Invoicing in China: The Fapiao System
In recent years, due to increased supervision and consolidation of tax systems, invoicing has become a complex procedure, which requires professional skills. Many businesses are at a loss in view of a series of new provisions and the level of detail and precision which invoicing requires.
Fapiao is the Chinese name for an official invoice issued by the local Chinese tax bureau that the seller provides for any goods or services purchased within the country. Fapiao are used by the government to track tax payments and deter tax evasion. They also provide buyers and sellers with proof of purchase and a means for tax offsetting and rebates.
Foreign entrepreneurs and companies must understand the fapiao system in order to carry out transactions and claim business expenses against taxes paid. Since all transactions are required by law to be recorded using fapiao, failure to comply could result in severe penalties from the local tax authority.
The Golden Tax System
China’s State Taxation Administration (STA) is responsible for recording all fapiaos issued across the country. They control fapiao distribution through the Golden Tax System, which is a centralized invoicing system that restricts companies to issuing invoices using government supplied software, pre-supplied invoice paper, and special printers linked to the central taxation system. The tax authorities therefore have strict control over the issuance of VAT invoices and system compliance.
Each company is allocated invoices in accordance with their business scope. At month end, when a company claims current taxes (such as VAT and surtax of VAT), the tax system will collect information from the Golden Tax System to estimate how much the company needs to pay. If the amount of VAT claimed does not match the system record, the company will not be able to issue fapiao in the system and will need to visit the local tax bureau to explain the reason for the discrepancy. Only then will the system will be unlocked and the company can resume issuing fapiao.
Types of Tax Invoices
There are two main types of companies in China: General Tax Payers (GTP) and Small Tax Payers (STP). In addition, China has two types of tax invoices: a general VAT fapiao, and a Special VAT fapiao. The main difference is that GTP can use Special VAT fapiaos for tax deductions, while STP’s cannot. For this reason, STP’s will usually ask the seller to issue a regular VAT invoice, in which the VAT rate is usually lower.
GTP’s are allowed to issue special invoices and buy the software and the printer that the company would use. STP’s, on the other hand are unable to issue Special VAT fapiao by themselves. If the buyer needs a Special VAT fapiao, these small-scale taxpayers should go to the tax bureau to have them invoice on their behalf. Foreign businesses can choose to start under an STP or GTP status.
Special VAT fapiao include a total of three sheets. The bookkeeping sheet serves as the seller’s accounting record; the tax deduction sheet is proof of the amount of input tax paid by the buyer; the invoicing sheet is used by the customer for his/her accounting.
In recent years, making payments to overseas entities has become a very complex tax involving paperwork and red tape. In most cases Chinese clients (or distributors), will prefer to pay in RMB in China and receive a VAT invoice, which they would use for tax rebate or for reporting to the tax bureau.
In the past three years, China’s tax authorities have begun to strictly enforce the requirements on businesses to issue the correct fapiao for each product or service. The system added thousands of categories and sub-categories, and therefore businesses cannot issue General VAT invoices anymore. Each fapiao has a description that must match the specific product or service.
At first, these changes made life very complicated for those issuing fapiao and for those who need them, such as sales staff who need to reimburse expenses. However, this burden has been eased by technology. Many businesses (especially retail) allow customers to scan a QR code and insert their tax information into a designated platform (such as via the Chinese social media app, WeChat). The fapiao is sent directly to the customer’s email and is simultaneously recorded on the company’s accounting system. This reduces the time taken to print a fapiao after a purchase has been made. It also reduces the use of counterfeit invoices that were common in the past.
Operating in China? How does the Fapiao system affect you?
If you are a law-abiding business in China, the comprehensive tax system has made your life easier. Reporting obligations are streamlined via the Golden Tax System since VAT deductions are easy to follow and local business accounting is relatively straightforward. This is why many businesses that used to import have switched to buying products locally. Not only are they saving the hassle that comes with importation costs, licenses, import VAT, and duty payments, but they also do not need to keep complicated records of their output and input VAT in order to offset the import VAT cost.
If you are an overseas company without an entity in China, and are looking to sell your products locally, PTL Group can help. We possess a long list of licenses that enables us to import products on behalf of our clients and sell them locally in China, making it much easier for the buyer to pay via a simple bank transfer and receive their invoices. PTL Group also collects the consideration for the goods or services from the Chinese customers for the overseas company in a formal and safe manner.
Buying and selling inside China: business that buy products or components and then sell finished goods in China, you will face multiple challenges. If you do not have an entity in China, you may need to export the products and then import them back in again. This increases the costs dramatically due to taxes, duties and shipping costs. It also transforms the VAT refund process into a difficult task that only an experienced accounting firm can handle. Also, as an overseas company, you may not want your clients to be in contact with your suppliers.
PTL Group is the perfect partner for overcoming these challenges. We can buy and sell in China in local currency, which makes everything simpler: bank transfers can be made within a day, input and output VAT are automatically offset and easily calculated. With the PTL Group platform, there is no need to submit requests for complicated VAT refund cases. In addition, PTL Group can serve as a buffer between the supplier and the client, and we can consolidate shipments that come from different suppliers.
If yours is a foreign company with an entity in China, then managing the Golden Tax System can be complicated. You must employ a local financial specialist who is experienced in operating the system and all the rules related to it. For example, many mistakes occur as a result of different practices between China and other countries. In many countries, a company will send products from a warehouse with the attached invoice. In China, companies must issue the invoice ONLY after the payment has been received in their bank account.
To avoid mistakes and complications, it is recommended to retain a skilled accountant who has experience and knowledge pertaining to the various business implications of practices related to tax, fund transactions and other compliance issues. As a reseller of various products for clients, PTL Group has acquired valuable accounting and logistics experience regarding product and service importation and sales in China.
Managing the financials of your operation in China with maximum efficiency and transparency is not a luxury. It’s an absolute must in order to do business in the country.
Learn more about Financial Management, Accounting, Budget Planning & Control, VAT Refunds and Tax Reductions in China or Get in touch for more information and practical solutions.