Global Chinese Enterprises Facing Substantial Regulation and Compliance Risks

Chinese companies “going-out” or “going global” should well prepare themselves with proven governance and reporting structure and compliance practices in order to avoid any repercussions arising from increasing regulation and the growing complexity of global financial reporting and tax reporting, says Ernst & Young


“Around 30% of the participants at a recent Ernst & Young tax conference, who were mostly tax executives working in Mainland China, indicated that they had experienced business interruption due to lack of compliance in one form or another," says Loretta Shuen, Asia Pacific Leader of Business Tax Compliance Services of Ernst & Young.


Shuen underscores the need to better prepare for the more stringent reporting and compliance requirements also applies to regional headquarters (RHQs) of MNCs in Hong Kong.


“Repercussions of non-compliance not only incur short-term financial loss including in the form of penalties but also long-term reputational discredit,” warns Shuen.


Shuen emphasizes that with an accelerating pace of Chinese enterprises investing overseas, the building of requisite governance and reporting structure and compliance practices worldwide is an area that should be considered as a priority.


Chinese government statistics indicate that China’s outward foreign direct investment net flows increased from US$21.16 billion to US$68.81 billion between 2006 and 2010.


With a growing number of footprints in other countries, Chinese enterprises are facing substantial regulation and compliance risks.


“To manage the regulation and compliance risks, companies should establish a comprehensive Global Compliance and Reporting (GCR) model appropriate to their own business," suggests Shuen.


GCR should comprise key elements of a company’s finance and tax processes to prepare various filings as required in applicable jurisdictions around the world. These works include statutory accounting and reporting, tax accounting and provisions, direct tax and indirect tax compliance and reporting and governance and control of these works.



The findings of Ernst & Young highlighted that more than 40% of respondents indicated a lack of global governance on statutory financial filings, and more than 60% indicated no global governance over direct and indirect tax filings by their companies.


“These deficiencies suggest that current GCR models require greater control, visibility and accountability," says Samuel Yan, China Leader of Global Compliance & Reporting Services of Ernst & Young.


Yan explains that by clarifying GCR requirements, process ownership and geographic coverage, companies can improve effectiveness, enhance visibility and avoid costly and time-consuming surprises across the worldwide GCR spectrum.


"Doing so will also provide support for simplification, standardization, automation and centralization of key processes which should be high on the agenda for leading companies,” he says.


Local Expertise Key to Successful GCR

Findings of the report also highlight that in response to the recent financial crisis and the pace of globalization, more than 80% of companies are undertaking transformations of their finance functions. Many are not taking full advantage of the opportunities to integrate and improve their tax and financial compliance and reporting model, however.


Because these finance transformations often reduce or redeploy local in-house expertise, the quality of filings required for compliance can be placed at risk. More than 82 percent of respondents said that they consider the need for local knowledge a significant barrier to moving compliance and reporting to a regional or global shared service center. More than 60 percent of respondents indicated that local-country resources are vital to successful compliance with tax and regulatory requirements.





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