When selling and sourcing from China, companies should closely track any fapiaos issued from its Chinese subsidiaries and obtained from Chinese vendors, as missing, falsified, or fake fapiaos can carry significant potential civil and criminal penalties.
Anyone who has travelled to China will have encountered little pieces of paper called “fapiao” that act as receipts for purchases. Similarly, any company doing business with or in China would have encountered fapiaos in the course of the transaction. A fapiao is an invoice issued in an official format by the Chinese tax authorities that plays a central role in compliance with tax requirements in China. Recently the Chinese tax authority has developed an electronic fapiao system for greater monitoring and control of fapiaos, which makes it easier for the Chinese tax authority to detect an inconsistencies and suspicious activities. Retail and wholesale businesses that sell in or source from China should have an understanding of the significance of fapaios to ensure compliance with Chinese tax laws.
There are many different types of taxes in China, but the primary taxes from a government revenue perspective are the value-added tax (“VAT”), enterprise income tax (“EIT”) and individual income tax (“IIT”). Fapiaos are especially important for VAT and EIT.
The VAT in China for goods has been lowered recently from 17% to 13%. Foreign businesses most often encounter the application of Chinese VAT for goods when their Chinese vendors discuss export VAT rebate. VAT fapaios are evidence of the input amount (for purchases) and output amount (for sales) the difference of which forms the basis for the VAT that needs to be remitted to the tax authorities. VAT fapiaios are also used to determine the amount of the VAT rebate when exporting goods from China. Given the above, when doing business in China, it is important for risk management to clarify in writing whether the quoted price in a contract is intended to include China VAT (i.e., whose responsibility it is to pay China VAT).
EIT is generally 25%, but recently there have been some preferential treatments to small enterprises with minimal profits and enterprises doing research and development for the purpose of encouraging innovation. EIT is calculated after costs, as evidenced by properly issued fapiaos, have been deducted. The development and research cost deductions are granted an additional 75% on the top of the actual expended costs, meaning that if the research cost is CNY 100, the deduction is worth up to CNY 175. Fapiaos that do not conform to the prescribed format or requirements cannot be used to evidence cost deductions.
Please be reminded, companies doing business in China should ensure proper management of Chinese fapiaos, including procedures for requesting fapiaos from Chinese partners, maintaining fapiaos in their record systems, and issuing fapiaos (for subsidiaries in China).