How Does an E-fapiao in China Work?
A COMPLETE GUIDE TO CHINA’S ELECTRONIC FAPIAO
For entities that have done business or are intending to do business in China, it is most likely that you will come across the term fapiao, which refers to an invoice in China. This key element of doing business is currently undergoing a digital transformation and its implementation has had a significant impact on the accounting and financial processes of enterprises. In this article we examine what the e-fapiao is, how it will work and the impact on companies doing business in China.
WHAT IS A FAPIAO?
A fapiao is an official invoice, which is registered with the tax bureau in China, and serves as a sort of proof of purchase for goods sold or services rendered. The Fapiao serves a dual purpose as a legal receipt for the exchange of goods and services, as well as a tax invoice.
As a legal receipt of the goods or services exchanged, a fapiao is the document that serves to support the legitimacy of a taxpayer’s transactions. As the main tax document, a fapiao sets out the applicable VAT rate and VAT amount that is due. This is used by tax authorities for the recording and tracking of transactions and as an effort to reduce tax evasion.
TYPES OF FAPIAO’S
Fapiaos can generally be divided into 2 main types or categories:
- General VAT Fapiao – this kind of fapiao is issued as proof of payment and although it can be issued by any company in China, it cannot be used for VAT deductions. It is generally used for B2C or tax-free transactions.
- Special VAT Fapiao – this fapiao is also used by general taxpayers whose turnover is more than RMB 5 million per year or if they have applied and been granted special taxpayer status, in an effort to ease their VAT obligations.
WHAT IS A FAPIAO USED FOR?
A fapiao’s main purpose is to serve as proof of the purchase and sale of goods and services. Therefore, a fapiao serves as a warranty against tax evasion for the tax authorities in China. An example of when a fapiao can be issued includes when a passenger takes a taxi ride, a fapiao can be issued by the driver or when a store owner purchases equipment for his store, the supplier can issue a fapiao to the purchaser.
WHAT IS INCLUDED ON THE E-FAPIAO?
E-fapiao’s include both basic information and specific information, depending on the nature of the transaction. Taxpayers in specific industries, those involved in the trade of specified goods and services, or in specifically outlined scenarios will be required to input the relevant information on the digital fapiao.
These specific industries, goods and services, and situations include:
- Construction services
- Passenger transportation services
- Cargo transportation services
- Real estate services (sales and leasing)
Taxpayers who are required to issue the fapiao for the abovementioned categories are required to display the type of business they are issuing to in the top left corner of the fapiao. Even though the e-fapiao has been digitally generated, the structure remains similar to that of the paper fapiao. There are additional anti-counterfeiting measures that have been implemented with it, such as electronic signature, to prevent the occurrence of fraudulent activities.
Even though the e-fapiao is transmitted digitally, a recipient is able to request hard copy, according to the law. Although in practice, this may make negotiations for smaller enterprises more difficult as larger businesses generally have more leverage in transactions.
WHY IS A DIGITAL FAPIAO IMPORTANT?
While the physical paper fapiao has been used for many years, there have been some drawbacks in its implementation. In specific industries with a high volume of transactions, vendors were constantly under strain to issue fapiaos, and the with the e-commerce boom it is becoming increasingly difficult to issue and deliver the document. The digital version now allows for a faster, more convenient way for vendors to issue a fapiao.
THE DIGITAL FAPIAO HAS AN EFFECT ON ALL BUSINESSES
Whether a business is located in China or located elsewhere and doing business with an enterprise in China, it is important they have an understanding of how the electronic fapiao works.
While many businesses may think it is not applicable to them as it is currently in its pilot phase and therefore only issued in the pilot areas, businesses nationwide are eligible to receive an electronic version of the fapiao.
THE E-FAPIAO AFFECTS ACCOUNTING PROCESSES
With the introduction of the e-fapiao the Chinese government has additionally been updating the relevant regulations and processes, in order to ensure its effective implementation. The authorities such as the State Tax Administration (STA) and Minister of Finance (MoF) have encouraged its implementation by making adjustments to processes.
ADVANTAGES AND DISADVANTAGES OF THE E-FAPIAO IN CHINA
ADVANTAGES OF THE E-FAPIAO IN CHINA
The implementation of the digital fapiao has various advantages for taxpayers, vendors and the taxation departments who deal with tax administration. Some of the advantages of the e-fapiao include:
Advantage #1: Easier and more convenient to issue
With paper fapiao’s vendors would need to issue a specially printed voucher which has a unique invoice number, which created a degree of inconvenience for the issuance. The implementation of the e-fapiao removes the necessity of having the special equipment that was previously required for the issuing. A digital fapiao can be issued at any time and any place through a mobile app.
Advantage #2: Streamlined process
An e-fapiao is by nature in a format that can automatically be read by a machine, as such it can be integrated into a company’s system for wider application and use. This allows companies to connect their transactions, payments, and overall accounting procedures, to achieve a more streamlined, well-defined process. This will influence other aspects of the business as well, such as the supply chain, annual reporting etc.
Advantage #3: Simple verification process
Taxpayers previously had to manually input the information of each fapiao issued on the National VAT Fapiao Verification Platform for each fapiao received. With a special VAT e-fapiao it is verified directly when opening the official fapiao platforms created by the STA.
Advantage #4: Efficient record keeping
As fapiao’s are no longer in paper format and they are now stored digitally, they are easier to access and search for. Additionally, as there is no need to manually store them, there is no risk that they may get damaged or lost.
Advantage #5: Environmental impact
Finally, e-fapiaos are a sustainable and environmentally friendly alternative to standard paper fapiaos. Like in many countries, the increased application of e-invoices is expected to have a positive impact on the environment.
DISADVANTAGES OF THE E-FAPIAO IN CHINA
Disadvantage #1: Online transactions
One of the main disadvantages of e-fapiaos is that it enables online merchants to impose higher prices for products as a result of accounting for the cost of electronic invoices. This poses a threat to ordinary B2C consumers who may experience obstacles when issuing electronic invoices.
Disadvantage #2: Duplicated fapiaos
Repeated reimbursements resulting from being able to print duplicates of e-fapiaos easily is also a difficulty faced by financial personnel. As a copied e-fapiao looks almost identical to the original version, the only way to verify the legitimacy of a fapiao and prevent repeated reimbursements is to write down the number of reimbursements each time.
IS THE E-FAPIAO BEING APPLIED IN CHINA?
The concept of the e-fapiao was first introduced as early as 2011, where the government released the e-fapiao blue book, which mapped out the technical pathway of the nationwide application.
In 2015 the general VAT e-fapiao was rolled out nationwide, after it had been piloted in small group of cities. General VAT fapiaos are non-deductible for tax purposes and as such were much simpler to manage in comparison to the special VAT fapiao.
As of 1 December 2021, the provincial governments of Guangdong, Inner Mongolia and Shanghai launched a new pilot invoicing system for specific taxpayers to issue e-fapiao. These taxpayers are able to use the national platform to issue, distribute and verify e-fapiao instead of using different platforms, as they were previously required to do. The Chinese is aiming to achieve countrywide application by 2025.
DO YOU NEED A FAPIAO?
For businesses that operate in China or do business with a Chinese based entity, you will at some point either need to issue a fapiao or receive a fapiao for tax administration purposes. Businesses need to be able to determine when a fapiao should be issued, as well as ensure that it is the correct type of fapiao and can be filed correctly (i.e., it needs to apply to the correct category).
It also offers businesses an opportunity to automate certain functions of the business, allowing for more precision in reporting and higher level of productivity. In addition, the automation and streamlining this process is more effective for managers to analyze the operations and reduce risk.
Businesses should be aware of the different fapiao and should work with an internal or external finance controller who knows the fapiao requirements and is able to share detailed instructions on how to handle a fapiao, with employees, partners, and vendors.
For employees you may need a fapiao to claim expenses or for specific tax deductions (e.g., you may get a tax deduction for your housing rental). In such a case it important that fapiao issued is relevant, authentic and contains all the information that is required.
UNDERSTANDING THE ‘TOTAL AMOUNT ISSUED’ ON AN E-FAPIAO
The tax authority in China has now implemented the “Total Amount Issued” system, which refers to the higher limit of the total amount issued by taxpayers in a calendar month (excluding VAT).
Example for General Taxpayers:
Company A is a general taxpayer who declares their taxes on a monthly basis. They declare the total amount issued in August is RMB 5.5 million.
As of 31 August 2022, the amount issued on all fapiao amounts to RMB 5 million, leaving the remaining amount which is invoiceable is RMB 500,000.
On 1 September, the e-fapiao platform will update automatically and readjust the amount issued in August to RMB 5.5 million. If Company A completes the VAT declaration for the month of August by 11 September, and the comparison is approved, the remaining RMB 500,00.00 can be invoiced by the company before 9am on that date. After 9am, if the actual invoice amount issued is RMB 300,000, the invoiceable amount will be RMB 5.3 million.
WE CAN HELP YOU WITH YOUR E-FAPIAO NEEDS
Whether it is a paper fapiao or efapiao, we are able to issue e-fapiaos on your company’s behalf provided that your company is eligible to issue a fapiao and we have access to your company’s golden tax device. With companies that have high frequency in transactions, our process can help save your business time and resources.
MS ADVISORY IN CHINA
Having been operational in China for more than a decade, Moore MS Advisory continues to assist companies with all their accounting, company setup and payroll needs. Distinguished for our emphasis on delivering only the highest quality, our long list of clients extends across multiple industries and sectors all over China. Get in touch with us today and let our consultants help you with your business needs.
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