Eager to catch up with the global trend of digitalization, China is quickly expanding the pilot program on electronic special value-added tax (VAT) fapiao (VAT e-fapiao) to the rest of the country. The digital invoice enables greater precision and efficiency in financial management, reducing human errors and paperwork.
The program started originally in Ningbo, Hangzhou, and Shijiazhuang, and in 2021, it was introduced across China. Companies are selected to participate and notified by the state tax administration and local tax bureau.
In China, the invoice (fapiao) represents a certificate of payment or receipt of money made or received in purchases and sales of goods, provisions or acceptance of services and other business activities.
A fapiao is a legal, physical receipt issued on paper, distributed, printed, and administered by the STA (State Taxation Administration), which serves as proof of purchase. Companies in China must acquire the fapiao from the STA before making their sales, meaning they essentially pay taxes before making their sales transactions.
For decades, the paper fapiao system was the norm. However, the methodology has come under increased strain from high-frequency transaction industries, such as retail, food and beverage, and travel. Especially with e-commerce booming in China, sellers find it difficult to issue and deliver fapiao in the traditional method due to the explosive number of online requests.
Therefore, China started to explore the application of e-fapiao.
Depending on the sector the company operates in and its estimated turnover, it will have to purchase different types of fapiao for a limited maximum amount. There are several types of fapiao: general fapiao, general VAT fapiao, and special VAT fapiao.
The e-fapiao is the digitized version of the fapiao, and there are two types: general and special. The general e-fapiao is the one issued for the commercial transaction of a product or service, and the VAT is non-deductible, and the special e-fapiao is the one that allows the deduction of VAT and on which the pilot program was developed. It affects the B2B area.
E-fapiao is a data file that is generated in the official tax system in a structured format. It is easier for financial systems to comprehend, book, and archive automatically. And it adopts technical anti- counterfeiting measures, such as electronic signature, to ensure its authenticity.
The invoicing system in China is based on the mandatory issuance of invoices (e-fapiao) through the Golden Tax System, the government's central platform.
After validation, the invoices are assigned a unique identification code to avoid tax fraud and are returned to the issuer, who can then distribute them by various means: email, sending a QR code, SMS, hard copy of the e‑Fapiao.
In addition, e-invoices must be archived electronically for a minimum of 10 years.
The local tax bureau regulates the e-invoice management and determines the maximum amount of e-fapiao that can be issued by an applicable company (per month). Adjustments to the maximum amount are done based on the risk degree, tax credit level, actual business situation and other factors.
If the amount is insufficient, the company may request the local tax authority to adjust the maximum amount.
With the process growing more advanced, general VAT e-fapiao can now be issued automatically or semi-automatically when a customer makes a payment. The necessary information can be transmitted into the service portal automatically without the help of an operator.
Though no special tax management equipment is required, companies must pass a real name verification to register and access the e-invoice service platform, from which they can issue the e-fapiao.
The online platform enables account users (selected companies) to query, download and print their collected data. E-fapiao can be sent through the e-invoice service platform via the account, or the company may send an e-mail or QR code.
Companies shall confirm the purpose of any obtained VAT deduction voucher, and apply for the deduction of VAT input tax, or apply for export tax rebate or agent tax rebate.
In the case of both the General e-Fapiao and the Special e-Fapiao, its use is mandatory for new taxpayers and voluntary for all other companies.
Businesses selected by the tax bureau should update their accounting systems and train their employees, before activating their e-invoice online service account. It is also important to inform clients and customers about the changes from the traditional fapiao to the electronic version. This would give the interested parties ample time to make the necessary adjustments.
Companies and individuals can access the e-invoice service platform or the national VAT invoice inspection platform to verify an e-fapiao. For this reason, any business issuing e-fapiao should implement an internal control system to ensure that e-invoices are being done lawfully.
It is expected that special e-fapiao will be mandatory for all Chinese businesses at some point in 2023.
To learn more about our services in China, contact our Head of Business Advisory - Ms. Kristina Koehler-Coluccia at email@example.com.
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.