China to launch Tsunami-like Tax Inspection of False Special VAT Fapiaos

After the recent changes regarding Fapiaos, the Chinese government has now launched a massive campaign to root out fake and falsely claimed Special VAT Fapiaos.


Already in February, Chinese tax authorities had issued an annual work plan (Shuizongji Bianhan (2017) No. 29), whose main objective is to create an ‘effective deterrent’ to any tax violation and fraudulent behavior.


The work plan includes several priorities for local tax agencies on which they should lay a particular focus throughout the year. Foreign companies should, therefore, make sure that they or their employees are not involved in any of them.


The main targets and goals of the work plan are:


  • Export tax rebate fraud
  • Faking of VAT invoices
  • Illegal invoices
  • Rectification of industry and regional taxes
  • Regional key inspections
  • Crackdown on serious tax fraud
  • Improve tax morality in accordance with the overall economic development


For this purpose, tax authorities are also required to cooperate with local public security bureaus, customs authorities, and the central bank in carrying out investigations and enforcing tax compliance.

The Fapiao-Tsunami


More recently, on 18 September 2017, the Shenzhen government issued its own circular to launch a local and regional inspection tour. The circular’s telling title is “Shenzhen ‘Tsunami’ No. 1”. The inspection tour’s explicit target is falsely claimed Special VAT Fapiaos.


According to Chinese media reports, in Shenzhen alone, there have been 1050 companies suspected of large-scale VAT fraud, most of which are domestic companies. The local government estimates that it has suffered a loss of 7.2 billion RMB in non-paid taxes.


What is considered as a falsely claimed Fapiao?


Most expats have come across street peddlers selling false fapiaos. However, even if you never recurred to such extreme forms of Fapiao swindle, there are a lot of seemly innocuous actions which tax authorities will consider as fraud, too.


These cases include:

  1. Wrong Fapiao titles issued by hotels, for example when the title is changed from ‘dining’ to ‘accommodation’, “conference fee’, ‘service fees’, etc.
  2. When the fapiao title is changed from “interest on loans” to “consultancy fees”, “service fees”, “handling fees”, etc.
  3. When the Fapiao title is changed from ‘gift’ to ‘office material’
  4. When the Fapiao title for the Mid-Autumn Festival Moon Cake is changed to “paper” and “consumables”
  5. When the Fapiao title for a ‘commission’ is changed to ‘Service fee’
  6. When construction firms and installation companies do not disclose labor costs separately but include them in the service fee and the operating costs.
  7. Purchase of one product A, but reception of Fapiao for another product
  8. Issue Fapiaos for a shopping card as one for ‘office material’
  9. Issue Fapiaos for a reception gift as a fapiao for promotional giveaways
  10. Change the title of fapiao for goods with a higher VAT to services and goods with a lower VAT


Which time period can be checked by tax authorities?


Since tax authorities usually discover tax violations only after a certain period, tax inspectors usually want to see not only the most recent tax documents but also those of previous years. In certain cases, when, for example, a company is suspected of tax fraud or systematic tax evasion, tax authorities can even demand unlimited access to all accounts and balance sheets.


The following table shows you the inspection period in each case:


Situation Inspection Period   Sanction Scope 
Unpaid or underpaid taxes within a given period  The taxpayer or withholding agent does not pay or underpays taxes   3 years Tax
(1) failing to pay or underpay taxes due to mistakes made by taxpayer or withholding agents; or
(2) taxpayers fail to submit tax declaration, resulting in non-payment or underpayment of taxes
Amount of taxes payable is less than 100 000 RMB  3 years Tax, Late Payment Fees
Amount of taxes payable is equal or higher than 100 000 RMB 5 years Tax, Late Payment Fees
Tax Evasion, Tax Boycott, Tax Fraud Unlimited Tax, Late Payment Fees
Previously caught for non-payment, underpayment or being in arrears for tax payments  The taxpayer has already declared taxes or tax authorities have already investigated the tax arrears Unlimited Dealt with according to the taxpayer’s declaration or the specific circumstances
Administrative Sanctions  Any violation of tax laws or administrative regulations subject to administrative sanctions 5 Years Administrative Sanctions
 Other acts subject to administrative sanctions 2 Years Administrative Sanctions

 Source: Law of the People’s Republic of China on the Administration of Tax Collection


What should firms do?


Firms, and especially foreign firms, should make sure that their accounts are managed correctly and that all documentation is archived properly. Accountants should firmly adhere to the Three-Flows-One-Fapiao-Principle. The product, payment, and the invoice should all be linked to one Fapiao, whose title should correctly reflect the transaction.


If firms are not sure, whether their accounting is up to date and corresponds to the new requirements, they should consider carrying out a health check done by professional accounting firms, such as ECOVIS Beijing. Based on our experience, it is always better to correct accounting mistakes before an inspection, given that accounting errors are seldom the result of a single lapsus but rather due to a faulty internal control system. Thus, when tax authorities come across tax violations, it is very likely that they will launch a thorough investigation into all accounts of at least the last 3 years.  


ECOVIS Beijing is a Sino-German Consultancy focused on accounting, audit, tax, and legal advisory. If you have any questions regarding our accounting and tax services, please contact


 Elizabeth 150x225  

Elizabeth Shi

Elizabeth Shi is a Senior Tax Manager at Ecovis Beijing. She has over 10 years of working experience in China´s legal, tax and business field. Prior to joining Ecovis, Elizabeth has worked in the Big Four accounting firms’ tax and business advisory departments. She has advised companies on various China tax and legal related matters, including dealing with tax and other government authorities. Her expertise covers tax compliance, restructuring, M&A, tax due diligence, liquidation and deregistration related tax matters as well as tax planning for companies and individual expatriates. Elizabeth started her professional career as a legal consultant in a prestigious IP firm, working on foreign direct investment (FDI) and intellectual property (IP) projects. With her legal background both in academics and in practice, she has a profound understanding of China’s tax system and its operation. For further information please


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