Understanding the VAT Tax and Invoice Fapiao System for your China business
In order to run your China business in the most efficient way, it is
essential for foreign investors to understand all the potentially relevant
tax costs that would be incurred in China and the complexities of its
The Chinese tax system is case specific, and it is highly recommended that you speak to your tax officer regarding the taxes that would apply to your business. However, there are a few basic aspects that are important to know and understanding them is a good start.
The Value Added Tax (VAT) and Fapiao system are two of the major sources of revenue income for the Chinese government. As one of the biggest markets in the world, China is attracting more than ever foreign investors eager to establish new businesses in its region.
VAT applies to the purchase and sale of goods, provision of processing, repair or replacement services within China, the import and export of goods into and from China as well as serviced-oriented transactions. Rates vary depending on the taxpayers' sales revenue, type of goods and type of sector.
In an effort to bring more transparency to their taxation system and tackle tax evasion, the Chinese government has established a strict invoice structure to register any form of transaction.
If you have established your entity in China and have a limited liability company, the first category that you will be designated is as a small-scale taxpayer. As such, you cannot offset the VAT that you are paying off your original expenses. But, if from day one you know that you are going to achieve certain volume of transactions, you can immediately apply for the general VAT taxpayer status and reclaim or offset the VAT in purchases of goods and services.
As a small-scale taxpayer, if you hit a turnover of about 800,000 RMB within a fiscal year, you will be required to upgrade to the general VAT taxpayer status.
The sum of 800,000 RMB is the general threshold in major Chinese cities. But it may vary depending on the district. You should find out the exact number in the jurisdiction where your business is registered.
If you are a general VAT taxpayer, the VAT is payable monthly. A small-scale taxpayer is required to pay VAT quarterly.
The most simplified formula of VAT payable equals the output VAT minus the input VAT. The output VAT is what is invoiced to customers, and input VAT is what you have paid to suppliers.
If you are a general VAT taxpayer, you can issue VAT special invoices or VAT general invoices.
As a general VAT taxpayer, the issue of VAT special invoices will allow you to make various deductions and offset input VAT, but it needs to be declared within 180 days by the other party.
Since April 1, 2019, the rates for general VAT taxpayers have been lowered.
Currently, the standard VAT for the sale of most goods and services is 13%. If your company provides services such as financial services and insurance; telephony and internet data; IT; technology; or consulting, the rate drops to 6%. Standard VAT for retail; entertainment; hotel; restaurants; catering services; real estate and construction, telephony calls; postal; transport and logistic is 9%.
In the past years, the Chinese government has reduced the VAT percentages, which represents good news for businesses and many experts predict further changes, possibly going from three to only two VAT rates.
Speed and efficiency regarding tax operations in China have significantly improved as well. If you were initially designated as a small-scale taxpayer and wish to become a general VAT taxpayer, it may take between 2 to 5 business days to get approved, compared to two months in the past.
You can remain a small-scale taxpayer if you wish, but you won’t be able to issue special VAT invoices if your business grows.
You can only issue general VAT invoices. However, you may potentially lose out on bids and projects from customers who request to be issued VAT special invoices.
Nevertheless, there have been some changes. As a small-scale taxpayer, you cannot issue a VAT special invoice yourself, meaning through your printer or your system, but if a customer requests one, you can go to the tax bureau and have them issue the VAT special invoice on your behalf.
It's not the most efficient, but since March 1, 2019, you can do that. There are eight industries and sectors where you have the ability as a small-scale taxpayer to issue VAT special invoices yourself, such as leasing, scientific research, residential services, hotel industry, and construction, among others.
Companies with sales that are less than 100,000 RMB per month will be exempt from paying any VAT. You are still required to issue the invoices. But if your revenue is less than 100,000 RMB, or 300,000 RMB in a quarter, you are exempt.
A fapiao (which literally means invoice) is a legal receipt issued by the Chinese Tax Bureau (but provided by the seller) that serves as proof of purchase of any goods or services. It is an essential component of the tax law in China and it does require compliance by companies. The Chinese government uses these invoices to track tax payments and deter tax evasion.
Your tax officer will request a safe and may even want to visit your office to see if you have one to protect your fapiao. Any fapiao sheet lost, may cost you a fine of 10,000 RMB. The tax bureau wants to avoid at any cost that these invoices end up in the black market and are used illegally.
There are two types of fapiao:
1. general fapiao, simply evidence of payment (what you'll need to ask for most of the time) and
2. special fapiao, used for tax deduction purposes, which contains detailed information about the goods and services, including the trader’s tax code, address, telephone number, and bank account information.
Fapiao's are officially business records, so you'll need to ask for one whenever you need to prove a purchase or claim expenses. For a business, not generating and issuing them upon request is a serious transgression.
The number of fapiao's that may be printed and the capital value of each individual fapiao sheet are subject to quotas. The district tax bureau will determine the quota based on the taxpayer’s actual business operation status.
In general, you will set up a meeting with the tax bureau and communicate what type of transactions your company will be performing. You'll have to specify what kind of value and volume of business will be generated.
If you are a small-scale taxpayer, and the number of transactions is minimal, then they will allocate you a booklet of sheets, between 25 and 50 sheets.
Each sheet is worth 10,000 RMB, which means that if you do a transaction for 11,500 RMB you will issue two sheets, one for 9,500 or 9,999, and the other for the remaining amount. You will issue as many sheets as necessary based on the value of the transaction.
If you reach sale amounts of 300,000 RMB or more per month, for a consecutive period of three months, you can upgrade from 10,000 RMB per sheet, to 100,000 RMB per sheet. If you have special transactions, for example, if you won a bid on a project that is worth 1 million RMB and you need to issue invoices.
You must meet with your district tax bureau within 30 days after opening your bank account to sign an authorization letter to allow the tax bureau to automatically deduct tax funds. Depending on the volume of your business, you will be able to apply for general VAT status and once approved, you can request to buy a printer and VAT software system from the tax bureau to issue the fapiao. Any time there is a transaction, it will be uploaded into the VAT system and your monthly VAT payable amount will be declared. This is automatically connected with the tax agency.
If you are outsourcing this function to a provider, whoever you are appointing to do this work will have to go through a training with the local tax bureau to understand how the software and printer work and how to purchase VAT invoices.
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 absolutely in your own best interest to understand Fapiao and how it relates to the company you’re trying to run.
Should you have questions about the VAT tax system and fapiaos, 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.