After years of continuous efforts in driving the Golden TAX initiative, China has been making key progresses in digitalization of national tax collection system. The achievements include data integration among regional tax offices, as well as data connection and sharing among tax offices, banks and social welfare institutes.
Based on conditions created by these developments, China tax administration has recently unveiled a set of measures to ease the way bookkeeping (for compliance purposes) is performed and taxes are filed. These measures can be seen in the wider context of incremental steps toward the ambition of complete abolishing of paper fapiao and digitalization of tax return.
Let’s first make an introduction of a key concept of tax system in China, if you are not familiar with what ‘fapiao’ is. Fapiao is an official VAT tax invoice provided by a seller as proof of purchase of goods or services including their value and the amount of tax paid. Fapiao has been taking a paper form for decades, and can only be printed/issued by a seller via a device which is connected with national tax administration, which ensures the transaction information goes to government tax system immediately, serving as a warranty against tax evasion. This is definitely unlike other countries where invoices serve as a tax receipt.
Paper fapiao is viewed as the main cause of complexity of accounting and compliance unique in China tax environment. A set of tasks are imposed to businesses as a result of processing paper fapiao, leading to additional cost burdens of doing business in China.
At the seller side, you have to purchase blank paper fapiao from the tax office, input transaction data and print paper fapiao, which is called output VAT fapiao by the seller, via a government controlled device, and post the paper fapiao to your client for payment. You also have to manually input fapiao data into your accounting software for bookkeeping and archive the paper fapiao for possible inspection.
At the buyer side, you have to collect and compile all paper fapiao, which is called input VAT fapiao by the buyer, issued by your supplier, count the fapiao amounts for processing expenses, verify the authenticity of fapiao for validity of VAT deduction, manually input fapiao data into your accounting software for bookkeeping and archive the paper fapiao for possible inspection.
Recent measures released by tax administration and benefits to businesses
1. Cancelation of zero tax declaration
Previously, if a business has no taxable income (sales revenue) and no tax payable in the period in which the tax return is filed, the tax payer was still required to perform a zero tax declaration to tax office, which is called zero tax declaration.
The newly released policy cancelled zero tax declaration for small scale taxpayer, which took effect since November 2019. More than one million zero-declaration businesses in China are no longer required to file their tax returns each month, resulting in cutting of thousands of jobs in performing such low value works.
2. Full set of data of VAT fapiao downloadable from online tax return platform
In a new update of online tax verification system released in November 2019, Tax administration opened the downloading of full set of data of both input and output VAT fapiao. Megi (www.megichina.com) Smartledgers version features uploading of fapiao data for automated bookkeeping.
3. Digitalization of normal VAT fapiao
Qianhai district of Shenzhen city declared the digitalization of all normal VAT fapiaos, which went into effect on Jan, 01 2020. This move signals that the complete abolishing of all paper fapiao (including both special VAT fapiao and Normal VAT fapiao) is drawing closer.
As introduced earlier, printing, collection, counting, verification, compiling and archiving paper fapiao account for a significant chunk of the workload of bookkeepers who perform compliance services for business clients. Digitalization of fapiao eliminates these works and evaporates value of such lower-end routine tasks.
4. Opening data interface for tax return.
In China, businesses have been required to categorize transactions and arduously fill in data fields in online tax return platform to complete tax declaration.
In U.K., the MTD (Making Tax Digital) for VAT legislation took effect in April 2019, requiring all VAT registered businesses with a taxable turnover above the £85k threshold to keep their records digitally and submit their VAT Returns using MTD compatible software, such as Xero (www.xero.com/uk). Businesses affected by MTD for VAT will no longer be able to use HMRC (the tax bureau of U.K.) Online Services.
According to insider information, China tax administration is also in the process of trial running data interface for making tax return digital. As a result, manual procedures are to be replaced by data-feeding connection between cloud accounting software, such as Megi (www.megichina.com), and government tax system. As transaction categorization is already performed in accounting software, online categorization (at online tax return platform) becomes unnecessary, and tax filing is going to be much more effective, efficient and easier for taxpayers.
Abolishing of paper fapiao and digitalization of tax return are set to reduce or completely wipe out elements of works which were performed manually, relieving cost burdens of statutory accounting and tax compliance.
Implications to accounting services
Thanks to the perceived complexity of compliance requirements in China, Lots of accounting practices serving foreign businesses have been making decently profitable business relying heavily on tasks of low value-added nature. Here is an article about the comparison of available services in the market.
China tax administration has been adopting technology to ease the complexity and make life easier for businesses, and the cumulative impact on accounting service industry is profound. We predict a drastic shifting of the landscape and ecology in the sector.
Inevitably and increasingly, manual and routine works goes out of date. Accounting practices are mandated to think about how to reshape their future by building new stream of revenue. Harnessing cloud technology and migrating to advisory services is how they can stay relevant in the face of losing of traditional business, which is taking place in a fast pace. The business management playbook for China elaborates on how advisory services creates value for foreign companies in China business settings.
Practice transformation involves redefining of service products, re-organizing of operations, as well as upgrading of accountants’ skills, which takes lengthy works and painful efforts to drive organizational change. The first movers who operate out of their comfort zone make a quicker transition and are better enabled to face up to the growing client expectations.