20 July 2013

问题: Fapiaos and Taxes - Do you want to be a Millionaire?

The popular Western maxim assures the populace two things are certain in this world of ours: death and taxes. Evidently, China is no exception. However, the system (note, I am going to focus specifically on commercial taxation and VAT) is not exactly your garden-variety system. 

According to Black’s Law Dictionary (a source law students love to quote), a tax is a “pecuniary burden laid upon individuals or property owners to support the government...not a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority”. Enter the fapiao (发票). A fapiao is a receipt - an official receipt, that is. In China, the State Administration of Taxation is in charge of tax collection, with the Ministry of Finance as the policy mastermind in the backdrop. And the fapiao is their bid to track tax payments and deter tax evasion. 

Fapiaos also double as state lottery tickets. So get your lucky charms ready. 

One of the first things you notice when you buy something in China is that you pay the number on the price sticker. No [insert your desired percentage here] addition at the cash register. This is not because commercial products are not taxed, but because the prices include the value added tax (VAT). The procedure is as follows: 
Step 1: The business owner purchases a fapiao printer (plus appropriate red-stamped and otherwise marked special fapiao paper) from the local tax authority. In the alternative, the business owner can print fixed amount prepaid fapiaos. In this latter case, the standard amounts are fapiaos for 20 RMB and 100 RMB. The business owner can then liberally round your purchase total to the nearest multiple of 20 and hand you your own starters kit for your fapiao collection. 
Step 2: Following the letter of the law, the business issues a fapiao to the consumer for all business transactions at the time of purchase.
Step 3: Once the prepaid fapiaos have run out or -for those proud owners of fapiao printers- the official paper has been all used up, time to call up the local tax authority and respectively, either pre-pay some more taxes or report and pay taxes . Rinse and repeat. 
Simple. However, the pitfalls in this procedure should be evident. To start (and this is not endemic only to China), business owners will look to avoid paying VAT on the transaction. Essentially, no fapiao, no need for the business to report and pay taxes; courtesy of the government, they’ll keep the VAT amount for themselves. The onus falls on the customer. As an additional detail to Step 2 above, in the minutia of the letter of the law, all businesses are required to produce a receipt at the customer’s request at the time of purchase. 

So, the authorities undertake to give customers incentives. And how better to give an incentive than to make each purchase a gamble hope for a cash windfall? Because, as I mentioned above, fapiaos are lottery tickets, complete with their own scratch-to-win box directly on the receipt. It’s ingenious, a Machiavellian turn-of-force that harnesses our self-interest and that intangible rush of hope-fueled adrenaline we get when we play the game. 

And for those customers having a hard time getting their quasi-lottery ticket: if the business owner is unable to produce a valid invoice, you have your chance to play whistle-blower, refuse to pay and call the national tax authority’s hotline at 12366. 

Merging back to the nature of the tax system, if the potential to win millions is not enough of an incentive to ask for that fapiao, there is also the detail that to claim business-related expenses, companies need to provide the tax authority with the original fapiaos. Thus, for any audit-related tax and expense deduction endeavours, fapiaos are mandatory. 

As a closing statement, heed the following warning: make sure that if you are getting a fapiao for tax reduction, the fapiao is issued for the right type of service and made out to the correctly-spelled company name. Otherwise, though you can scratch-and-(maybe)-win all you want, but when it comes time to be reimbursed by your employer for that tai gui kao ya dinner, you’re going to be out of luck. 

KEYWORDS: taxes, fapiao, lottery, Ministry of Finance, VAT

03 July 2013

问题: Anti-Bribery and Guanxi - No Red Envelopes Please

There is an almost unanimous consensus (see your favorite how-to-do-business-in-china book or talk to the suited 老外on the streets of Beijing) that cultivating relationships is the kernel of any business venture in China. It’s called guanxi, key component of Chinese social culture with a practice dating back into the annals of history. 

The concept alludes to the Confucian (yes, him again – just as the West venerates the Athenian philosophers and credits them with the essence of Western thought, the Chinese hold a special place in their hearts for 孔子师傅) structural idea of a “government of the people” as opposed to the more legalist “government of laws”. There is no denying that maintaining good relationships with regulators and officials is crucial to any enterprise, in China and elsewhere. However, for some reason, guanxi is oft misinterpreted. The result of this misunderstanding: a belief that bribery and corruption are the norm in China and a required rite of passage for any foreign investor.

Bribery is not “the way things are done in China”. Bribery is bad. It is illegal and can put both nationals and foreigners away for a long-time. The media is rampant with horror stories of foreign companies that have run afoul of anti-bribery and anti-corruption legislation (the Rio Tinto fiasco put away Stern Hu, Australian citizen, for a seven year prison term on a bribery charge, one of the harshest sentences handed down to a foreign executive of a multinational corporation). Yes, maybe giving a local official in a second-tier/third-tier city a red envelope might yield short-term results – a relaxation of the stringent requirements for the establishment of a WFOE, for example – but this type of personal guanxi will not contribute to a stable long-term future. The reach of the national government – in the form of required audits and the like – is not to be underestimated. 

Within China, anti-bribery regulation is outlined in China’s Criminal Law (CCL). Convictions of bribery, thanks to Xi Jinping’s noble quest to fight corruption, are proliferating. The agencies mustered in this witch hunt are spearheaded by the Anti-Bribery and Embezzlement section of the People’s Procuratorate Office, with aid from the Central Committee for Discipline Inspection (CCDI) in the case of tracking down CPC members. In May 2011, the law was extended to include the bribery of foreign officials as well. Art. 164 does not seem like much at first glance – it does not provide for internal control requirements nor does it clearly define any of the critical terms (who exactly is a foreign official remains to be determined). An encouragement for greasing the wheels? No. Art 164’s extraterritorial applications are vast. 

Hypothetical: a WFOE trying to secure a development project in Nigeria has their employee pay a Nigerian local government official a nice vacation. Bribery within the jurisdiction of Art. 164? Yes. And prosecutable in Chinese courts. 

And, of course, foreigners must not forget the wide jurisdictional scope of the US Foreign Corrupt Practices Act (FCPA) and the new “gold standard” in anti-bribery legislation, the UK Bribery Act 2010. The latter creates a new corporate offence of failing to prevent bribery (s.7), with the sole defense requiring the company to demonstrate (and with a very high bar to meet) that they had adequate procedures in place specifically tailored to preventing bribery. And voluntary disclosure will not save you, in neither the US, the UK or in China. 

Bottom line: best to avoid bribery and follow the law. Always sage advice. 

So, what should be the consensus on guanxi? Mathematically: guanxi ≠ bribery and a more institutional approach is recommended. Enterprises that contribute to local development will likely be recognized and supported by the government. That is the way to cultivate a relationship. Anti-bribery crusades are not disjoint with Chinese social culture and structure, as some would lead you to believe.

Red might be auspicious, but red enveloped are certainly not.

KEYWORDS: Anti-Bribery, Anti-Corruption, Extraterritorial, FCPA, UK Bribery Act 2010, China's Criminal Law, Art. 164