If you are familiar with the Chinese business world, you have at least heard of the Fapiao.
Fapiao translates directly to “invoice”. However, simply translating the term is not enough. Fapiaos are a little more complex than simple invoices and there are also different types which are available. What many may not realize is that a Fapiao is both a legal receipt and a tax invoice. Firstly, it serves as proof of purchase for goods and services. Consecutively, it’s a way to determine the tax paid on any given transaction.
If you’re planning to expand your business to China, you need to be familiar with this type of invoicing, continue reading as we will introduce the ins and outs of the Chinese Fapiao system!
Fapiao – The Essentials
The State Administration of Tax (SAT) is in charge of printing, distributing, and administering Fapiaos. The authorities require all businesses to purchase relevant Fapiaos, according to their business scope. A legitimate empty Fapiao may only be issued by the government, from whom retailers then buy the relevant Fapiao.
The Fapiao is a core part of China’s tax law and is critical for compliance purposes for businesses operating in the country. This receipt allows businesses and taxpayers to meet the legal standards required by China’s tax system, but also to keep track of all business transactions among enterprises.
Generally, a Fapiao means that a company must report taxable income. Receiving a Fapiao from a business means that the transaction is taxable. The company will need to pay taxes from the money you give them.
Companies can generally issue a maximum of 50 ordinary VAT invoices and 25 special VAT invoices monthly and the amount to be invoiced may not exceed RMB 100,000.
A Fapiao is an official receipt, which serves as an invoice. A Fapiao serves different purposes for different parties:
For individuals: A Fapiao is needed to reimburse business expenses. Businesses will also require one when returning a purchase or to access other possible after-sales services.
For companies: Businesses require a Fapiao to record business transactions. It’s also used for accounting and tax deductions.
For the government: China’s tax authorities require businesses to use a Fapiao to compel companies to pay tax, serving as a paper warranty against tax evasion.
Types of Chinese Fapiao
There are two main types of Fapiao available in China:
General VAT Fapiao: Issued in regular circumstances, where special VAT Fapiaos do not apply, by a business of any size. A regular Fapiao can be issued in the event of sales of goods, tax-free services, or VAT registered operations. These Fapiaos are typically employed by business taxpayers, VAT small-scale taxpayers, and general VAT taxpayers who are not permitted to use special VAT invoices. Businesses that fall under this category are usually general commercial taxpayers, offering goods like cigarettes, alcohol, food and other consumer goods.
Special VAT Fapiao: Issued by taxpayers to consumers when selling goods or providing taxable services. Bookkeepers issue special VAT Fapiaos to their customers for services rendered. Note, that a special VAT Fapiao may not be used for the sales of tax-free commodities. Another important feature – a special VAT Fapiao can be used for tax deduction, whereas a general Fapiao cannot.
Key differences between Special VAT Fapiaos and General VAT Fapiaos
General VAT Fapiao
Special VAT Fapiao
Printed by enterprises designated by the local tax bureau
Printed by enterprises designated by the competent tax department under the State Council
Range of Application
Can be carried out by various taxpayers engaged in business activities who may or may not have been registered with the tax bureau
Generally, only used by general taxpayers to buy and use, small-scale taxpayers need to use, can only be approved by the tax authorities, issued by the local tax authorities
Including buyer’s name, seller, commodity or service description, its quantity and unit of measure, unit price and total amount, invoicing entity, payee, and invoicing date
In addition to the contents of the General VAT fapiao, it also includes the tax registration number of the taxpayer, amount excluding VAT, the applicable tax rate, total amount, etc.
Not deductible for input VAT, excluding freight, acquisition of agricultural and sideline products, scrap goods deductible at the statutory tax rate
It’s not only proof of the transaction for both parties, it may also be used as a proof for the purchaser to deduct input VAT
Chinese authorities regularly use the Fapiao system to fight income tax evasion. Hence, Chinese tax authorities demand that businesses use Fapiaos to pay taxes in advance of their future sales. In case an enterprise fails to provide a Fapiao upon request to a customer, the former constitutes as an illegal act. All business transactions must be recorded on a Fapiao, as required by law.
For individuals, a Fapiao serves as proof of expenditure in situations where one needs to claim business expenses. There are instances when a business owner is not willing or unable to provide a Fapiao. In this case, the customer has the right to report the company to the local tax bureau.
As the Fapiao is written completely in Chinese, which often complicates the process for foreigners, therefore, in order to avoid facing fines and penalties and ensuring compliance, we suggest consulting with professional advisors. A proper support network will be of great help when being audited by the local tax authorities.
We also suggest you pay close attention to something called “Xiaopiao” – another type of receipt in China, issued as evidence of purchase. These are not deemed as official documents and cannot be used for reimbursement.
Fapiaos and Foreign Companies
In general, Chinese companies do not issue Fapiaos when dealing with overseas customers. However, if they do, you may treat it as an invoice or a receipt. When Chinese companies pay to foreign suppliers, they will not get a Fapiao – the overseas company does not have one. In this situation, the proper money remittance process for the Chinese company will generate a similar official document to claim the expense.
If a foreigner is running a business in China, it is strongly advised to get to know how a Fapiao affects their business and how to properly manage the related paperwork and logistics. Be sure to place close attention when procuring or preparing Fapiao/s. Remember to make a proper tax plan, as the Fapiao reflects the tax-paid status of a company. If all is completed correctly, the company will be given more quotas in applying for foreign staff work permits in the future – which is definitely a huge benefit!