A fapiao is a tax receipt. It serves as proof that a person paid for goods and services. It is an essential part of the Chinese tax system and may be necessary for business compliance. It is important for businesses to understand fapiao and acquire it if it is necessary. Using fapiao also offers some advantages if you elect to use it.
Why Businesses Need to Use Fapiao
If a business uses fapiao, this signifies that it is required to report taxable income. When a person pays with fapiao, this signifies that the transaction is taxable to the business. Many vendors would prefer cash transactions and may not disclose their total earnings to the Chinese government. This is relatively common for offline businesses and vendors such as taxis, shops and restaurants.
Chinese tax authorities require businesses to use fapiao. This serves as paying tax in advance on their future sales. The transaction must be declared to the Chinese tax department, and the business must pay tax on it. Using fapiao helps avoid tax evasion.
While some countries use an invoice as a tax receipt, Chinese tax laws involve this more integrated system. Rather than declaring earnings later, the business uses fapiao and pays the tax upfront at the time the transaction occurs. The Chinese government is concerned that businesses would under-declare their earnings and not pay the total amount of taxes due so uses this system of upfront payment instead.
Fapiao is required for individuals to claim business expenses while businesses record their business transactions on fapiao. Someone who asks for fapiao is asking for a tax write-off receipt. The fapiao also serves as an official record from the business.
Who Is Responsible for Administering Fapiao?
The State Administration of Tax is responsible for printing, distributing and administering fapiao. These authorities require businesses to purchase the appropriate type of fapiao, which corresponds to the scope of their business.
Requirements to Issue Fapiao
Giving fapiao to a customer is called “issuing” fapiao. In order to do this, you need to have a Chinese company, and specifically a Mainland Chinese company. Companies that are just starting out may use only a Hong Kong company and cannot offer fapiao if this is the case.
Local Chinese startups may try to save money on fees and may not register the business, in which they case they would not be able to issue fapiao to customers.
Information Contained on Fapiao
When a business issues fapiao, it indicates the type of service the business provides and the type of transaction that was carried out. Fapiao shows the name of the company and where the business is registered.
Some Chinese customers may confuse a traditional invoice with fapiao. An invoice often includes similar information, including a list of all items purchased. However, regular invoices or receipts do not connect to the Chinese tax department and does not require the business to pay taxes on the income generated from the transaction.
Similarity to Sales Tax
Many visitors compare the fapiao system to sales tax. However, in countries that use sales tax, the base price of the item is usually listed as lower and then the total shows the full amount with taxes included.
In China, the menu price includes the price of fapiao. The business is then responsible for paying the percentage owed to the tax authority.
In the United States, sales tax is paid quarterly to the state and based on their total sales and sales tax received. However, this system makes it easier for businesses to modify their cash receipts.
In contrast, fapiao represents an upfront declaration system. It declares that the transaction is taxable upfront and does not rely on businesses to use the honor code when conducting business. A fapiao is an official tax invoice that is made at the time of the transaction.
Types of Fapiao
There are two major categories of fapiao:
Special Value-Added Tax Fapiao
Value-added tax fapiao can be used for tax deduction purposes. Therefore, it contains much more information, including the company’s:
- Tax code
- Telephone number
- Bank account information
The amount of this type of fapiao may be broken down into taxable and non-taxable figures.
General fapiao is not used for tax-deduction purposes. Usually, the purchase amount on general fapiao is not broken into different amounts. General fapiao transactions usually occur when businesses are not capable of making a special VAT fapiao transaction.
Because there are different types of fapiao, businesses should check with their accountant so that they know which type of fapiao they will need to request when paying for goods and services.
Why Consumers Request Fapiao
There are a few reasons why consumers might request fapiao. One common reason is because the consumer is required by his or her accounting department. An employee may go out to a business luncheon or pay for supplies. The accounting department wants to be able to treat the transaction as a taxable deduction and may insist on using fapiao.
Another reason is that workers may be required to turn in a certain quota of fapiao each month. The use of more fapiao can result in a decrease in some of the worker’s taxable salary.
Possible Problems with Fapiao
While fapiao can provide certain benefits, it can also result in some problems. Some merchants list one price and then change this price if a customer mentions fapiao. In other situations, the receipt may show how much is being charged for the fapiao. This can lead to customer confusion and an incentive not to request fapiao.
Another possible problem is that some people sell fapiao on the grey market. This is an illegal act that can result in significant consequences. Customers may pay a percentage of the requested value, which is lower than the amount that can be written off. However, this fapiao may not be official or may be counterfeit.
Customers may also forget to request fapiao. It is generally their responsibility to request it. This document is important proof of paying for goods or services. If they do not ask for fapiao, they will not be able to claim the business expense.
For businesses, the use of fapiao can be problematic because they must try to predict how much they will receive in sales and be prepared for this. If they do not have enough fapiao, they may have to interrupt business operations and acquire more. If they refuse to use fapiao, the customer may cancel the order.
Liability for Fapiao
If a customer requests fapiao and the business refuses to provide it, the business may face criminal liability. All business transactions are legally required to be recorded on a fapiao. If a business owner does not provide a requested fapiao, the customer can report the business to the local tax bureau.
The business files a maximum invoice amount application to register for fapiao and to have its status determined. Maximum invoice applications that consist of transactions over RMB 100,000 trigger a site inspection for the person filing the application. The number of fapiao that can be printed and the capital value of each fapiao are subject to specific quotas. The local tax bureau makes determinations regarding these quotas that are connected to the business’ actual manufacturing or business operation status.
After the tax bureau approves the quotas for special VAT invoices, the business can print the invoice using special computers from the tax bureau. These printers are integrated into the Chinese tax system. One or more members of the company must visit the local tax bureau if they want training to use these printers.
If the business goes over the provided quota, it can ask for a temporary value increase or can obtain additional fapiao.
Contact Horizons for Assistance
In order to mitigate possible liability and ensure compliance with fapiao system, many businesses consult with professional advisors who can help develop fapiao best practices and register their business.
Horizons is familiar with local norms and regulations, including the use of fapiao. We understand complex tax regulations throughout China and can help ensure that you comply with local labor and tax laws.