In China, fapiaos (meaning invoices) play a pivotal role in everyday business transactions and taxation. Unlike invoices or receipts typically used elsewhere, fapiaos have several functions. These official invoices serve not only as proof of purchase and sale of goods and services but also as a vital component in tax compliance. Due to the distinctiveness of the fapiao system, many foreign businesses establishing operations in China encounter challenges when navigating it.
The article below will delve into the workings of the fapiao system, providing you with essential information about the issuance and usage of fapiaos. In addition, it will offer an overview of the fast-evolving e-fapiao system.
Table of Contents
Overview: What are fapiaos?
The primary purpose of fapiaos is twofold. Firstly, fapiaos serve as official documents to substantiate the legitimacy of your business transactions. Individuals use fapiaos as evidence of purchase of goods and services when reimbursing business expenses. Companies, on the other hand, use fapiaos to claim tax deductions and facilitate the recording of transactions for accounting purposes.
Secondly, fapiaos specify the value-added tax (“VAT”) owed and are used by the tax bureau to monitor transactions and deter tax evasion. Instead of making a declaration to the tax bureau later, you are required to pay the tax upfront upon issuance of the fapiao.
How are fapiaos issued?
The administration of fapiaos falls under the purview of China’s State Taxation Administration (“STA”), which also regulates the printing and distribution of fapiaos. You are required by the law to print fapiaos on special paper obtained from the local authorities. Prior to issuing fapiaos, you must have:
- Been granted a valid business licence and a special permit for printing fapiaos;
- Implemented the relevant technical standards to ensure accurate invoice printing; and
- Established a robust financial management system as well as rigorous oversight, safety, and confidentiality protocols.
To print fapiaos, a special printer that is connected to the central tax system is required. You must first log into the system using a small electronic device, usually a USB dongle. Then, the corresponding fapiao bearing the number indicated in the system should be inserted into the printer.
Once your device is connected to the central tax system, the transaction is automatically logged in the tax bureau’s records held under your company’s name. VAT becomes payable upon issuance of the fapiao, which must be settled in the subsequent month.
Upon receipt of a fapiao, the customer can log into the system to verify the transaction. The deduction will be reflected in the amount of tax due in the following month.
Who can issue fapiaos?
In order to issue fapiaos, it is necessary to have a legal entity established in mainland China, i.e., a foreign-invested enterprise.
Fapiaos can be issued by registered taxpayers. In China, taxpayers are divided into two categories: general taxpayers and small-scale taxpayers.
- Small-scale taxpayers
Small-scale taxpayers refer to companies with a cumulative taxable income of less than RMB 5 million over a consecutive 12-month period. Small-scale taxpayers with monthly sales not exceeding RMB 100,000 can continue to enjoy tax exemption until the end of 2027. Additionally, their taxable sales are subject to a reduced VAT rate of 1% instead of 3%. Items subject to a pre-payment VAT rate of 3% are now taxed at a reduced rate of 1%.
- General taxpayers
Those with an annual revenue exceeding RMB 5 million are considered general taxpayers. Their taxable sales are subject to VAT rates of 13%, 9%, and 6%, depending on the nature of goods or services being provided. General taxpayers can offset input VAT against output VAT. Input VAT refers to the VAT that a business pays on its purchases of goods and services. On the other hand, output VAT refers to the VAT that a business charges on sales of goods or provision of services, which is collected from its customers.
What are the different types of fapiaos?
There are two types of fapiaos: general VAT fapiao and special VAT fapiao. The primary difference is that the special VAT fapiao allows for the deduction of tax, whereas the general VAT fapiao does not. Small-scale taxpayers, who are not permitted to deduct input VAT from output VAT, must use the general VAT fapiao instead.
- General VAT fapiao
The general VAT fapiao serves as proof of payment in cases where the special VAT fapiao is not applicable. Small-scale taxpayers as well as general commercial taxpayers engaged in the sale of specific items, such as alcohol, cigarettes, clothing, cosmetics, food, hats, shoes, and other consumer goods, can only issue general VAT fapiaos.
- Special VAT fapiao
Typically, special VAT fapiaos are issued by general taxpayers to customers when they sell goods or provide services. They, however, cannot be issued for the sale of tax-exempt goods.
Given that the special VAT fapiao serves as an important document for tax deduction purposes, it includes additional information, such as the company’s tax code, particulars, and bank account details. In addition, a detailed breakdown of the sales amount into the constituent taxable and non-taxable items is provided.
The special VAT fapiao comprises three duplicate copies in total: accounting copy (retained by the issuer), deduction copy (used for tax deduction purposes), and invoice copy (retained by the customer).
Taxpayers are limited by quotas set by the local tax bureau. Quotas apply to both the quantity of special VAT fapiaos that can be printed and the value of each fapiao. The local tax authority will consider the scale and nature of the company’s business activities when setting the quota.
If taxpayers use up their quota of special VAT fapiaos, they must obtain additional fapiaos from the local tax bureau. Alternatively, if monthly sales exceeds the prescribed limit, a temporary increase in the fapiao value can be requested.
What are e-fapiaos?
The new e-fapiao is a paperless electronic invoice. It has the same legal effect and functionality as the traditional paper fapiao. Unlike the standard fapiao, the e-fapiao does not have several duplicate copies, i.e., the accounting copy, deduction copy, and invoice copy.
As the nationwide implementation of e-fapiaos continues apace, paper fapiaos will gradually be phased out in favour of their digital equivalents. The e-fapiao system utilises technology to enhance efficiency, optimise data structures for improved financial data organisation and analysis, and implement more effective controls to authenticate fapiaos.
In October 2023, the local STA in Beijing, Hunan, Shandong, Anhui, Qinghai, Ningxia, and Guizhou announced the rollout of a pilot programme to trial the use of fully digitalised e-fapiaos. Since 1 November 2023, eligible taxpayers in these regions have had the opportunity to participate in the pilot scheme.
The procedures to obtain and issue e-fapiaos will be further streamlined and simplified. Under the pilot programme, a nationwide e-invoicing service platform will offer eligible taxpayers around-the-clock online access to issue, send, check, query, and download e-fapiaos. The new platform will also eliminate the need for external authentication devices, such as USB dongles and the tax UKey.
What are the advantages of using e-fapiaos?
- No need to obtain approval prior to issuance: Taxpayers can issue e-fapiaos once they have set up their company. The e-invoicing service platform enables taxpayers to issue e-fapiaos in a timely manner without the delays associated with seeking prior approval.
- Streamlined procedures: Once logged in, taxpayers can issue, deliver, download, query, and verify e-fapiaos all in one place. By consolidating the various functions into a single platform, taxpayers can experience a more seamless and integrated approach to fapiao management.
- Different issuing channels: Taxpayers have the option to issue e-fapiaos via the e-invoicing service platform as well as through email, a dedicated mobile app, and QR codes.
- No need to separately request a quota increase: With e-fapiaos, taxpayers are no longer required to formally apply for an increase in the maximum value of each invoice, or in the number of invoices that can be issued per month. Instead, the tax bureau will adjust the quota accordingly based on various factors, such as the taxpayer’s business activities, credit rating, and risk level. This alleviates the compliance burden on taxpayers and allows for a flexible adjustment of the quota, providing greater flexibility and efficiency in invoice management.
How CW can help you
Navigating the complexities of China’s fapiao system can be challenging without the guidance and expertise of local professionals. This is especially so for overseas companies that are not well-versed in the nuances of local tax laws and regulations. Issuing fapiaos correctly is crucial for operational success and tax compliance in China. With over 30 years’ experience, we provide holistic support in managing fapiao-related procedures, ensuring adherence to all regulatory requirements. Our meticulous and risk-oriented approach to compliance management allows you to focus on your core operations with confidence and peace of mind.
Contact us to find out how we can assist you.