An Overview of the VAT and Fapiao Invoice System

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China’s Value-Added-Tax (VAT) is a broad-based system with more than 160 countries around the world having implemented a VAT (or equivalent tax). China’s VAT system is different by international standards, because it applies VAT to most financial services and real estate transactions involving business-to-business (B2B), business-to-consumer (B2C), and consumer-to-consumer (C2C) transactions. It is considered a neutral tax that allows companies to deduct contributions paid on purchases from their corresponding VAT rate.

What is the fapiao?

Simply, the fapiao is a receipt that validates the purchase of goods and services. It is used by companies and taxpayers to satisfy the legal standards of China’s tax system and track business transactions. China’s tax authorities require businesses to use fapiao so they pay tax in advance of future sales, preventing tax evasion.

Types of fapiao

There are two types of fapaio, the special VAT fapiao and the regular VAT fapiao. The main difference between the two is that the special VAT fapiao can be used for tax deduction purposes. The special VAT fapiao, which cannot be used by small contributors, is issued by general taxpayers when goods or services are sold to other businesses or non-consumers. Since it is used for tax deduction purposes, it requires more information. It consists of three documents: the accounting copy for the issuing company, the deduction copy (of the fiscal deduction) for the client, and the receipt copy (for bookkeeping) for the customer.

The regular VAT fapiao, which is for companies of any other size, is used as evidence of payment in all other circumstances. They can be issued for sales of goods, tax-free services, or VAT registered operations by a small-scale taxpayer. Of the two types of regular VAT fapiao, the regular VAT invoice and the roll invoice, taxpayers can choose their preference.

There are two groups of VAT taxpayers in China — general taxpayers and small-scale taxpayers — based on annual sales. small-scale taxpayers receive a lower tax rate, but general taxpayers have the potential to deduct input VAT from output VAT. The general taxpayers’ VAT rate varies from 6% to 17%; small-scale taxpayers pay a flat rate of 3%.

It is important to understand the seriousness of the fapiao. It is illegal if a company does not have a fapiao when a customer requests it, because all business transactions are required by law to be recorded on a fapiao. For consumers, the fapiao is proof of spending and it is their responsibility to get it since they are not always offered.

China’s new VAT policy

In May, the Chinese State Administration of Taxation (SAT) announced a new VAT policy that became effective July 1, 2017. Titled “Announcement of Matters Regarding the Issuance of Value-added Tax Invoices,” the new policy sets forth changes that increase the requirements for taxpayers requesting a fapiao. Previously, taxpayers were required to provide just their company’s name in Chinese for the regular VAT fapiao. The new policy mandates taxpayers provide the tax ID code, the fapiao with the corresponding transaction summary, and the issuer’s special fapiao chop. For the special VAT fapiao, much more information is needed, including complete information in the upper left corner of the form (Chinese company name, tax ID code, address, telephone number, bank name, and account number), fapiao passcode, tax breakdown of goods and service tax, content of fapiao with the transaction summary, and issuer’s special fapiao chop.

WeChat supports new policy

To help simplify the process for issuing fapiao, the popular social media app WeChat introduced a new function for users to input the relevant corporate tax information and share it with service providers by scanning a QR code.

WeChat’s new function, titled, “My Receipt Payee Title,” is located under the “Me’→‘My profile” section of the app. Corporate tax information can be added and stored for future use. The required fields, which must be added in Chinese, include: company name, company address, tax ID code, mobile phone number, registered bank branch, and bank account number. Once this information is added, a QR code is generated on a card, which can be scanned by service providers to quickly and easily issue a fapiao.

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