Business in China: don’t underestimate the importance of the fapaio

2/8/2018 11:47:28 AM

Doing business in China? Be aware of the importance of fapiao, the document your business needs to have the Chinese tax authorities accept and compensate your VAT deductions. The regulations for this all-important sales slip in business have been changed recently. Club China takes a closer look at one of the most important documents in China’s business arena, with Matthew Dresden, partner in the China practice group at Harris Bricken, an international law boutique.

The term fapiao is Mandarin, indicating a legal slip that validates the purchase of goods and services. In China, everybody – businesses and taxpayers – uses the fapiao as proof of a business transaction. You need the fapiao to meet the legal standards required by China’s tax system. You also need it to keep track of all business transactions with other enterprises. It is both a receipt (i.e., proof of purchase) and a tax invoice (i.e., a way to determine the tax paid on a given transaction).

Not just a receipt

Beware: a fapiao is not just an ordinary receipt. The fapiao is only legitimate if it is printed on a special paper provided by the State Administration of Tax (SAT). This organisation prints, distributes, and administers fapiao. SAT requires all businesses to purchase relevant fapiao, according to their business scope. Don’t even think of using another kind of paper, Chinese tax authorities will most likely not recognize it. And, more worrying: the tax people won’t compensate your VAT deductions.

Different from the practical use, there is more behind the fapiao. It serves as a paper warranty against tax evasion. China’s tax authorities require businesses to use fapiao to compel companies to pay tax in advance on their future sales. This is quite different from other countries, where invoices serve as a tax receipt.

Right use is essential

For both businesses and consumers, the right use of fapiaos is essential. If you fail to produce a fapiao when requested by a customer, this constitutes an illegal act. Be aware that all business transactions are required by law to be recorded on a fapiao. For individual consumers, fapiao act as proof of expenditure in cases where they need to reclaim business expenses. Message to consumers: if a business owner is unable or unwilling to provide a fapiao, you have to right to report the company to the local tax bureau.

Club China asked Matthew Dresden (Harris Bricken) for his opinion on fapiao and on the recent changes in legislation. 

Why were the changes made? “Under the previous system, a buyer of goods or services in China simply had to provide its legally registered name (i.e., the name listed on its business license) to receive a valid fapiao from the seller. Abuse of the system was widespread; fapiaos were often inaccurate both in terms of amount and in the description of what was sold.” Also: “this new rule should be viewed as part of China’s escalating clampdown on capital flight and tax avoidance.”

What are the most specific changes? “New requirements are that the fapiao must specify the goods or services being provided. The fapiao must bear a special fapiao chop from the seller. The buyer must provide its tax identification code or unified social credit code. Sellers/issuers of fapiao must link their internal fapiao data with the government to ensure that when the buyers/recipients of fapiao file their taxes, the amounts and the descriptions match up.”

How will the new fapiao system affect foreign companies operating in China?

“For those already scrupulously following the rules, things shouldn’t change that much: a minor, but manageable increase in paperwork and logistics overhead. WFOEs will need to be even more attentive when procuring or preparing fapiao. This puts more pressure on the general manager to oversee operations, especially staff who regularly deal with fapiaos (like sales agents). Easier said than done. It also puts more pressure on the parent company to appoint a general manager who is both trustworthy and understands that the parent company isn’t just giving lip service when it says it wants to follow the rules.”

According to Matthew Dresden, it also puts more pressure on the entity handling the WFOE’s accounting and tax reporting. “I don’t think that every WFOE needs to go out and hire a Big Four Accounting firm, but the WFOEs that have been doing it all themselves may want to rethink their strategy and hire an outside accounting firm. I know I would.”

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