Fully digitalized e-fapiao Regime in China

Fapiao system is a unique system in China for tax authorities to oversee revenue and tax. China tax authorities use fapiao as an important mean to manage taxpayers and tax. Up to now, Fapiao system has?presumably?experienced three phases like?paper?fapiao, e-fapiao and fully digitalized?e-fapiao.?Starting from December 2021, China triggered the trial use of fully digitalized?e-fapiao in pilot taxpayers in Shanghai, Guangdong and Inner Mongolia. Till the end of July 30?2022 the taxpayers in 22 cities/provinces including Jiangsu, Chongqing, Hebei, Anhui, Shanxi, Hunan etc., can accept the fully digitalized?e-fapiao. It is expected that?recipients?of fully digitalized?e-fapiao?have?been expanding gradually to nationwide.?In this article, we will briefly?introduce the fully digitalized e-fapiao regime and how it affects business in China.?

What is fully digitalized?e-fapiao

Fully digitalized?e-fapiao is not an?upgrade version of existing e-fapiao, but a fully new form of fapiao which has the same legal effect as?paper fapiao. All information presented in paper VAT fapiao is fully digitalized?and different?types of paper VAT fapiao are?integrated and combined to one single type of full digitalized?e-fapiao.?This definitely simplifies the management of VAT fapiao by tax authorities. But the simplification of management does not mean tax authorities will loosen?the management on VAT fapiao. With the fully application of digital technology, tax authorities may achieve?more stricter management easily.?

?Now there are basically?six types of VAT fapiao including paper VAT general fapiao, paper VAT special fapiao, electronic?VAT general fapiao,?electronic?VAT special?fapiao, fully digitalized?VAT general fapiao?and fully digitalized?VAT special fapiao.

?General introduction of fully digitalized?e-fapiao regime

-?Electronic invoice service platform

Tax office provides?a free electronic invoice service platform on which pilot taxpayers?can issue fully digitalized e-fapiao, paper VAT fapiao without any special tax control equipment after the real-name certification.

-?Tax digital accounts

Pilot taxpayers can have a unique tax digital account in the electronic invoice service platform. When pilot taxpayers issue and receive all kinds of fapiao on electronic invoice service platform, all fapiao information will be collected automatically to the tax digital account of the taxpayers.?With tax digital accounts, pilot taxpayers can confirm the purpose of fapiao including fully digitalized e-fapiao and paper fapiao and inquire??relevant fapiao?information.?Especially for fully digitalized e-fapiao, pilot taxpayers can download and print?out?fapiao on?the electronic invoice service platform through tax digital account directly.?

- Issue and receive the fully digitalized fapiao via electronic invoice service platform

Pilot taxpayers can log on the electronic invoice service platform, select fapiao type and input fapiao content. After verified successfully?by the electronic invoice service platform, the unique fapiao No will be granted and fully digitalized e-fapiao will be generated automatically. ?

The electronic invoice service platform provides two ways of fapiao delivery?, i.e. automatic delivery and manual?delivery through tax digital account.?Under automatic delivery way, fully digitalized e-fapiao will be sent to the tax digital account of recipient by electronic invoice service platform automatically. Where the automatic delivery cannot be realized, for example, for the recipients?like?government?organisations?that do not input their organization code on?the platform, seller may download fully digitalized e-fapiao and then send?it?to recipient by email, QR code or digital documents.

As mentioned above, the electronic service platform?supports to issue fully digitalized e-fapiao and paper fapiao. So when pilot taxpayers issue paper fapiao on the electronic invoice service platform, the paper fapiao can still be collected and delivered?automatically to seller/purchaser’s tax digital account. Where the purchaser has no tax ID, such paper fapiao can?still be collected and?delivered?to seller’s tax digital account. Even for quota fapiao without seller’s information, the electronic service platform can still collect and deliver?quota fapiao to seller’s tax digital account based on withdrawing fapiao record of the pilot taxpayers. So the whole process is smarter than before. This also leaves less opportunity for provision of fault fapiao and help taxpayers identify fault fapiao more effectively and efficiently than before.???

- Account for fully digitalized e-fapiao and paper fapiao

The tax digital account provides the marking function for accounting purpose. Pilot tax payers can mark the fapiao issued after January 1 2017 unless the following situation:

(1)?abnormal VAT fapiao

(2)?abolished VAT fapiao

(3)?Deductible VAT faipiao

(4)?Others

However, accounting for VAT fapiao under tax digital account only means you can select the fapiao status either?as?“deducted for corporate income tax purpose”?or as?“non-deducted for corporate income tax purpose”. Pilot taxpayers?can not realize accounting for fapiao actually in their own accounting system. The tax digital account supports batch marking. In the future, the connection to enterprises own accounting system through interface means and data direct transferring may be realized. Then fapiao received by taxpayers?may be booked into their own accounting system directly which further minimizes?labor cost for checking and risk of duplicate recording.

- Maintenance of client and fapiao information?

The electronic invoice service platform provides maintenance of client information and fapiao information. Pilot taxpayers can put the client and fapiao information including client name, address, tax ID, good/service name, model, unit, tax rate etc. into the electronic?invoice service platform in advance. When issuing fapiao, taxpayer just need to select and click the pre-input information which is expected to further reduce the issuing time.

- Other functions

The electronic invoice service platform through tax digital accounts provides enquiry, inspection, download, printing and purpose confirmation of fapiao, enquiry of taxation policies, application for adjustment of total amount of invoices, and invoice risk warning.

Especially?for the adjustment of total amount of fapiao, pilot taxpayers need not apply?to?the tax authorities?for fapiao type?and the number of fapiao?copies,?but the?maximum amount of fapiao?that could be?issued?in a calendar month?need to be approved by tax?authorities beforehand.?Within the maximum amount of fapiao, the fully digitalized e-fapiao has no limitation on?both?the?number of fapiao issued?and?the maximum amount of a single fapiao. Tax authorities?may make dynamic adjustments thereto based on the risk level, taxpaying credit rating, actual operating conditions, and other factors of a taxpayer. Total amount of paper fapiao, e-fapiao, fully digitalized e-fapiao through all platforms by a taxpayer should be under the maximum amount of fapiao confirmed by tax authorities.?

The benefit of fully digitalized?e-fapiao regime

- To further simplify the management process by tax authorities

Before the trial use of fully digitalized?e-fapiao , new taxpayers need to get the special tax control devices first, then ask the approval for the?initial use and subsequent increase of volume of fapiao based?on?business scale. Under fully digitalized?e-fapiao regime, taxpayers do not need to get the approval from in-charge tax authority for?initially using and subsequently?increasing volume of fully digitalized?e-fapiao. Tax authorities may either dynamicly?adjust the total volume of fapiao automatically through the electronic invoice platform or manually adjust based on pilot taxpayer’s request. This definitely simplifies the management of VAT fapiao by tax authorities.

- More transparent tax data of taxpayers

Pilot taxpayers own one digital tax account. All fapiao issued and received by?pilot?taxpayers except?under?some special situations?will be pushed to the tax digital account of pilot taxpayers which means more transparent tax data of pilot tax payers?to tax authorities.

- To issue fapiao more conveniently

Batch operations?are supported by the fully digitalized e-tax regime, for example, batch input for confirming purpose of fapiao. Electronic invoice service platform also supports?to pre-input client information and fapiao information to speed up?issuing?process.??

Pliot taxpayers can issue fully digitalized?e-fapiao through multiple channels including website, app, mobile app etc.?

- Direct connect to ERP or other financial software of taxpayers

Currently, pilot taxpayers can only mark the fapiao status as either “deducted for corporate income tax purpose” or “not deducted for corporate income tax purpose” under tax digital account. In the future, the electronic invoice service platform?will?support the direct connection with ERP and other financial software of taxpayers to realize the integrated operation of fapiao?reimbursement, entry, and filing.

- Minimize the fapiao management cost of tax payers.

The electronic invoice service platform?is provided by tax authority freely which further minimize the fapiao management cost of?tax payers.

Our take

- The need to update the reimbursement procedure to adapt to the full digitalized?e-fapiao regime

Under the new fully digitalized?e-fapiao, taxpayers need to consider how to update the existing reimbursement procedure to catch up with?the development of digital fapiao system. For example, under tax digital account, most fapiao issued and received by taxpayer may be pushed to the tax digital account automatically. Especially when employees claim reimbursement of travel expense, they may also provide printed?version of?e-fapiao for further review. How to match the printed version of fully digitalized e-fapiao provided by employees?with?the fully digitalized?e-fapiao pushed to the taxpayer’s tax digital account?and avoid duplicate payment? Or whether to ask employees to provide the printed version of fully digitalized e-fapiao for reimbursement? If not, how to address?the fully digitalized e-fapiao to the specific employee? These all raise a new challenge to enterprises.?

- The requirement to keep digital accounting documents

According to the relevant laws and regulations, where enterprises?use printed version of electronic accounting documents including?paper copies?of?e-fapiao for bookkeeping and reimbursement purpose, the e-copies?should be kept at the same time. Practically enterprises?are used to printing?out?e-fapiao and binding them?to vouchers for filing purpose.?Enterprises need to consider to set up a filing system to keep the e-copies?properly.?

- Update the accounting system to adapt to the fully digitalized e-fapiao regime

As we mentioned above, it is expected that?the electronic invoice service platform?will be improved to connect to ERP or other accounting software of most enterprises. It gives?rise to several concerns for enterprises. For example, how to choose proper accounting software? Whether to choose the most common software in current market to realize the future connection with the electronic invoice service platform?easily or to choose the specialized software designated by group? It needs to be?considered?carefully.

The electronic invoice service platform?does not support issuing fapaio in batch?at?present. Although the client and fapiao information can be input and maintained before issuing fapiao, this can only speed up?the issuing process somehow. Taxpayers still need to issue fapiao one by one by selecting client and fapiao information?maintained in the platform in advance. So for taxpayers who have to issue a?large number of?fapiao?copies?in a month, the issuing fapiao system which?supports?to issue fapiao in batch may still be needed. Then how to connect the issuing fapiao system, the electronic invoice service platform/tax digital account?and accounting software needs to?be considered carefully.

- The concern to keep company business information

Normally client information is the most important asset of one enterprise. Although the electronic invoice system claims they provide very secure security technology , some enterprises?may still have concern that they input client information in the electronic invoice system.

In the context of the article, China or the PRC refers to the People’s Republic of China but excludes Hong Kong Special Administrative Region, Macao Special Administrative Region and Taiwan Region. The information contained in this article is of a general nature only. It is not meant to be comprehensive and does not constitute the rendering of legal, tax, or other professional advice or service by ALA. ALA has no obligation to update the information as law and practices change. Before taking any action, we suggest you obtain advice specific to your circumstances from your professional advisers.

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