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
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
As I have discussed before, China is primarily a civil law country. The law is a body of codified, written rules not determined by judges. However, China is also special. Due to the legal kick-start the country went through in 1979, the laws are patchy and lacking comprehensiveness. Furthermore, broad changes have taken place in China’s social and economic spheres (and are still taking place today) – the system needs an internal mechanism to make up for the fact that laws cannot cover all the new developing social and economic relations.
Xi Jinping, General Secretary of the Communist Party of China Central Committee, for one, is concerned with the efficiency and authority of the judicial system. The list of aspirations is long: efficiency, judicial transparency, judicial justice, improved access to justice…en bref, he wants a China ruled by law. What the system needs is judicial reform and innovation.
Part of the solution: guiding cases. Two questions immediately arise.
One, what are ‘guiding’ cases? They cannot be referenced or cited, nor are they binding on the courts. A head-turner for us disciples of the common law, who live by precedent and incorporate cases into our music in our spare time. These are not common law cases: they are more like a hovering notion for the judges to keep in mind. An advisory opinion that is not an advisory opinion.
Two, why have guiding cases? Can these really meet Xi Jinping’s lofty goals? In the opinion of Professor Wu Shuchen of Shandong University, yes: “the effect of the guiding cases system…first, significantly limits the discretionary power of judges and effectively avoids the defect of different verdicts for similar cases; second, it significantly reduces the uncertainty and unpredictability of the law.”
So far, the guiding cases have served to cover particularly prickly areas of the law – they provide general provision for cases that happen frequently enough to warrant guidance but not to such an extent that they rank high on the list of priorities for the NPC. With a heavily backed up legislative, the guiding cases act as a steam-valve. For example: of the four guiding cases released upon the SPC’s initiation of the system in 2001, Shanghai Centaline Property v Tao DeHua addressed disputes arising from “private transactions by passing intermediary” between buyers and the intermediaries in second-hand property transactions. Intermediaries were not allowed to pursue damages for use of information if the buyer could have accessed this information through other legal means. A niche area of the law that the NPC would not be able to prioritize but which needed resolution, as intermediary companies are the de facto way to purchase urban property in China.
The younger generations of legal scholars are open to this quasi-common law addition to the legal system. After all, the Constitution gives the SPC the power to issue advisory cases. Furthermore, most of these up-and-coming legal scholars have served educational terms in common law countries; the efficiency and dynamic adaptability of using case-law is not lost on them. An active judiciary is not that bad of an idea.
Sixteen cases have been released so far, and no large legal opposition has formed (apart from a few furrowed eyebrows in the legal literature from the legal purists). Hopefully, at least, guiding cases will promote an environment where the rule of law is victorious and people can settle all their problems by legal means.
Interested? Check out the catalogue of guiding cases with commentary and legal analysis (yes, in English): https://cgc.law.stanford.edu/
KEYWORDS: Supreme People’s Court, Guiding Cases, Judicial Interpretation, Shanghai Centaline Property v Tao DeHua, NPC
German influence is a recurring theme in the study of Chinese law. Contract law, Foreign Investment Law, IP Law, Company Law…and I do not doubt this pattern shall continue. The interesting question is: why? Entire papers are written on this subject. In an effort to oversimplify and be brief, I will focus on the Chinese Civil Code drafted in 1930.
First, a bit of history. During the late Qing Dynasty, Emperor Guang Xu mandated the formation of a special legislative committee: hand-picked legal experts to draft a brand new civil code for China. The sunset days of the Qing Dynasty were the days of the imperial invasion; after the Opium War in 1840, China was opened to the world by the West. The existing legal system of China was to be re-hauled and ‘modernized’, integrating foreign and domestic practices. In 1928, upon the founding of the National Government of the Republic of China, a legislative council charged with codifying a civil law was formed following Guang Xu’s model.
The civil code that was published in 1930 and still exists in Taiwan today is essentially a copy of the German BGB; cut and pasted from the civil codes of Continental Europe. Mei Zhongxie, a legal scholar from Taiwan, shows that 60-70 % of the provisions in the new civil code are imported from the German BGB, 20-30 % from the Swiss and the rest of the provisions lifted from the civil codes of France, Japan and the Soviet Union.
Why copy foreign codes? These codes were not suited to Chinese society; they spoke of inspiration rather than a deep insight into Chinese society. The result was a law disconnected from local customs, traditions and philosophy.
The legislative committee looked to the Continental-European system for three primary reasons. One, they saw Europe as the future of China, and so sought to adapt to what they believed the reality of Chinese society would be. China of 1920s was an agricultural society; the legislative committee wanted a legal system for the industrial and commercial society China would transform into. Two, foreign materials were clear while Chinese legal knowledge was scattered. The civil code would have to strike a balance between the effort to simplify the code (so that it could be promulgated in a wide way) with the effort to be thorough (the document still had to be comprehensive); a hurdle the European codes had already jumped. Third, the legislative committee had a deadline to meet.
Currently, the PRC is looking to reform the Chinese Civil Code. The professors at RenMin University all agree: this time around, the government should not cut corners. If the civil code is to be successful, it must be based on profound theoretical study and broad perspective, requiring practical civil adjudicative experience and a deep insight into actual Chinese society.
REFERENCES: “From an Integration of Western and Chinese Legal Norms to Comparative Legislation: Codification of the Civil Law of the Republic of China” Zhang Sheng (China Legal Science, Vol. 1, No. 2, May 2013).
KEYWORDS: Chinese Legal Culture, Qing Dynasty, Civil Code, BGB, Germany, Republic of China
