What is China’s Fapiao?
The Fapiao is a unique type of legal receipt issued by the Chinese government that essentially acts as a “proof of purchase” for goods and services. The idea behind it is straightforward, and the name itself literally means “invoice” when translated to English. The key thing to understand, however, is that the Fapiao system is the cornerstone of China’s tax laws. All distribution, administration and even printing of Fapiao is handle by the State Administration of Tax, or the SAT for short.
The two main types of Fapiao are VAT Fapiao and Special VAT Fapiao. The first is used as evidence of payment and are usually used by business taxpayers, small-scale organizations and similar types of businesses. The second is used by taxpayers and is issued to consumers when selling goods or providing services that are otherwise taxable. Accountants, for example, would likely issue a Special VAT Fapiao as proof of services provided.
Fapiao Tax Considerations for Expats
One of the reasons why Fapiao is now getting more attention is because China recently updated its individual income tax laws, otherwise known as the IIT. These revisions focus on expanding deductibles, adjusting tax brackets and, most importantly—changing residency rules that were formerly in play.
These changes are supposed to ease the tax burden for people on the “low to middle” end of the income scale, all while taking a harder look at foreign and high-income earners at the same time. Part of this was a necessity because the cost of living in China has skyrocketed over the last few years.
Under the most recent version of the law, expatriates who are tax residents in China for at least five consecutive years have to pay IIT on their worldwide incomes. Expatriates working in China for a shorter period of time, however, only have to pay income from Chinese sources. A “full year” means that the expat was not absent from the country for longer than 30 days during a year for a single trip, or for a total of 90 days spread out over multiple trips.
Experts agree that a lot of foreign companies based in China are concerned by these new laws, as they essentially replace many incentives that were put in place a decade ago when the country was “desperate” for foreign talent. During that period, China opened up its economy to the outside world and took an aggressive stance towards making it as attractive as possible to expand into this region. Now that this is no longer necessary, those incentives are going away— bringing with them negative implications for those who are already here.
Some predict that companies are, on a case-by-case basis, likely to raise salaries of important executives working in China in an attempt to offset some of these new changes. There will also be people leaving the country permanently due to these changes. At this point, it’s difficult to say what will happen in the broad scheme.
There are, however, ways that the Fapiao system can be employed to help reduce as much of this burden as possible. IIT on salary, for example, takes into account any income received from employment—including bonuses and stock options—and is set at rates from 3% to 45%. Now, employment benefits (as well as contributions to Chinese social insurance) can be added to a pre-tax deduction, so long as relevant Fapiao are provided. These benefits include but are not limited to things like relocation expenses, allowances for housing, allowances for language training, and education for children, and more.
These types of allowances are not mandatory for an employer to provide in China. However, this is a way to use the Chinese Fapiao system to one’s advantage. By offsetting some of these new requirements, it’s now possible for a company to help valuable employees reduce their taxes to the point where they’ve negated a lot of the disadvantages of the new tax law and are able to keep going more or less as they have been while working abroad.
Expand into China with an Experienced Partner
Whether Fapiao is your main concern, or you’re considering China as the next stop on your global expansion, take the leap with an experienced partner. Velocity Global has helped hundreds of companies establish their presence in new international markets with its International PEO (Professional Employer Organization) solution, and we can do the same for your organization—no entity setup required. Ready to go global? Let’s talk.