China FapiaoI’m interrupting my series on grey market goods on China to discuss the new fapiao (tax invoice) system that came into effect on July 1, 2017. Though this new system is not directly aimed at grey market goods, it may nonetheless have an indirect effect.

A fapiao (发票) is both a receipt (i.e., proof of purchase) and a tax invoice (i.e., a way to determine the tax paid on a given transaction). Under the previous system, a buyer of goods or services in China simply had to provide its legally registered name (i.e., the name listed on its business license) to receive a valid fapiao from the seller. Abuse of the system was widespread; fapiaos were often inaccurate both in terms of amount and in the description of what was sold.

The new system imposes several additional rules, including the following:

  1. The fapiao must specify the goods or services being provided.
  2. The fapiao must bear a special fapiao chop from the seller.
  3. The buyer must provide its tax identification code or unified social credit code.
  4. Sellers/issuers of fapiao must link their internal fapiao data with the government to ensure that when the buyers/recipients of fapiao file their taxes, the amounts and the descriptions match up.

It’s hard to say with specificity whom the new requirements are aimed at, in part because there are so many potential targets. But on a certain level, this new rule should be viewed as part of China’s escalating clampdown on capital flight and tax avoidance.

One of the major ways Chinese factory owners get money out of China is to create a Hong Kong shell company and then route all payments for manufacturing at the mainland China factories to that Hong Kong company. The Hong Kong dollar is not regulated in the same way as the Chinese renminbi, and once money is in a Hong Kong account, it can be moved offshore with relative ease. There’s nothing illegal about this process per se, so long as the payments in Hong Kong are declared as income by the Chinese factory that actually did the manufacturing. I’ll leave it as an exercise for the reader to guess how often that happens.

A variation of this scheme is the overinvoicing of products imported into China from Hong Kong. For example, a shipment of goods valued at $100 would be invoiced at $1000. The Chinese company sends the full $1000 to Hong Kong, and the Hong Kong exporter deposits the difference (i.e., $900) in the Chinese factory owner’s Hong Kong bank account, less a service fee. Presto! $900 has been moved offshore. And the goods at issue have been transformed into grey market goods.

How will the new fapiao system affect foreign companies operating in China, especially WFOEs? For those already scrupulously following the rules, things shouldn’t change that much: a minor, but manageable increase in paperwork and logistics overhead. But WFOEs will need to be even more attentive when procuring or preparing fapiao. This puts more pressure on the general manager to oversee operations, especially staff who regularly deal with fapiaos (like sales agents). Easier said than done. It also puts more pressure on the parent company to appoint a general manager who is both (1) trustworthy and (2) understands that the parent company isn’t just giving lip service when it says it wants to follow the rules. And it puts more pressure on the entity handling the WFOE’s accounting and tax reporting. I don’t think that every WFOE needs to go out and hire a Big Four Accounting firm, but the WFOEs that have been doing it all themselves may want to rethink their strategy and hire an outside accounting firm. I know I would.

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Photo of Matthew Dresden Matthew Dresden

Matthew advises a wide range of businesses on corporate and transactional matters at Harris Bricken, with an emphasis on media and entertainment, international intellectual property, and cross-border work. Matthew provides finance, development, production, and distribution legal services for filmmakers and other creative artists…

Matthew advises a wide range of businesses on corporate and transactional matters at Harris Bricken, with an emphasis on media and entertainment, international intellectual property, and cross-border work. Matthew provides finance, development, production, and distribution legal services for filmmakers and other creative artists, and has worked on behalf of film studios, cable channels, production companies, video game developers, magazines, restaurants, wineries, international design firms, product manufacturers, outsourcing companies, and computer hardware and software companies. Matthew is widely viewed as an expert in Chinese intellectual property law, and is regularly quoted in publications from the New York Times to The Economist to Variety.

Before attending law school, Matthew worked in Hollywood for eight years as an independent filmmaker, starting as a production executive for Roger Corman’s Concorde-New Horizons Pictures. Before that, he was a computer science graduate student at Stanford University. He has also worked as a journalist, a transportation planner, a food critic, and a website designer. He serves on the board of the Northwest Film Forum, and is currently the immediate past chair of the Washington State Bar Association’s International Practice Section. He is also an adjunct faculty member at Indiana University Maurer School of Law, where he teaches a clinic on legal issues for independent filmmakers.

Matthew was born and raised in the San Francisco Bay Area. He spends his free time watching movies, hiking, cooking spicy food, and relaxing with his wife and daughter.