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China's Legacy Paper Tax Invoicing System, How it's Going Digital, and Why it's Important

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ECFO • 4 minutes read
September 5, 2023 

China's Legacy Paper Tax Invoicing System, How it’s Going Digital, and Why it’s Important - Blog from ECFO

In an effort to streamline business processes and improve the efficiency of tax management, China has launched its program to fully digitalize its tax invoicing system. This is known as “Fully Digitalized Electronic Invoices” (FDEI). This new system represents a significant departure from the previous invoice system, which consisted of the traditional paper tax invoice (fapiao) and the normal electronic invoice (e-fapiao). For those familiar with business in China, the old system required companies to apply for blank invoices from tax authorities, and in addition, required the use of special software and equipment to print transaction data on invoices. It is generally required that all fapiaos to be stored for 30 years.

The 2022 launch of phase 4 of the national VAT administration and monitoring system (Golden Tax System phase IV) was a critical step towards the goal of transforming China’s tax system from a “managing tax through invoice” to “managing tax through big data”. The FDEI rollout is a key tool to achieve this goal, and to help China’s broader plan to digitize its economy. 

The pilot program of the FDEIs was first launched in December of 2021 starting with 3 trial areas (Shanghai, Guangdong Province (excluding Shenzhen) and Inner Mongolia). As of today, qualified taxpayers from 16 regions/provinces are allowed to “issue” FDEIs, and in most recent cases some tax departments are now making the change mandatory only leaving 1-2 days to adjust to the change. The full implementation across the country is expected to be achieved by 2025. 

Timeline of the FDEI Pilot Program

What are the special features of FDEIs?

This initiative aims to make invoicing more convenient, faster, and less expensive. It allows businesses to issue, deliver, and validate fapiao through an all-in-one online platform that is accessible 24/7. The system is designed to be comprehensive, offering a range of formats that are customized for different types of industries, with simpler and cleaner layouts that allow for faster processing. In the future, it is expected for companies to also have more capabilities to issue fapiaos through mobile applications.

One of the key features of the new system is the simplified issuance process. Under the pilot program, businesses do not need to physically go to the tax bureau to apply for blank fapiaos with already assigned serial numbers. Instead, these can be issued through the online platform, with the invoice number of an FDEI automatically assigned by the system at the time of issue. The limit on the fapiao issuance is also much more straightforward, with only one single “maximum” amount on the total transaction volume within a calendar month, instead of two limits under the current system (amount per slip and amount in total), an archaic feature that created a lot of pain points in practice.

The new system offers businesses an opportunity to streamline processes for greater convenience, faster speed, and higher productivity. From issuance to verification to tracking and data access, companies on a multiple department level will be able to save time for other productive tasks. It also allows for real-time tracking, enabling businesses to mark the status of FDEIs, whether they have been posted to their accounts for bookkeeping purposes, or used by customers to support an input VAT credit. Most importantly, the online platform will have the potential to integrate with certain ERP systems, with data being automatically shared, and allowing room for further automation and efficiency for a company’s order management cycle. 

 

How does this impact businesses and how to be prepared?

The new system holds huge promise for businesses. Lower costs, greater convenience, faster speed, and greater control are among the many potential efficiencies. Benefits for finance departments are substantial: they will no longer need to purchase and reserve a workstation for the infamous “fapiao machine” and will see savings on paper slips, printing, courier fees, etc. They will also be able to store and access invoices more easily, without the need for physical copies that generate higher costs. Additionally, on-time reporting and record-keeping will be made easier with fewer steps and shorter lag times. Businesses will be able to reconcile fapiao issuance and other data sets more efficiently. The issuance should also be able to assist the sales process, with companies no longer needing to wait for clients to “request” the fapiao issuance beforehand, which to date has been a common practice with potential to increase friction in the sales process.

Apart from finance department efficiencies, companies can also benefit as a whole from the new system. The increase in productivity from the change can be maximized as long as management is able to appropriately restructure processes – there may be scope for automation or even elimination of specific inter-department review, approval and reporting processes. Controls can at once be tightened and be made less cumbersome. Furthermore, it is important to assess if the company’s current technological tools (ERP systems, cloud systems, CRM solutions, reimbursement APPs, portal tools, and others) are up to date and compatible with the new initiative in order to capture efficiencies from the change.

China’s shift to a digital invoicing system is an exciting development that will reward well-prepared companies with improved efficiency. As more businesses adopt the new system, it is expected to become the norm for doing business in China. Making the transition to the new digital system will affect standard procedures both within and across departments. Companies will need to ensure they engage knowledgeable leaders and experienced team members who have in-depth knowledge of the e-fapiao system to ensure a smooth transition.

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