By Alexander Chipman Koty
Last week, China’s State Administration of Taxation (SAT) released measures clarifying what documents are needed for corporate income tax (CIT) deductions.
SAT Announcement  No. 28, which will go into effect on July 1, 2018, states the specific instances where taxpayers may not require fapiao – Chinese invoices – in support of CIT deductions.
Receipts, internal documents, and payment slips can be used as supporting evidence for pre-tax deductions in some cases – if fapiao cannot be obtained.
Such a scenario can arise if the expense in question is not subject to value-added tax (VAT), or if, for example, a taxpayer receives an unqualified fapiao and cannot acquire a re-issued fapiao because the counterparty has been liquidated and can no longer issue the fapiao. In most situations, however, the re-issued fapiao must be obtained before CIT reconciliation.
A valid fapiao must include the correct company name, tax identification number, detailed expenditure items, and other relevant information.
In contrast, an unqualified fapiao might be missing required information or have information printed incorrectly. Tax authorities will also deem a fapiao unqualified if it was illegally issued and printed, or if it was forged, altered, or voided.
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If an enterprise acquires an unqualified fapiao, it is obliged to request the issuing counterparty to revise and reissue the fapiao. If tax authorities notify an enterprise that a fapiao submitted for CIT reconciliation is unqualified, the enterprise must obtain a valid fapiao within 60 days of the notification.
Where an enterprise cannot obtain a valid fapiao, it must provide the following documents for tax deduction purposes:
- Any materials that prove the issuing counterparty is unable to replace or reissue the fapiao;
- Agreement with the counterparty for business activities; and
- Proof of payment made on a non-cash basis.
It must be noted, however, that taxpayers still must submit fapiao to receive pre-tax deductions in most situations.
“The new measures emphasize the importance of obtaining valid fapiao for CIT deduction purposes,” said Hannah Feng, Senior Manager of Corporate Accounting Services at Dezan Shira & Associates. “Tax authorities will continue monitoring the compliance of fapiao for CIT deduction purposes at the post-filing examination.”
Further, the measures state that where an enterprise incurs an expenditure for receiving services subject to VAT jointly with another enterprise – including a related party – the cost-sharing shall be based on the arm’s length principle. In such a situation, the fapiao and the related cost-sharing agreement should be used together as supporting documents for pre-tax deduction.
Additionally, the measures clarify that for overseas expenses, supporting documents of withholding tax payment must be obtained before CIT reconciliation. Previously, some regions required withholding tax on overseas expenses to be paid before year-end, while other regions stipulated that overseas expenses can only be deducted when the payment is actually made.
The measures also state that for office utilities, such as water, electricity, air conditioning, internet, etc., where the lessor issues a fapiao for the taxable item to an enterprise renting the premises, the enterprise shall use the fapiao as the pre-tax deduction proof. Where the lessor adopts a cost-sharing method, the enterprise shall use other external proof issued by the lessor as the pre-tax deduction proof.
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