Whenever you expand your business into a new country, it's always critical to understand the new rules and regulations that to which your business will be subjected. Each nation has its own intricacies and "quirks" to that end, and China is certainly no exception. Ignorance of the law is not an excuse for breaking it, after all.
Case in point: China has a very specific type of invoicing system called Fapiao that all organizations operating within the country will need to become more familiar with sooner rather than later.
China’s ‘Fapiao’ Invoice System: Here's What You Need to Know
As stated, the Fapiao is a very particular type of legal receipt issued by the Chinese government that is designed to serve as proof of purchase for various types of goods and services. In fact, the term itself is literally translated into English as "invoice."
The Fapiao system is a core part of China's tax law and is critical for compliance purposes for businesses operating in the country. Fapiao distribution, administration, and even printing is handled by the State Administration of Tax, otherwise known as the SAT. All businesses need to purchase relevant Fapiao as per their current and future business scope.
There are actually two main types of Fapiao: General VAT Fapiao and Special VAT Fapiao. To speak to the former, these are commonly used as evidence of payment and are typically employed by business taxpayers, VAT small-scale taxpayers, and VAT general taxpayers who aren't permitted to use special VAT invoices for whatever reason. Businesses that might fall into this category are commonly seen as general commercial taxpayers who offer goods like cigarettes, alcohol, food, and other goods aimed at consumers.
Special VAT Fapiao, on the other hand, are issued by taxpayers to consumers when selling goods and providing taxable services. A bookkeeper might issue a special VAT Fapiao to their customer for services rendered, for example. The important thing to understand here is that a Special VAT Fapiao cannot be used for the sales of tax-free commodities. Special VAT Fapiao can be used for tax deduction purposes, while General VAT Fapiao cannot.
Other Essential Considerations
The Fapiao system is required as support in order to claim either expenses or certain types of allowances as non-taxable. In that way, it's been regularly used by the Chinese government as a viable way to fight income tax evasion. Tax authorities in China demand that businesses use Fapiao to pay tax in advance on their future sales. This is contrary to a range of other countries around the world that use invoices as a type of tax receipt after the fact.
The major factor that often complicates the Fapiao process for foreigners in particular is that they're written totally in Chinese. When you also consider that if you are audited by tax authorities without the correct level of support at your side, you may end up on the receiving end of some very significant fines and penalties.
Regardless of the type of Fapiao being employed, they must contain a few key pieces of information like the trader's tax code, their address, their telephone number, and all relevant bank account information.
Customers’ Fapiao Responsibility
But perhaps the most important aspect to acknowledge is the fact that it is a customer's responsibility to obtain a Fapiao from a service provider; they are not always automatically issued. If a business owner operating in China is either unable to provide a Fapiao or is totally unwilling to do so, customers have the legal right to report that company to the local tax authorities.
In an effort to streamline the Fapiao issuing process as much as possible, a new function has been launched within the popular social media app WeChat that allows users to type in all relevant corporate tax information and present it to service providers as a scannable QR code.
Expand with Confidence—and a Keen Understanding of Local Laws
As you can see, China's Fapiao system is a complicated one that can be confusing for foreigners in particular running a business in this area. 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. Many organizations often enlist the help of professional advisors in an effort to make sure everything is proceeding as it should and if you're not confident in your ability to do so on your own, this is absolutely an idea worth exploring.
If you’re considering expanding your business into China (or virtually any country) Velocity Global’s suite of global expansion services that includes its International PEO (Professional Employer Organization) can help get you there. Whether you’re sending one employee or retargeting operations, our International Development Advisors can help with each step. Reach out to us today to learn how we can get you global quickly and seamlessly—no entity required.