What is Fapiao? The Fapiao System Explained
“The fapiao system is highly complicated. If you’re a foreigner doing business in China for the first time, you might need to take a while to learn about this sophistaced system.”
1. What is Fapiao?
A fāpiào (发票) is essentially an invoice used in China. It is a piece of paper that shows proof of purchase or expense. The government used the information on these fapiaos to monitor all transactions of businesses in the country. They can then use the data collected from the fapiao to compute the amount of tax that the company has to pay.
After making a purchase, the customer also receives a fapiao. They will then have to login to the tax payment system to verify the transaction. The tax deduction will be applied in the next month in their tax payable.
Essentially, fapiao is a combination of a goods and services receipt and a tax payment tracker.
Fapiao are printed, distributed, and administered by tax authorities, and taxpayers are required to purchase the tax invoices they need from the tax authorities. It helps the government track tax payments and deter tax evasion.
This system is unique to China. There is no equivalent of fapiao in any other country. Other countries only issue documents for proof of purchase. None combine a proof of purchase with a tax payment record. It is this uniqueness that causes many foreigners a lot of confusion when they first enter China to do business.
2. How does Fapiao work?
All businesses need to issue invoices to customers and clients for accounting and bookkeeping purposes. In China, when you open a company, you will need to go to the tax bureau to obtain a pile of blank fapiaos to use.
These empty fapiaos have fapiao numbers printed on them for monitoring purposes. Companies have to use a device known as the “Golden Tax Device” to print their fapiaos. This device contains a wide range of information, including the company’s name, tax number, and business scope. Once a transaction occurs, they will have to use this device to print the fapiaos for their customers. The data will then be sent to the tax data system for tax computation and deduction.
The customers have to request their buyer for a fapiao, because it is not always automatically issued. In case the customer wants to receive business reimbursement or gains access to aftersales services, they need to present their fapiao. It is similar to how an invoice works.
The fapiao system is also linked to the VAT declaration system. If the company books are inconsistent with the fapiaos, the company will be prohibited from issuing fapiaos until they resolve the discrepancy. Companies are required by the law to maintain their fapiaos and physical records of business activities for up to 30 years.
So, in summary, fapiao has 3 major usages:
- For customer: work as proof of purchase, similar to the traditional invoices that we are familiar with
- For business: work as proof of business transaction and tax payment record
- For the government: work as tax payment tracker
3. Example of fapiao
Here is a real-life example of how fapiao works:
A car dealer and a car buyer in China enter a deal.
In this case, the car buyer is a corporate client. They want to buy the car for business purposes.
The client pays the car dealer the price they agreed on.
The car dealer and the client then sign an agreement on the deal. The agreement specifies the details of the transaction.
The car dealer then has to take the agreement to the tax bureau, who calculates the amount of tax the car dealer has to pay.
The car dealer then pays the tax and receives the fapiao. The fapiao is then taken back to the company for bookkeeping and auditing purposes.
If the company is found to be not keeping the fapiaos, they will be fined.
4. Non-compliance with fapiao system
There are many requirements around a fapiao. If a company fails to produce a fapiao when requested by the customer, the customer can report the company to the tax bureau.
But in reality, a lot of people don’t bother with the reporting. The reporting process can be cumbersome and time-consuming, and nobody wants to deal with the endless bureaucracy, so most of them ignore that.
Complying with the fapiao system means paying extra tax, and people want to not pay extra money whenever they can. Avoiding taxes might be a bad thing, but so many Chinese companies avoid paying taxes on a daily basis that it has become a normal thing to do. After all, nobody is paying tax, why should I?
There is also a roaring black market for fapiaos in China. These fapiaos can be fake, or real fapiaos that haven’t been used. The penalty for using these fapiaos is extremely high, up to the death penalty. However, the enforcement of the law on this practice is not strong, so many companies still use fake these fapiaos to be non-compliant with the tax law and reduce their monthly tax payment. It’s a risky practice, but it exists, and is still going strong.
5. 2 types of fapiaos: General Fapiao and Special VAT Fapiao
There are 2 types of fapiaos in use:
- General fapiaos (增值税普通发票): a proof of payment, similar to an invoice
- Special fapiaos (增值税专用发票): a proof of payment and a tax payment record. Because it serves the tax payment record purpose, a special fapiao contains a wide range of information about the business (tax code, address, phone number, and bank account information)
General fapiaos are used by businesses that distribute and sell non-taxable items, such as groceries, cigarettes, alcohol, food, clothing, and other types of consumer goods. The VAT is added directly to the price of these goods, so the seller doesn’t need a special fapiao to record their tax payments.
Special fapiaos are used by businesses and vendors that sell and distribute taxable goods and services.
6. E-fapiao: the more advanced form of tax record in China
The digitalization trend found itself in every industry. Tax payment in electronic forms is extremely convenient and much faster than tax payment in paper. After the success of its first introduction in 2015, the e-fapiao system has gained widespread popularity in this country. A lot of industries with high transaction frequency such as the F&B industry, have adopted this advanced transaction record system.
The e-fapiao system was truly a revolution. It has too many advantages compared to the old paper fapiao system. Without the e-fapiao system, the eCommerce industry in China couldn’t have achieved today’s success and level of growth.
7. Advantages of the e-fapiao system
7.1. Fewer Copies
The paper fapiao has up to 3 forms and 3 copies:
- 1 invoice copy for the customer
- 1 copy for tax purposes
- 1 copy for bookkeeping purposes
The e-fapiao, of course, only has 1 single electronic copy. Everything is automated, so the company doesn’t have to go to the tax bureau to receive a pile of tax receipts to use for a month anymore. It also reduces the amount of paper needed for fapiaos.
7.2. Simplified Verification
With paper fapiaos, we need to go to the tax bureau to register and obtain a scanning equipment. The business must manually input the fapiao code, fapiao number, issuing date, transaction amount, and verification code to verify each fapiao paper they receive and issue. This is extremely time-consuming and slows the business down significantly.
With e-fapiaos, everything is automated through an online invoice reader. It is simple, efficient, and cost-effective.
A paper fapiao also needs to be stamped with an invoice seal. These seals can be faked. There have been so many cases of faking seals in China before. e-fapiaos, on the other hand, use electronic signatures, which are much harder to copy and fake.
7.3. Fapiao Loss
Because paper fapiao is physical, it can be lost or damaged. In those cases, the taxpayer will need to obtain evidence and re-stamp other copies.
Meanwhile, e-fapiao is stored electronically. The data can easily be backed up and retrieved within minutes.
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8. What you need to know about fapiao when expanding your business to China?
There are so many reasons why you should take time to study the fapiao system when expanding your business to China:
- The Fapiao system is Complex: It is unlike any other invoice system in the world. First-time entrants to Chinese might encounter some confusion and even problems when they try to figure out the cumbersome process of fapiao.
- WeChat offers e-fapiao tracking services: Almost everyone in China uses WeChat. It is a powerful social media platform for businesses in China, and this platform offers e-fapiao services for consumers. If you do business in China, especially business in the consumer goods industry or eCommerce, you will need to use WeChat, and consequently, e-fapiao.
- Fapiao tasks are usually outsourced, but it is already changing: Back in the day, companies usually outsource fapiao-related tasks to agencies and accounting service providers because it was too complex and bureaucratic. However, as e-fapiao gets more and more common, many businesses can now handle the volume on their own, even businesses with high transaction frequency.
- Foreign businesses should consult legal advisors to develop their China relocation strategy: Moving to China can be quite a complex task. The legal environment is a lot more complicated than other countries. If you want to be compliant and reduce the legal risks for your foreign business, you should consult legal advisors or local consultants who have deep knowledge of the legal environment and business environment in China.
pTranslate has written many guides on doing business in China that you definitely should have a look at:
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