Saturday, 24 December 2011

A tax weapon that cuts both ways

Government needs invoices to assess taxes but firms avoid issuing them by giving clients freebies

2 comments:

Guanyu said...

A tax weapon that cuts both ways

Government needs invoices to assess taxes but firms avoid issuing them by giving clients freebies

By Ho Ai Li
22 December 2011

It is no easy task for China’s taxman to keep track of who should pay how much in a country with tens of millions of businesses and hundreds of millions of employees.

In 2009, Beijing traced 119.2 billion yuan in missing taxes, or 0.002 per cent of total tax receipts, but that was probably the tip of the iceberg.

Enter the fapiao, or official invoice - a flimsy and ubiquitous yet effective weapon in the battle against tax dodgers.

Different from a mere receipt, it is a must-have for workers claiming expenses, foreigners seeking tax relief and businesses keen to set up shop.

This is how the fapiao system works: The authorities mandate that businesses give consumers the government-issued invoice for every transaction. These slips must be bought in advance from the government. Providers of goods and services have to buy special printers and software to print out the slips, which can then be traced and tabulated by tax officials.

Unfortunately, such rules are simply not enough in China. Many businesses simply choose not to give consumers a fapiao - to avoid paying taxes.

To combat this, the authorities dangled a carrot in front of consumers - make sure you ask for a fapiao and you stand a chance to win some money.

Most invoices thus have a scratch and win box, usually located in the top right- hand corner. The top prize can be as much as 5,000 yuan (S$1,000).

‘In the beginning, the chances of winning in Beijing were quite high. I used to ask for invoices because of this. But now it has become a habit,’ said IT manager Zhang Rui, 37, of the tax lottery system which was launched in 1998.

Another reason to collect the fapiao is that it is usually needed before an employee can claim expenses.

In countries like Singapore, receipts can be used for expense claims, but in China, only official invoices are accepted.

Foreigners working in China have another reason to collect invoices for things like meals, Mandarin classes and rental - these can be used to claim tax relief.

Such claims are usually capped at about 30 per cent of a foreigner’s income in China. In the case of someone who earns 10,000 yuan a month, as much as 3,000 yuan can be exempt from income tax if one can produce valid invoices.

China does this to make its otherwise high personal income tax a little more palatable. Foreigners usually have to pay tax on 20 per cent to 45 per cent of their income, compared with up to 20 per cent in Singapore or 17 per cent in Hong Kong.

For businesses, invoices amount to higher operational costs, noted Mr Henry Wong, business director of an international school in Beijing.

Some businesses are fighting back by devising creative ways of not giving these invoices to customers. For starters, a customer in almost all establishments does not get one unless he asks for it.

Some restaurants offer free drinks, dessert or a small discount to those who do not ask for an invoice. It is a win-win situation for them - no tax for the shop and freebies for the customer. Too bad for the taxman. The more recalcitrant businesses simply do not issue any fapiao with excuses such as ‘the printer is faulty’ or ‘we ran out of paper’.

This rather unusual system to stem tax leakage is believed to be used only in mainland China and Taiwan. And it is based on the assumption that people cannot be counted on to be honest.

In other places, the taxman tends to rely on taxpayers to declare their income.

As long as the amount chimes with estimates, it is accepted in good faith, and generally, most people do not lie, noted tax scholar Liu Heng of the Central University of Finance and Economics.

‘They are more honest. But in China, many people are not. Hence, people say, ‘I don’t believe in your words, only in your fapiao,” he added.

Guanyu said...

It also does not help that cash is king in China. It is harder to track transactions using cash than those using cheques or bank payments, which leave a paper trail.

By and large, the fapiao system has helped the Chinese authorities get a handle on business income and how much tax should be paid, noted Professor Liu.

But this being China, anything can be faked. The fact that there are many security features on invoices, from two official red ‘chops’ to a hotline for verification, underlines how vigilant the authorities have to be against counterfeiters.

Sometimes, the invoices may be real but are used to make false claims. Want to claim more money from your company after a business trip? Just buy a fapiao.

The going rate is 3 per cent to 5 per cent of the face value of an invoice, say, 300 yuan for a 10,000-yuan fapiao. On any day, mobile phone users in China can easily get five to 10 messages from those hawking these invoices.

One problem is that these invoices do not spell out exact items of expenditure but just broad descriptions like ‘a meal’.

Officials accused in graft cases have been known to make exorbitant expense claims by misusing invoices.

One urban legend has it that prostitutes in Amsterdam even proposition potential Chinese clients by cooing: ‘Come in, have fapiao!’

But this flawed system is here to stay for now, said Prof Liu.

‘If you want to get rid of this, the quality of the Chinese has to improve. We won’t need the fapiao if everyone is like Lei Feng,’ he said, referring to a Chinese soldier hailed as a paragon of selflessness, modesty and dedication.