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USASBE 2008 Proceedings - Page 0555 - page 8 / 23





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USASBE 2008 Proceedings - Page 0562

Issue Income Taxation

Explanation PRC GAAP adopts the balance sheet liability method to determine deferred tax of temporary difference in 1/1/2007. The income taxation now has very similar accounting treatment between PRC GAAP and US GAAP.

Business Implication China has a very complicated tax system, involving national, provincial, city and district. Each has it own regulations on income taxes. Depending on companies industry, location and corporate structure, the income taxes may have different implication on your investment. For example, China has a number of tax zones, and each may offer a different corporate income tax rate ranging from 15% to 33%.

There are several other issues that can potentially affect the practice of accounting in China. After evaluating several potential challenges, the authors believe the 12 issues listed above are the most critical and can have considerable business implications.

In the interest of brevity, and for discussion purposes, the authors focus on four accounting issues identified by the authors to be applicable in most industries to illustrate their implications on entrepreneurial decision-making. These issues are: revenue recognition issues, disclosure of related party transactions (i.e. transfer pricing issues), income taxation policies, and cash flows. The eight remaining issues described in Table 1 are industry-specific in regard to implementation and will be discussed in future papers.

Revenue Recognition

In the case of the manufacturing industry, revenue recognition is similar in the PRC GAAP and the US GAAP (KPMG Primer, 2007).

The PRC GAAP provides no guidance concerning the timing of revenue recognition when rights of return, warranties, installation charges, and post-support services are elements of the transaction. US GAAP has very specific guidance (KPMG Primer, 2007). Converting from “PRC GAAP” to US GAAP can result in the deferral of revenue recognition until substantially all elements are accounted for. The conversion would result in the recognition of less net income. For example: Company US and Company PRC each have gross revenues of $1,000,000 and have experienced identical warranty costs to sales ratios in the past. Company US uses past experience to determine the ratio of warranty cost to sales (in compliance with US GAAP) that they have determined to be 5% of sales. Company PRC decides to use only $10,000 as the expected warranty costs on its revenue in order to show a larger net income. The results are:

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