Anyone who has spent time dealing with compliance issues in China has come across the fapiao (发票). This four-part series will try to explain (1) what a fapiao is, (2) the different types of fapiaos and receipts in China, (3) how fapiaos can be misused for fraud, embezzlement, and corruption, and (4) ways to counter these schemes to minimize compliance risk.
So what is a fapiao? In essence, a fapiao is a paper receipt, recognized by Chinese tax authorities, that is provided by the recipient of a payment to show that the transaction actually occurred.
Fapiaos are normally generated for most business-to-business transactions as part of the internal payment process. But for business-to-consumer transactions (e.g., an employee stays at a hotel, an employee has a meal at a restaurant), fapiaos typically are not automatically generated, and a consumer must specifically request a fapiao.
An employee would normally obtain a fapiao for all business expenses, including meals, hotel room fees, air tickets, etc. The fapiao is then used by the company in order to legally claim a tax deduction for business expenses. If the company did not want to seek a tax deduction for a particular expense, it would not be necessary to obtain a fapiao. But nearly every company operating in China — multinationals and Chinese companies alike — requires those seeking reimbursement from the company (employees and third-party service providers alike) to obtain a fapiao for any expense and then submit it for reimbursement.
In addition to being proof of a tax-deductible transaction for the payor, a fapiao is proof of the transaction for tax liability for the payee (i.e., the company receiving the money). If a recipient of a payment does not issue a fapiao, it is much harder for the Tax Bureau to prove that they actually received taxable income. For this reason, a number of businesses will resist issuing a fapiao. In some cases, a reason given for not issuing a fapiao may or may not be legitimate, such as the fapiao machine is broken, or the business has run out of fapiao paper. In some cases, an establishment will issue a fapiao but will insist that a consumer pay the incremental income tax (perhaps 5-6%) that the business would otherwise evade on the expense.
Importantly, a fapiao can be issued only by a legally registered business entity in China assigned a tax identification number; an individual cannot issue a fapiao by himself or herself. Similarly, many mom-and-pop stores are not properly licensed to provide fapiaos. Both individuals and small stores can visit the local Tax Bureau to submit certain documents and have the Bureau issue a fapiao. For both the tax implications and the hassle, many resist issuing a fapiao.
When a government agency in China receives a fee for an official service, it will issue a type of official receipt to the payor titled “receipt of fees for administrative activities” (行政事业性收费票据) rather than a fapiao.
Tomorrow, we’ll examine the different types of receipts and fapiaos in China.
Eric Carlson, a contributing editor of the FCPA Blog, is a partner at Covington & Burling LLP. He specializes in anti-corruption compliance and internal investigations, with a particular focus on China and other regions of Asia. He speaks Mandarin and Cantonese. He can be contacted here.