Invoicing in China: The Fapiao System
One of the more complex and critical elements of operating a business in China relates to invoices, known as fapiao in Chinese. A fapiao is an official invoice issued by the local Chinese tax bureau that the seller provides for any goods or services purchased within the country. Fapiao are used by the government to track tax payments and deter tax evasion. They also provide buyers and sellers with proof of purchase.
Foreign entrepreneurs and companies must understand the fapiao system in order to carry out transactions and claim business expenses against taxes paid. Since all transactions are required by law to be recorded using fapiao, failure to comply could result in severe penalties from the local tax authority.
The Golden Tax System
China’s State Taxation Administration (STA) is responsible for recording all fapiaos issued across the country. They control fapiao distribution through the Golden Tax System, which is a centralized invoicing system that restricts companies to issuing invoices using government supplied software, pre-supplied invoice paper, and special printers linked to the central taxation system. The tax authorities therefore have strict control over the issuance of VAT invoices and system compliance.
The tax authorities require all companies to use the fapiao system. This means that they must purchase fapiao in advance, in accordance with their business scope. At month end, when a company claims current taxes (such as VAT and surtax of VAT), the tax system will collect information from the Golden Tax System to estimate how much the company needs to pay. If the amount of VAT claimed does not match the system record, the company will not be able to issue fapiao in the system and will need to visit the local tax bureau to explain the reason. Only then will the system will be unlocked and the company can resume issuing fapiao.
Types of Tax Invoices
There are two main types of tax invoices in China: General VAT fapiao, and Special VAT fapiao. The main difference is that Special VAT fapiao can be utilized for tax deductions. General taxpayers who meet the requirement can apply for Special VAT fapiao, but small-scale taxpayers are unable to issue Special VAT fapiao by themselves. If the buyer needs a Special VAT fapiao, these small-scale taxpayers should go to the tax bureau to have them invoice on their behalf. Foreign businesses can choose to start using a small-scale taxpayer status or general taxpayer status.
Special VAT fapiao include a total of three sheets. The bookkeeping sheet serves as the seller’s accounting record; the tax deduction sheet is proof of the amount of input tax paid by the buyer; the invoicing sheet is used by the customer for payment or collection.
In many cases, when selling to Chinese clients (or distributors), they will request an RMB denominated invoice. Many of them also prefer to pay to an RMB account to avoid the hassle of transferring money out of China, which has become a significant challenge for local companies.
In the past three years, China’s tax authorities have begun to strictly enforce the requirements on businesses to issue the correct fapiao for each product or service. The system added thousands of categories and sub-categories, and therefore businesses cannot issue General VAT invoices anymore. Each fapiao has a description that must match the specific product or service.
At first, these changes made life very complicated for those issuing fapiao and for those who need them, such as sales staff who need to reimburse expenses. However, this burden has been eased by technology. Many businesses (especially retail) allow customers to scan a QR code and insert their tax information into a designated platform (such as via the Chinese social media app, WeChat). The fapiao is sent directly to the customer’s email and is simultaneously recorded on the company’s accounting system. This reduces the time taken to print a fapiao after a purchase has been made. It also reduces the use of counterfeit invoices that were common in the past.
Operating in China? How does the Fapiao system affect you?
1. If you are a law-abiding business in China, the comprehensive tax system has made your life easier. Reporting obligations are streamlined via the Golden Tax System since VAT deductions are easy to follow and local business accounting is relatively straightforward. This is why many businesses that used to import have switched to buying products locally. Not only are they saving the hassle that comes with importation costs, licenses, import VAT, and duty payments, but they also do not need to keep complicated records of their output and input VAT in order to offset the import VAT cost.If you’re an overseas company without an entity in China, and are looking to sell your products locally, China & Partners can help. We possess a long list of licenses that enables us to import products on behalf of our clients and sell them locally in China, making it much easier for the buyer to pay via a simple bank transfer and receive their invoices.
2. If you buy products or components and then sell finished goods in China, you will face multiple challenges. If you do not have an entity in China, you may need to export the products and then import them back in again. This increases the costs dramatically due to taxes, duties and shipping costs. It also transforms the VAT refund process into a difficult task that only an experienced accounting firm can handle. Also, as an overseas company, you may not want your clients to be in contact with your suppliers. China & Partners is the perfect partner for overcoming these challenges. We can buy and sell in China in local currency, which makes everything simpler: bank transfers can be made within a day, input and output VAT are automatically offset and easily calculated. With the China & Partners platform, there is no need to submit requests for complicated VAT refund cases. In addition, China & Partners can serve as a buffer between the supplier and the client, and we can consolidate shipments that come from different suppliers.
3. Are you a foreign company with an entity in China? If you are, then managing the Golden Tax System can be complicated. You must employ a local financial specialist who is experienced in operating the system and all the rules related to it. For example, many mistakes occur as a result of different practices between China and other countries. In many countries, a company will send products from a warehouse with the attached invoice. In China, companies must issue the invoice ONLY after the payment has been received in their bank account.To avoid mistakes and complications, you need a skilled accountant who has experience and knowledge pertaining to the various business implications of practices related to tax, fund transactions and other compliance issues. As a reseller of various products for clients, China & Partners has acquired valuable accounting and logistics experience regarding product and service importation and sales in China.