I. Pre-Review Preparation
First, confirm the qualifications of the contract parties, inspect the business license, tax registration certificate, etc., of the counterparty to ensure their legal business operation and tax payment qualifications.
Then, verify whether the contract amount matches the project budget. For any excess, review the approval procedures. Carefully check the amount information in the contract text, including the accuracy of calculations for various expenses, unit prices, quantities, etc., and ensure consistency with the annex materials and the correspondence between the Chinese capital and lowercase numbers.
Clarify whether the amount in the contract terms is inclusive of tax or exclusive of tax, in order to correctly calculate the stamp duty.
For framework contracts, focus on reviewing the rationality of the contract amount, ensuring it falls within the set upper and lower limits.
II. Payment Clause Review
Review whether the contract terms comply with the company's credit management system. In procurement contracts, prepayments are generally not made in principle. Payments are made in instalments according to the progress of execution, with the payment ratio determined based on the credit rating of the cooperating party. Special cases requiring prepayments must be approved by the management. In sales contracts, focus on the amount of credit sales and the collection time, trying to shorten the collection period, with the credit sales ratio and term determined according to the credit rating of the purchasing party.
At the same time, check whether the contract settlement method complies with the company's regulations. For example, if it is stipulated to use electronic settlement methods such as bank transfers, avoid the tax risks brought by cash settlements. If there is an abnormal input tax, the tax bureau will require the provision of original contracts, transportation contracts and freight transfer records, goods warehousing and outbound orders, and bank payment certificates, etc.
The bill settlement methods include checks, promissory notes, bills of exchange, etc. Attention should be paid to the maturity date of the bills of exchange and the uncertainties and risks of various types of bills.
Finally, ensure that the name of the payee account in the contract text is consistent with the name of the contract signing party.
III. Invoice Review
Clarify whether the amount in the procurement contract is the price inclusive of tax or exclusive of tax, which affects the enterprise's cost. When general taxpayer suppliers provide value-added tax (VAT) special invoices with different tax rates, a calculation formula can be agreed upon, such as the tax-exclusive procurement cost, and the tax-inclusive procurement cost = tax-exclusive price × (1 + the tax rate of the special invoice issued by the counterparty), but attention should be paid to consistency with tax regulations.
The contract must clearly stipulate the type of invoice to be obtained, either a special invoice or a general invoice, and ensure that the invoice content is consistent with the business content. Small-scale taxpayers cannot offset value-added tax with special invoices and generally require general VAT invoices; general taxpayers require special VAT invoices for offsetting, but in cases where the purchase is used for situations where the input tax amount cannot be offset (such as simple tax calculation projects, tax-exempt projects, etc.), general invoices can be requested.
Eliminate vague expressions. The type and content of the invoice must be consistent with the business content and nature of the contract. Judgments should be made in combination with the location of the cooperating party's institution, the place where the labour occurs, and the business content.
IV. Tax Treatment
Pay attention to whether the contract type belongs to the taxable vouchers within the scope of stamp duty collection. For taxable contracts, it must be clear whether the amount is inclusive of tax or exclusive of tax. If only the total amount inclusive of tax is listed, the basis for calculating stamp duty is the total amount inclusive of tax; if the tax-exclusive amount and tax amount are listed separately, the tax-exclusive price is the basis for calculating the tax. From the perspective of stamp duty, agreeing on a tax-exclusive amount in the contract can simplify the calculation of tax burden, but it must comply with tax regulations.
Contract management must meet internal control requirements, ensuring that business dealings, financing investments, and labour contracts, and so on, are free of contentious points and potential risks. The signing of contracts must comply with compliance requirements and align with national laws and company internal systems.
The contract review process must be carried out in accordance with the company's internal control system and contract management process and meet the requirements of financial accounting.
In terms of fund risk control, attention should be paid to the matching of invoice issuance and goods delivery to avoid fund loss.
In terms of budgeting, predict the income and expenditure of existing contracts and unexecuted contracts to ensure the profitability of the contracts.
At PHC Advisory, we can offer you full support on matters regarding doing business in China, or any other issues your business may face. If you would like to know more about policies relevant to your business in Italy or Asia, please contact us at info@phcadvisory.com.
PHC Advisory is a company of DP Group: an international professional services conglomerate of companies with approximately 100 experienced professionals worldwide. We offer comprehensive services in tax, accounting, and financial consulting, including financial supervision, financial audit, internal audit, internal control over financial reporting, and support for audited financial statements and annual audits, ensuring clients' financial transparency and compliance.
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The content of this article is provided for informational purposes only, financial advice must be tailored to the specific circumstances on a case-by-case basis, and the contents of this article do not legally bind PHC Advisory with the reader in any way.
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