Law and practice of tax invoices in China

1. Type of tax invoices issued depends on the taxpayer's status
2. Transactions for which VAT special tax invoices are not to be used
3. Sales amount, VAT, and invoiced value for business quotes
4. Qualification for being recognized as VAT general taxpayer
5. Computation of VAT payable
6. Comparing general VAT payer and small scale taxpayer
7. Comparing tax burdens
8. VAT Liability vs. Tax Invoice
9. Scope of VAT and Business Tax
10. Function of tax invoices
11. Unlawful acts of handling tax invoices
12. Unlawful acts for issuing invoices
13. Tax invoices - Internal control issues
14. Rules and penalty for lost or stolen tax invoices
15. Time for Issuing Tax Invoice

(Part of the contents is applicable to payers of business tax)

Type of tax invoices issued depends on the taxpayer's status

	General VAT payer	Small scale VAT payer
VAT special invoice	Issue invoice on its own? Yes	Cannot issue invoice (Must be done at tax office)
Ordinary invoice	Issue invoice on its own? Yes	Issue invoice on its own? Yes

 

Transactions for which VAT special tax invoices are not to be used 

1. Small taxpayer supplies goods or taxable services
2. Sales of VAT-exempt goods
3. Supply of goods or taxable services to consumers
4. Supply of specific goods (cosmetics, cigarettes, and vehicles, etc)
5. The buyer is a payer of business tax (such as property developer, construction company, advertising or transportation companies).
6. The sale of export goods
7. Goods are to be used for collective or personal consumption
8. The giving out of goods at no consideration

Sales amount, VAT, and invoiced value for business quotes

Given that invoiced value including VAT is 100.

General taxpayer
VAT = 100 / 1.17 x 17% = 14.53
Sales amount = 100 / 1.17 = 85.47

Small scale taxpayer
VAT = 100 / 1.06 x 6% = 5.67 (production enterprise)
Sales amount = 100 / 1.06 = 94.33
VAT = 100 / 1.04 x 4% = 3.85 (Commercial enterprise)

Qualification for being recognized as VAT general taxpayer

1. Annual sales reaching 1 million or above (production type) or 1.8 Million (non-production)
2. Taxpayer should submit application,
3. Accounting staff holding a license and the books kept in accordance with PRC accounting rules
4. Maintaining a sound accounting system to enable tax officials to ascertain the output VAT and input VAT.
5. Tax invoices are properly kept in accordance with legal rules.

Computation of VAT payable

	Method	VAT payable
I	Simple computation  (Small scale taxpayer)	Sales amount x levy rate (Note: no input credit)
II	General computation (General taxpayer)	Output VAT - Input VAT (Purchase invoice must be certified by tax bureau

 

Comparing general VAT payer and small scale taxpayer

Example 1

General VAT payer

• Sales 1,000; (VAT17% = 170)
• Purchase 900; (VAT17% = 153)
• VAT = (1,000-900) x 17% = 170 - 153 = 17

Small-scale taxpayer

• VAT = 1,170/1.06 x 6% = 66.23 (Production)
• VAT = 1,170/1.04 x 4% = 45 (Commercial Enterprise)

Example 2

General VAT payer

• Sales 1,000; (VAT17% = 170)
• Purchase 100; (VAT17% = 17)
• VAT = (1,000-100) x 17% = 170 - 17=153

Small-scale taxpayer

• VAT is the same as example one above.

Comparing tax burdens

The percentage of added value in example one is low, the tax burden is lower; the percentage of added value in example two is high, the tax burden is higher.

• Percentage of value added = (Sales - Purchase) / Sales x 100%
• Percentage of Value Added and Tax Rate are not necessarily the same.
• For general taxpayer, VAT is computed on the value added; for small taxpayer, VAT is computed on the sales amount.

VAT Liability vs. Tax Invoice

• VAT liability is independent of the type of tax invoices used.

Scope of VAT and Business Tax

Type	Scope of tax	Including
VAT	Sale of goods; importation of goods	Providing processing, repairing and replacement service
Business Tax	Supply of taxable services; transfer of intangible assets	Sale of immovable property

 

Function of tax invoices 

1. Sales recognition
2. Original document for accounting use
3. Tax computation
4. Receipt for payment

Unlawful acts of handling tax invoices (applicable to VAT and business tax payer) 

1. Purchasing tax invoices from other party than the tax bureau
2. Sales or transfer of blank tax invoices for a profit
3. Providing tax invoices for, or borrowing tax invoices from, other parties
4. Using receipts in lieu of tax invoices

Unlawful acts for issuing invoices 

1. Failure to issue invoices for taxable transaction
2. Issue invoices on behalf of third party or request 3rd party to issue invoice
3. Issuing invoices for fictitious transactions
4. Goods not matched with details in invoices issued
5. Invoice issued for transactions falling outside VAT scope

Tax invoices - Internal control issues (applicable to VAT and business tax payer) 

1. Designated person keeping blank tax invoices
2. Using safe for keeping unused tax invoices
3. Division of duty between custody and issue of invoices
4. Division of duty between keeping invoice stamp and using stamp for invoicing purposes

Rules and penalty for lost or stolen tax invoices (applicable to VAT and business tax payer) 

1. Reporting losses to tax bureau immediately
2. Application for public notice of Declaration of lost invoices
3. Paying the publication fee
4. Taxpayer failing to keep tax invoices in good custody is liable for an administrative fine not exceeding RMB10,000, and is not allowed to purchase tax invoices from the tax authority for a period not exceeding 6 months.
5. If it is found that the tax invoices have been used fraudulently, taxpayer shall assume legal responsibility for tax evasion jointly and severally.

Time for Issuing Tax Invoice

• Sales on cash-and-carry terms: day of receiving payment;
• Credit sales: payment day as provided in agreement;
• Consigned sales: day of receiving statement of consigned sales;
• Advanced deposit: day upon the delivery of goods (For property developers, the day of receiving pre-sale payment);
• Provision of services: day on receiving sales payment or check for the services completed.