• Any guarantee regarding VAT compliance outcomes

This is a risk assessment and explainability-focused advisory service, not an execution or remediation service.

Deliverables

Upon completion, clients will receive:

• A VAT compliance risk rating (Low / Medium / High)

• Professional analysis and explanation of key risk areas

• Identification of issues requiring priority attention versus acceptable deviations

• An executive-level VAT compliance summary for management and headquarters

Who This Review Is Designed For

• Foreign-invested enterprises with active operations in China

• Companies that have experienced changes in business models or revenue structures

• Organizations affected by personnel turnover or historical practice accumulation

• Enterprises preparing for tax inspections, audits, or internal reviews

Position Within the Overall Service Framework

The VAT Compliance Risk Review typically serves as:

• A core module of China Compliance Risk Review™

• A critical risk checkpoint for the operation of China Entity Foundation™

• A decision-support input for subsequent VAT advisory or compliance adjustments

VAT risks do not arise from doing something wrong,but from being unable to clearly explainwhy a particular VAT treatment was adopted.

Contact Us

We do not make decisions for you; we only help you clarify facts and risks.

Phone : 400 800 7472

Email : info@rtfcpa.com