What Is Chinese Fapiao (and Do I Need It?)

Michael MicheliniBlog, Corporate, Taxes6 Comments

Want to know what one of the first Chinese words you’ll need to learn is?

Well – here is one!

One of the first words you will learn inside Mainland China is fapiao!

Picture this:

You’ll have dinner with a group of high level business executives, and then when the bill comes, the credit card is left on the paper and handed to the waiter. But then, the executive treating you to lunch says – firmly – fapiao. Then the waitress confirms, you really want fapiao? Then the executive re-confirms it. Then a wallet is opened, and a business card given. Some more writing, maybe the executive now needs to leave his or her seat at the table and go to the cashier.

What is all this fuss about?

This took me a while to figure out as well – and often business people in China tell foreigners to not even try to figure it out.

But you’re reading this because you’re curious – curious like me – so let me give you some background on fapiao.

Letter from a US Person Confused on Fapiao

Thought it would be time we discuss this matter of fapiao and tax receipts. Got a letter from a reader:

Hi Michael. When Chinese companies ask if you want a ‘fa piao’ (receipt/invoice), what do you do? Can you explain what that is about and for a US person?
William

So with that as context, let’s dig in!

What Does Fapiao Translate To In English?

Fapiao translates to tax receipt.

Fapiao means that company has to report taxable income.

If you’re in a rush today – the main point is – when you receive a fapiao from a business – that means it is a taxable transaction to that company. They need to pay taxes on the money you give them.

So, of course if a business – especially “cash” and offline businesses like taxis, restaurants, and shops, would rather take the money and slip it in their pocket and not tell the government this ever happened.

Which happens a lot.

But when you insist on fapiao, that means they must declare this to the Chinese tax department and pay tax.

To Issue Fapiao – You Need a Chinese Company

Also, it is worth noting – to issue (give) fapiao to a customer, you need to have a legitimate Chinese company. Not a Hong Kong company, not a USA company – but a Mainland Chinese company.

Oftentimes, foreign companies starting out just use a HK company and can’t offer it.

Also – local Chinese people prefer to not register a company to save on the fees, and just operate in cash. So they can’t give you fapiao.

So when someone asks for fapiao, they are asking for a tax write off receipt but also an official record from the business on the type of transaction.

The Fapiao Says What The Company Does and What the Type of Transaction It is

Not all fapiao is the same. When a business issues it – it will show what the business does as a business activity and the type of transaction that was done.

In laymen terms, this means that you will see the company, for example my Chinese company name is:

Shadstone Import and Export Shenzhen Co, Ltd.

Notice it has Import and Export

Also notice it has Shenzhen

This forces the business to show where they are registered, and what their business does.

So your tax receipt will show this, and make it transparent to the buyer, as well as tax department, the details of the transaction.

Transparency.

A “Regular” Invoice Is Not The Same As a Fapiao

You will get a slip of paper at the restaurant listing out all the food you ordered, itemizing them nicely with a total at the bottom.

This is not a fapiao. This is a receipt. This doesn’t connect to the Chinese tax department and does not require the restaurant to pay taxes on this income.

You’re confused, right?

Basically, the system works on taxable transactions – upfront. Not on declaring your earnings later on an honor system. The system and tax department fears that the business owners would always under declare their earnings and not pay the full amount of taxes due.

So the fapiao, or taxable invoice, was created. Pay the tax upfront at the time of the transaction.

Kind of Like Sales Tax in America

You may think this is like sales tax in America. In a way it is – except that is added on top of the order amount. You know, at McDonald’s in USA the menu shows 3.99 for a Big Mac, but you need to pay $4.35 as they add sales tax on it (and then you get stacks of coins in your pocket – but that is another story)

In China, the price on the McDonalds menu is the exact amount you’ll pay. From that amount, the business needs to pay to the tax authorities.

And in USA, the sales tax is paid quarterly to the state, based on total sales volume and total sales tax received. It could easily be, let’s say “modified”, if the business owners wants to play around with their cash register with the cash sales.

In China, that is much harder to do – IF – the customer asks for a fapiao when making the transaction.

Thus, the birth of the whole fapiao game.

So – Why Do Consumers / Clients Ask for Fapiao?

Now you have an idea what fapiao is – but why in the world did our Chinese business man who took us out for a nice dinner insist to the waitress for his fapiao paper? Why does he care about it so much, to actually leave the table and go across the restaurant and wait at a special counter to receive it.

There are a few reasons, let’s hit them 1 by 1:

Chinese Tax Department Has Made a Lottery Game Out of It

To make the normal consumer want to get fapiao, the Chinese tax authorities thought of an ingenious way – make it a lottery!

This creates everyone of all ages want to ask for the fapiao – to be able to have a scratch and win game!

The prize probably is extremely low, and the payout is also low – sometimes 10 rmb to 100rmb – but why not?!

So this creates the cat and mouse game of customer and business owner bargaining over fapiao.

Some Businesses Fight Back – Win a Free Glass

I’ve had some fun times practicing my Chinese and asking for fapiao. One bar didn’t have any more (they needed to go to the bank to buy more) and said I could come back tomorrow.

I wasn’t planning to go back the next day for a 20 USD tax receipt – so I said – why don’t you give me a bar glass. They thought I was crazy, but gave in and gave me a free glass to take home. My friends said I have definitely been in China too long, but Steve (my friend and mentor) still uses his Guinness glass from that night as his toothbrush cup!

Other restaurants don’t even make you ask! You get small prizes at the end of each meal – so long as you don’t ask for fapiao.

Pretty ingenious!

So the war between the tax department, business owner, and consumer continues.

Company Staff Are Required To Submit Fapiao To The Accounting Team

Many workers in China have a monthly quota of fapiao they need to turn in. This is to offset some of their taxable salary.

I’ll have Chinese friends often ask me at a meal “can I keep the fapiao for today?”. They are often in their 20s and working as international sales at a factory. They are doing this to offset their sales commission income or base salary as a request from the company accounting department.

Other times I have business owner friends asking me and others to collect fapiao and submit to them. As a friend, so that they can use more taxable expense receipts to offset some of their income.

Fapiao becomes almost a tradable asset.

Buying Fapiao On the Street – in the Grey Market

Walking around many business marketplaces, especially in Hua Qiang Bei in Shenzhen, China – you’ll hear people around you shouting “fapiao, fapiao, fapiao”.

Makes me think of birds.

They are offering to sell (or sometimes even buy) fapiao with you.

So there is an underground market for these tax receipts! You pay a percentage of the value of the amount you want, and it is lower than the taxable write off value.

Maybe you need 5,000 RMB of fapiao – maybe you didn’t get enough restaurant dinner receipts this month for your company – so you head over to the market of fapiao and purchase some.

Or maybe a client needs a fapiao and insists they will not order unless they get one. You don’t have an official Chinese company, so you don’t know what to do – and you hear about this underground market and buy some to get the deal done.

Yes, this happens!

Many Businesses Will Add Fapiao Percent on the Order

So, some businesses turn it into a sales tax transaction. Meaning, they have a price of their product with fapiao and a price without fapiao.

Funny encounters are – you’ll get a price and then want to make the purchase. Then you mention fapiao and the shop owner will get all flustered and say “mei you fapiao”. Meaning no fapiao. You can insist more, and either they ‘ll say they don’t have it, or they’ll say it will cost you more.

Even in bigger transactions, a sales proposal or quotation may show the extra fees if you want fapiao stated right in the terms and conditions.

So in a way, it becomes like a sales tax. But it is meant to be reflected in the price from the initial quotation.

Fapiao Represents “Upfront Declaration” System in Taxes

The main summary of this article to explain what fapiao is – is this – it is declaring the transaction as a taxable transaction – upfront.

Not the honor system.

Not a handwritten receipt that can be given to your accountant at the end of the year to say this was a sales order.

No.

A taxable transaction needs to be an official tax invoice (fapiao) and it needs to be sorted out at the time of the transaction.

So – Do You Need Fapiao?

I hope you enjoyed this fun little writeup of what is a fapiao. It always creates some fun discussion at a pub with friends. The push and pull of the consumer, business owner, and tax department.

Hey, this is actually one of the things that makes doing business in China fun, right?!

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stevelaudig
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stevelaudig

not providing the percentages of taxes makes this article only half helpful

Peter
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Peter
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[…] to compensate the customer for foregoing the lottery. More entertaining accounts of fapiao here and […]

ohwell
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ohwell

Still, are foreign businesses accustomed to giving Fa piao? Do they really get one from the black market if their customer insist?

example
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I was wondering if you ever thought of changing the layout of your site?

Its very well written; I love what youve got to say.
But maybe you could a little more in the way of content so people
could connect with it better. Youve got an awful lot of
text for only having 1 or 2 images. Maybe you could space it out
better?