The operational aspects of the Chinese VAT Tax and Invoice Fapiao System
China’s Fapiao system is a complicated one that can be confusing for
foreigners running a business. But in an effort to minimize your liability
as much as possible, and to guarantee that you’re meeting any and all
compliance requirements, it is in your own best interest to understand
the VAT Fapiao system and how it relates to your company.
From the operational perspective, you have two options when invoicing in China. The first is issuing the VAT invoice immediately to your Chinese customer instead of issuing a debit note or an Excel invoice. This is crucial because the moment the invoice is issued, it goes into the tax software system and regardless if your customer has paid or not, you are liable to pay VAT.
If you are in the startup phase and cash is critical, you can issue an approved formal invoice or debit note to your Chinese customer with all of the required information (bank account, service trade transactions, service fee amounts, VAT calculation). Once you receive the payment, you may issue the VAT fapiao. This enables you to control your cash flow freely.
Some multinational and foreign invested companies will request the VAT invoice upfront before making any payments. You can negotiate with them, explain your situation, and ask if they would operate this way for the first year as an exception.
The VAT impact is different in relation to cross-border services. For example, an overseas company invoicing a Chinese company, in order to get payment, there will be VAT deducted on that invoice as well as withholding tax.
Investors importing goods to China are subject to VAT at the same applicable tax rates applied to goods sold within the domestic market which, subject to the May 2018 reforms, are now at 13 percent for the majority of products.
Still, exporting certain taxable services from China to foreign countries can allow investors to benefit from certain VAT reliefs. If a Chinese company issues an invoice overseas, it may benefit depending on the service from a zero rate VAT or an exemption.
Both VAT reliefs are exempt from any output VAT. The difference between the two are that under zero-rated VAT, the input VAT attributable to the export of services can be credited from VAT payable and/or refunded, while under VAT exemption, the input VAT attributable to export of services cannot be credited or refunded.
If a service is eligible for both VAT zero-rating and VAT exemption, the taxpayer may choose which one to apply. Whether an investor chooses a zero-rated VAT or tax exemption should depend on the overall VAT structure of the company.
Taxpayers who have little input VAT deductible are not advised to apply for a zero-rated VAT, given that the procedure for obtaining a tax refund for zero-rated VAT services is quite complex and time-consuming.
Providers of zero-rated VAT services may opt to pay VAT or apply for VAT exemption instead by filing a relevant declaration. However, taxpayers will be prevented from electing VAT zero-rating in the subsequent 36 months.
To enjoy VAT exemptions on cross-border services, a written contract is generally required; the entire payment should be sourced overseas; and the sales of the cross-border services provided must be accounted separately.
VAT compliance and management is extremely important. One key element is to keep the fapiao sheets in a secure location and make sure they are not misused.
The severity of mishandling a company’s fapiao system should not be underestimated – if a company fails to produce a fapiao when requested to by a customer, this constitutes an illegal act, as all business transactions are required by law to be recorded on a fapiao.
For individual consumers, fapiao's act as proof of expenditure in cases where they need to reclaim business expenses. It is a customer’s responsibility to obtain fapiao from a service provider, as they are not always automatically offered.
To streamline the fapiao issuing process, the popular social media app WeChat has launched a new function allowing users to input relevant corporate tax information and present it to service providers in the form of a scannable QR code.
Fapiao's can be easily faked. If you wish to verify the validity of a fapiao, you can input the fapiao’s number in the tax bureau website and see which company is responsible for it. You can also validate the fapiao of individuals in your company claiming reimbursement of expenses and make sure they are not fake.
The latest updates in the VAT fapiao system aim to make the invoice issue in China more effective and simpler. At the same time, the rules have become somewhat stricter.
An additional piece of information that must be now included particularly on general VAT invoices is the Tax Identification Number (TIN). The TIN number is your company’s licensing number, which goes on every single certificate that is issued when you incorporate your company and now must be included in your invoices.
If you are found out to have either booked a fake invoice or not included all the correct identification information, you may have to go through a tax audit to see why this non-compliance is arising. This is a very tedious and complicated process, which is why it is important to ensure that everything on your invoice is legitimate.
During your first meeting with the officers at the tax bureau of your jurisdiction, it is in your best interest to maintain an open dialogue and offer as much information as possible about your business. Even if you outsource this service, it is convenient to visit the tax office at least once in person to better understand the process.
The best way to obtain accurate information about your tax obligations is to talk to your tax officer. You shouldn’t rely solely on corporate service providers because their experience is based mainly on other companies that they have worked with. The ultimate decision maker about profits tax, VAT, consumption tax and transfer pricing will be your tax officer.
It’s crucial to develop a good relationship with that person in order to be able to get accurate information.
The main advantage of working with outsourced providers, such as tax lawyers, is that they can help you appeal in case there is an outcome that you don't like. But don't underestimate the relationship that you develop with your tax officer, since this will most likely help you as well if you need to make an appeal.
Nevertheless, the tax officer’s main job is to generate tax revenue for the government, which means that they won’t always prioritize your company’s interests. If you are looking to apply for any form of exemption or you are in the high-tech sector and you are looking to get a lower profits tax rate, from 25 to 15 percent, they may not make it easy for you.
The same goes if you are looking to set up profit repatriation strategies and you want to get those contracts approved and registered at the tax bureau. They will not make it easy because repatriating funds means that funds are not kept in China for further investment.
Every single district in Shanghai has a tax bureau and there is an annual competition between them to find out how much tax revenue they are earning, and which one collects the most. Obviously, business centers will collect more tax money because there are more companies registered in those locations.
On January 9th, 2019, Chinese Premier Li Keqiang announced an ambitious plan to boost spending, increase foreign firms' access to markets in China, and cut billions of dollars in taxes. These measures would apply to taxes being paid from January 1st, 2019 until December 31st, 2021.
There is a certain criterion that must be met to benefit from these various tax cuts. Shareholding companies need to have assets of under 50 million RMB and fewer than 300 employees, and a taxable income of less than 3 million RMB in China in order to profit from these new tax rates. In addition to that, companies cannot be within sectors that are listed as non-restricted.
Should you have questions about the VAT tax system and fapiaos or the profits tax system, complete the below inquiry form with your questions and comments.
DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.