Regulatory updates - China

The local STAs (State Taxation Administration) announced adding seven more regions to the fully digitalized invoicing pilot, including Anhui, Beijing, Guizhou, Hunan, Ningxia, Qinghai, and Shandong. Selected taxpayers in those regions can issue fully digitalized invoices from 1 November.

The e-fapiao receiving pilot has been deployed nationwide.

After the newly added provinces and regions, the coverage of e-invoice issuance pilots will be countrywide. 

The fully digitalized e-invoice (e-fapiao) issuance pilot started in early 2022, with the implementation in only a few provinces. Right now, the pilot is making rapid progress, as it has been implemented in more regions in the past few months. Selected taxpayers in the appointed sixteen regions can generate e-fapiao via the e-invoicing system.

The latest regions that joined the e-fapiao issuing pilot are the following:

• 30 November 2022- Xiamen
• 20 January 2023- Shanghai, expanding to cover all newly registered taxpayers
• 28 January 2023-Chongqing, Qingdao, Dalian, Tianjin, and Shaanxi provinces
• 22 March 2023 Henan and Jilin
• 30 March 2023 Shenzhen, Ningbo, Fujian province, and Yunnan province

Pagero continues to closely monitor the pilot developments in China.

China implemented a Fully Digitalized E-Invoice (FDEI) pilot in December 2021, starting with 3 provinces. Currently, one more region-Sichuan has joined the pilot program on 28 October 2022. Selected taxpayers in this region can issue e-fapiao on the Sichuan e-invoice service platform after they have authenticated themselves.

As we mentioned before, fully digitized e-fapiao (e-fapiao) is an advanced e-invoicing system, which can help taxpayers issue tax invoices more efficiently. The ability to receive e-fapiao has been deployed to all provinces. Along with Sichuan joining the pilot, it steps forward in accomplishing the plan of countrywide e-invoicing by 2025.

On 30 November, Shanghai, Guangdong, and Inner Mongolia released announcements, respectively, carrying out a new invoicing system pilot for selected taxpayers to issue fully digitized invoices (fapiao) as of 1 December 2021.  

Pilot taxpayers can use the National platform to issue, distribute, and verify e-fapiao instead of multiple platforms as before. 

The electronic invoice is not new in China. As Pagero mentioned before, special VAT e-invoices have already been launched in 2021, allowing newly registered VAT taxpayers to issue special VAT fapiao electronically through the National Invoicing system. However, the fully digitized e-fapiao is a brand-new version of the invoice, and it reduces the pre-processing procedure from the taxpayers. 

Features of the new e-invoice in the pilot program 

• No hardware devices required: After user verification, taxpayers can issue e-invoices without the “Ukey” or any other tax control equipment.
• Fapiao automatically assigned: In this pilot, taxpayers do not need to apply for fapiao numbers and fapiao quantities beforehand. A unique fapiao number will be assigned automatically when a fully digitized invoice is issued in the National invoicing system.
• Invoice amount cap: Instead of having a limited amount per invoice, the tax authorities will determine the total monthly amount a company can issue. This amount will be based on the risk level, the credit rating, and the operation of the business.
• Fully digitalization: Fully digitized fapiao can be delivered in a structured format, waived OFD obligation. Once fully digitalized e-fapiao is generated, the structured invoice will be automatically sent to the digital tax account of both trading parties.

During the pilot program suppliers may issue red invoices directly via the platform only if the original invoice has not been deducted yet; no red-letter confirmation form (Confirmation form) is required. For invoices that have been deducted, the issuer or the recipient should file the Confirmation Form before issuing a red-letter invoice. 

What is the next step? 

Currently, six types of invoices, Special/General VAT fapiao, Special/General VAT e-fapiao, and Special/General fully digitized e-fapiao, are working in parallel. However, according to the announcement from the State Council, the Chinese government aims to introduce country-wide e-invoicing by 2025. Very important for businesses operating in China to be prepared so that the transition to electronic invoicing is as smooth as possible. 

On 20 December 2020, the State Administration of Taxation (“STA”) of China has published Regulations on Optimising the Business Environment (further, the “announcement”). This announcement gives the Special VAT e-invoice the same legal effect as the paper invoice and introduces several changes to the current invoicing processes.

Geographic scope and timelines

• From 21 December 2020, Special VAT e-invoices will be allowed for issuance in 11 regions including Tianjin, Hebei, Shanghai, Jiangsu, Zhejiang, Anhui, Guangdong, Chongqing, Sichuan, Ningbo and Shenzhen.

   

• From 21 January 2021, Special VAT e-invoices will be allowed for issuance in Beijing, Shanxi, Inner Mongolia, Liaoning, Jilin, Heilongjiang, Fujian, Jiangxi, Shandong, Henan, Hubei, Hunan, Guangxi, Hainan, Guizhou, Yunnan, Tibet, Shaanxi, Gansu, Qinghai.

   

• In all instances, the reception of the Special VAT e-invoices is nationwide, i.e. the taxpayers in any part of China will be allowed to receive and process Special VAT e-invoices.

   

• The local tax administrations of the provinces, autonomous regions, and the municipalities will be responsible for clarifying the details of the implementation of the Special VAT e-invoice.

   

Main features of the Chinese e-invoicing model

A number of things remain to be clarified, but the following is already known:

• E-signatures will be used to replace wet stamps and signatures.

   

• The supplier must clear the Special VAT e-invoice with the STA platform, before distributing to the buyer/recipient.

   

• The supplier will issue Special VAT e-invoice in OFD format but is free to choose the method for providing the e-invoice to the buyer e.g. e-mail, QR code, or other methods.

   

• The buyer may download the e-invoice from the STA platform and verify the validity of the applied e-invoice.

   

• The content requirements to Special VAT e-invoice have been made more concise, and specific aspects of the layout have been changed.

   

• Red-letter e-invoice must be issued to correct irregularities in the original invoice, upon registering of such transaction with the STA platform.

   

E-invoicing to remain voluntary

Currently, STA has no plans to completely phase out paper Special VAT invoice and replace it with e-invoice. On the contrary, both will co-exist in parallel for the time being. You can compare this approach with the General VAT e-fapiao, where no mandates have been put into place. However, the adoption of the General VAT e-fapiao has been promoted.

The announcement stipulates even that the recipient/buyer may demand the seller to send a paper invoice to the buyer.

To date, the STA platform is available only for manual operations, meaning, that it is not yet possible to automate clearance or validation of a large number of e-invoices.

Pagero is closely monitoring new announcements and developments in China.

What is a fapiao?

In China, fapiao translates to “invoice”; more specifically it is an official invoice admistered by the STA that also serves as a tax tracking system. Businesses must record all transactions on fapiao, as the system serves to combat tax evasion and ensure compliance with trade laws.

It is up to businesses to purchase the correct fapiao from the STA based on their business scope.

The Golden Tax System and types of fapiao

The Golden Tax System is the tax administration system in China. The system was implemented several years ago and is now operating in its third stage called “Golden Tax System III.” Modern and innovative technology is the foundation of the system in order to establish consistency throughout the tax administration.

The main focus of the system was initially the registration and storage of paper invoices. In the past few years, the system has grown to allow for electronic issuance of some fapiao.

In China, there are two types of fapiao:

• General VAT Fapiao: issued as evidence of payment. This invoice type does not allow for VAT deduction and is typically used for B2C and tax-free transactions. As the General VAT Invoice is simpler than the Special VAT invoice, a process for electronic issuance has been available for several years.
• Special VAT Fapiao: issued by general taxpayers to customers when selling commodities or providing taxable services. This invoice types allows for VAT deductions and is typically used for B2B transactions.

B2B e-invoicing pilot stage

In September 2020, the provinces of Anhui, Jiangsu and Zhejiang started piloting the new system for the Special VAT fapiao together with the STA. Businesses in these provinces can now join the pilot stage on a voluntary basis, with more provinces joining as the system develops further.

Technical insights

The STA has set up a number of technical and accreditation requirements in order to interact with the new e-invoicing system. For instance, all e-invoices must be issued in ODT format and stored by the tax subjects, irrespective of whether they process the invoice electronically or on paper. The supplier has to submit the e-invoice to the mandatory infrastructure, which will validate as well as distribute the e-invoice to the buyer.

Timelines

Following the pilot stage, there are plans to connect other provinces to the scheme by the end of 2020 or early 2021. Experts expect that, similar to the General VAT Fapiao, the Special VAT e-Fapiao will be voluntary prior to becoming mandatory for all relevant tax subjects in China.

Key advantages

Besides the commonly accepted benefits such as automation, cost reduction and improved data quality, the new system will bring a number of country-specific benefits for businesses operating in China:

• More time, less bureaucracy: The new e-invoicing system will remove time-consuming and bureaucratic processes that currently take place in person at local tax offices. Businesses will no longer have to physically show up to obtain training in fapiao issuance, apply for paper fapiao, or apply for additional volumes of paper fapiao. E-invoicing also eliminates the need to acquire special printing hardware for paper fapiao.
• Simplified validation. Under the current regulations, buyers have to manually check the validity of the received paper Special VAT Fapiao with the Golden Tax System. This will become redundant with the e-invoicing system, as the STA will provide valid Special VAT e-fapiao to the customer.