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Every business manager and entrepreneurs running a company in China has had to deal with the infamous VAT fapiao. Misunderstanding the VAT rules is the quick way to get in trouble with the local taxman. Here’s what you need to know to be on the safe side…
If expatriate business owners or managers are asked what is the most troublesome stuff that brings confusions and difficulties in China, 1 out of 4 persons would probably tell it is ‘fapiao’. Simply speaking, fapiao is actually a mechanism capitalized on by Chinese government to capture, track and monitor economic or business activities in China to ensure the tax department is able to collect revenue from taxation. For various kinds of transactions, there are many different types of fapiaos, among which VAT fapiao is of most significance. After rounds of taxation reforms, now all business tax is transformed to value added tax, which accounts for the predominant part of tax businesses pay to the government.
When doing business in China, now that you can’t keep away from fapiao, then you’d better learn how to keep it under control. Properly addressing all the works and issues related to fapiao has both compliance and money implications.
Let’s look first at the components of VAT and formula on the basis of which the VAT tax is calculated.
VAT payable = Current output VAT – Current input VAT
Output VAT = Sales volume * VAT rate
Possible Risks Associated with VAT Fapiao Management
All the businesses feel compelled to know whether the fapiao from suppliers have been received and with the right number, as well as whether the fapiao for clients have been issued with the correct amount. It’s a crucial part of a business procedure and controlling, as there are some hidden risks in fapiao management:
For purchases, this might be because the supplier accountant is not informed about the transaction or the supplier delays the fapiao issuing on purpose. This might cause the VAT payable amount go up.
For expenses (as a result of the program to replace the business tax with VAT), it might be that the employees lose the fapiao, or hasn’t handed in the VAT fapiao in time. If the expense fapiao is not received in time or received in an incorrect amount, the VAT payable amount will be higher than it should be, which leads to VAT overpayment.
As can be seen from above that it’s important to keep detailed track of every input and output fapiao, as well as link the fapiao information correctly to corresponding sales and purchases.
* In the second part of the article, we will talk about how to solve this Fapiao hustle and avoid the trouble.