There is a lot of confusion about invoices in China. If you ask for an invoice from a vendor in most of the world and you will get a piece of paper issued by the vendor that lists the items or services you are buying, total amount due and terms. In Mainland China, asking for an invoice (“kai fapiao” ie. 开发票) will result at best in a piece of paper listing how much you spent on what goods and services or, more typically, several small squares of paper with various values that vaguely resemble very ugly Monopoly money and have little to no indication of what you purchased or from where it was purchased.
Below are 10 things you may not have known about invoices in China. ##1. Chinese invoices are actually taxation invoices##
These pieces of paper issued by the relevant government taxation authority are proof that the proper tax has been paid on the goods or services.
##2. Chinese companies can only expense goods and services for which a taxation invoice was issued##
If a taxation invoice was not issued for a good or service purchased by a company, this means that the vendor did not pay the proper tax on the transaction and consequently the customer will unable to deduct the expense and end up paying the (often higher) income tax rate on the amount of the un-taxed transaction.
3. Chinese invoices are a critical part of the Value Added Tax system
Chinese invoices help to align incentives such that customers put pressure on their suppliers to pay taxes. In practice, however, Chinese invoices create a strong incentive to conduct all transactions in cash with the result that no parties paying any taxes.
Regarding our friend and fellow Ohioan [email protected] and his problem with deducting his rent, his mistake was being a wage earner at a foreign enterprise that fully reports his earned income. If he had worked for a small to medium private Chinese company, they would have probably under reported or never reported his income and he would not have had to even file a tax return.
The tenants in China that request invoices for their rent usually do not care about paying the additional cost passed on by the landlord because they would be using the taxation invoice as a way to expense the rent to a third party.
4. Chinese invoices in many cities have scratch-off prizes as an incentive for customers to request them
Invoices in cities such as Shenzhen have scratch-off spaces similar to lottery tickets where you can instantly win cash. This is supposed to work as an incentive for customers to request taxation invoices from businesses and increase tax compliance.
5. Chinese invoices cost money for businesses to purchase
Businesses are supposed to purchase invoices by paying the tax rate for the particular good or service category on the face value of the invoice. However, they often find ways to purchases invoices on the black market at significantly reduced rates.
6. Chinese invoices make it easy and convenient for civil servants and government officials to get reimbursed by the government for personal expenses
Many civil servants can get reimbursed by submitting taxation invoices to their work unit. Since taxation invoices often make it impossible to know what was actually purchased by instead simply listing a category, many entertainment venues will simply issue “food and drink” taxation invoices for services rendered.
7. Chinese invoices for goods and services claimed as expenses by companies need to be collected and pasted on to pages in a book for possible review by taxation officials
Similar to Western rules requiring retention of business records, Chinese taxation invoices claimed as business expenses must be retained.
8. Deduction of expenses (like rent) from income taxes is only allowed when a taxation invoice has been issued
If you do not have a taxation invoice for a good or service, the appropriate tax was not paid on the good or service. To the Chinese taxation authorities, it does not matter if the tax was actually paid but the invoice was lost or misplaced.
9. Properly issued taxation invoices should be dated with the current date and stamped with the taxation invoice company chop
Many vendors will ask you for the name of the individual or “unit” (company or government body) in which the invoice should be issued. This proves that the purchase was an expense of that person or unit.
10. Taxation invoices are frequently purchased on the black market
The black market for taxation invoices is so strong that a large amount of daily text message spam is advertising black market availablity of taxation invoices. Many telephone poles have stickers or writing on them advertising a phone number to call for those interested in purchasing black market taxation invoices.