Aug. 19 – China’s State Administration of Tax appears to be concentrating efforts on curbing a rise in the use of faked receipts for businesses filing their monthly business taxes and reports to the local tax bureau.

The use of false receipts, or fapiaos, to justify expenditure (and thus reduce income tax liability) has been evident since the restructuring of China’s income tax law a couple of years ago, with rises in taxable income for both foreign investors and domestic companies. The use of such bogus receipts is rampant in China. Fapiaos should be obtained from the tax bureau as a means to document company business activities. These are dependent upon the scope of business and are issued to any customer purchasing goods or services. It is included in the accounting statements as a record of expense. They are also used by company staff to claim back expenses.

However, obtaining fake receipts in China is not difficult; companies advertise them via spam telephone text messages and can be found at many small booths and shops in most Chinese cities and openly being advertised along with other bogus documentation such as driving licenses.

The Qinghai tax bureau has recently announced a discovery amongst some 20 companies in Xining who had collectively presented some 1,154 fake tax receipts to the tax bureau for claims totaling RMB4.94 million, an average of RMB4,280 per receipt.

Apart from increasing scrutiny of fapaios, the tax bureau is also looking at ways to change the system because of the widespread corruption that goes with the reliance on official receipts as auditing evidence. Such moves are likely to involve the complete digitization of the accounting and auditing procedure as well as changes in how expenses are calculated, such as using calculated settlements in contracts rather than on actual expenses used.

In the meantime, foreign companies submitting expenses to the tax bureau are advised that monitoring of tax receipts in expenses is being increased.

Companies with clarification issues over tax and finance reporting throughout China may contact Dezan Shira & Associates at tax@dezshira.com for one-off checks that financial reporting systems are being operated in accordance with the law.