China has been on the verge of blockchain adoption as of late. The technology, in fact, has become part of the country’s national, president-signed program. The latest advancement in the field relates to the country’s old corruption staple — fake invoices used to embezzle corporate and state funds.
Tax authorities of the city of Shenzhen and a state-owned aerospace firm have recently turned to blockchain for immutable and transparent record-keeping, steadily putting an end to paperback corruption.
China’s complex ‘fapiao’ invoice system
To understand the nature of the latest blockchain solutions for China’s invoicing system, its general context should be explained first. Essentially, it revolves around the concept of the so-called ‘fapiaos’ (the Chinese word for an official invoice), which is a legal receipt that serves as proof of purchase for goods and services.
Fapiaos are issued by the Chinese Tax Bureau — but provided by the seller — for any goods or services purchased within the country. The Chinese government uses these invoices to track tax payments and forestall tax evasion. Individuals need fapiaos to reclaim business expenses, while companies are obliged to record their transactions on a fapiao — failing to do so violates the law.
However, the fapiao system, which was established back in the 1980s, is largely corrupt. As a New York Times article suggests, those tax invoices are openly sold on the streets, which are either original ones that weren’t claimed in the first place or high-quality replicas. Buyers use them to evade taxes and cheat employers: Essentially, a Chinese individual can obtain any kind of fake receipt — from travel receipts to value-added tax (VAT) receipts. Finding them does not necessarily require having deep connections to the black market, as promotions for counterfeit fapiaos are sent via text messages or even advertised on Taobao.com, where sellers offer special discounts and same-day delivery of those documents, as NYT article reveals.
Even the state-run agencies are involved in the grand scheme. In 2010, for instance, the National Audit Office claimed that it detected central government departments embezzling as much as $21 million through the use of fake invoices. Wang Yuhua, an assistant professor of political science at the University of Pennsylvania and the author of a study on corruption in China, told New York Times:
“Their salaries are relatively low. So they supplement a lot of it with reimbursements. This is hard to monitor.”
Tax evasion is a serious crime in China — sometimes punishable by death — but that doesn’t seem to hinder the counterfeit fapiao industry. Although state authorities boast impressive statistics on the matter (in 2009 alone, they reported detaining 5,134 people and closing 1,045 fake receipt production sites), the system is alive, and fapiaos are sold even in hotel gift shops. However, there is a technology that might finally tackle the system with some effect.
Blockchain versus corruption: Tax authorities and Tencent’s collaboration
While Bitcoin and other cryptocurrencies are often blamed for cultivating corruption — this remains to be one of the most commonly used arguments for conservative politicians and businessmen who are skeptical about the prospects of crypto — its underlying technology represents an efficient tool for fighting it. Blockchain, being an immutable, decentralized and encrypted ledger, can provide a clear record of any transaction that took place on it, any time of the day, thereby solving the problems of over-reporting, false-reporting and other true-false inconsistencies in the process of invoice circulation.
Hence, the prospect of applying blockchain to fight the fapioas might seem especially attractive for Chinese authorities. It became possible after the Shenzhen National Taxation Bureau teamed up with local internet titan Tencent — the developer of the one billion-user social media app WeChat — to fight tax evasion back in May. In the vein of their collaboration, they formed an “Intelligent Tax” innovation lab that aims to promote a technological approach to the field of tax, including the use cloud computing, artificial intelligence, blockchain and Big Data, the press release argued.
The release also explicitly outlined the first aim of the collaboration, as Li Wei, deputy director of the Shenzhen Municipal Bureau of State Taxation, claimed that Tencent’s success in the application of blockchain for invoicing would help to fight the issue of fake fapioas and “improve the invoice supervision process.”
First results: “A frictionless link between consumer scenarios and tax services”
On Aug. 10, local news platform EEO reported that China’s first digital invoice on the blockchain was issued in the city of Shenzhen, where the aforementioned collaboration was announced.
Thus, Tencent has created a pilot blockchain ecosystem for invoices designed for comprehensive use by consumers, merchants and tax authorities, according to local publication. The debut invoice was issued by a local restaurant, while several other Shenzhen businesses have already been granted access to the system, including a parking lot, auto repair shop and cafe.
Cai Yunge, the general manager of blockchain at Tencent, was quoted by EEO as saying that the new system achieves “a frictionless link between consumer scenarios and tax services.” Consumer payments are facilitated through Tencent’s WeChat, and an invoice suitable for further inspection and management by tax authorities is reportedly generated in “one click.”
Conversely, processing a traditional invoice takes multiple steps and requires a lot of time: When a consumer completes a transaction, they must wait for the merchant to generate the invoice, file it away safely, complete a returns form in the Finance Department, wait for the documents to be processed and then finally receive their returns.
As EEO explains, a blockchain-backed e-invoice only requires the customer to perform one click on the WeChat app during the checkout. After that, they just have to wait and track their reimbursement status in real time via the app. The process leaves no room for forging or over-reporting. Moreover, the technology also has the advantage of improving data privacy through encryption and of providing an overall cost-effective streamlining of processes, as multiple reviewing parties have been excluded from the process.
More blocks on the chain: State-owned aerospace firm joins the new scheme
The next player to adapt blockchain for fighting invoices-induced corruption is the state-owned China Aerospace Science and Industry Corporation Ltd.
According to an article in the official state newspaper, People’s Daily, that was republished by the State Administration of Science, Technology and Industry for National Defence, blockchain will help innovate the supervision of invoices for tax purposes nationwide.
As the article suggests, electronic invoices are on the rise in China: In 2017, there were around 1.31 billion electronic invoices in circulation, and by 2022, the number is expected to hit 54.55 billion, as the projected average annual growth rate constitutes over 100 percent.
China Aerospace, in turn, uses electronic invoice services that are end-to-end, covering issuance, delivery, filing, inspection and reimbursement for the country’s taxpayers and authorities. It has already issued some 2.5 billion invoices to date, as per the People’s Daily article.
However, such an e-invoice system, like the traditional one, is not safe from over-reporting, false-reporting and traceability issues. Hence, China Aerospace has now created a blockchain system to allow for authenticated and “credible” invoice issuance, traceable circulation, and efficient and cost-effective oversight by tax authorities — just like in Shenzhen.
China Aerospace’s representatives are confident about fighting the fapiao corruption at its root with blockchain technology. As a company representative told People’s Daily, the technology will finally resolve the industry’s “pain points.”
JD.com Rolls Out Blockchain Platform With Its First App
Chinese e-commerce giant JD.com has launched a blockchain-as-a-service platform alongside its first app – one that digitally tracks corporate invoices for one of the largest publicly traded insurers in China.
According to a release on Friday, JD.com said the application moves invoice data for Pacific Insurance onto a distributed network at each step of the issuance cycle, automating the process and making it visible to all participants.
Invoices, or more commonly known as “Fapiao” in China, play an important role among businesses in the country both as a reference for bookkeeping and for taxation purposes.
The goal of the app, as explained by the e-commerce giant, is to boost issuance efficiency and to streamline the accounting process by keeping the invoice data updated on a distributed ledger.
The application comes as the first use case for JD.com’s Blockchain Open Platform which was also announced today.
The blockchain-as-a-service product – rolled out months after the firm announced its plan for the project in April – is designed to aid enterprises wanting to develop their own blockchain applications, including those for tracking supply chain information, charity donations, certificate authentication and property assessment.
JD.com has previously announced several blockchain trial programs within its own business divisions.
In March, the firm partnered with an Australian beef producer to track the supply chain information of beef import on its platform using blockchain technology. CoinDesk also reported in June that JD’s financial services arm planned to issue its asset-backed securities on a blockchain in partnership with a local bank and brokerage firm.
Coin of Realm in China Graft: Phony Receipts
SHANGHAI — To begin to comprehend China’s vast underground economy, one need only visit this city’s major transportation depots and watch as peddlers openly hawk fake receipts.
“Receipts! Receipts!” calls out a woman in her 30s to passers-by as her two children play near the city’s south train station. “We sell all types of receipts.”
Buyers use them to evade taxes and defraud employers. And in a country rife with corruption, they are the grease for schemes to bribe officials and business partners. Making them and using them is illegal in China. Some people have been executed for the crime. But demand is so strong that a surprising amount of deal-making takes place out in public.
It is so pervasive that auditors at multinational corporations are also being duped. The British pharmaceutical company GlaxoSmithKline is still trying to figure out how four senior executives at its China operation were able to submit fake receipts to embezzle millions of dollars over the last six years. Police officials say that some of the cash was used to create a slush fund to bribe doctors, hospitals and government officials.
Signs posted throughout this city advertise all kinds of fake receipts: travel receipts, lease receipts, waste material receipts and value-added tax receipts. Promotions for counterfeit “fapiao” (the Chinese word for an official invoice) are sent by fax and through mobile phone text messages. On China’s popular e-commerce Web site, Taobao.com, sellers even promise special discounts and same-day delivery of forged receipts.
“We charge by percentage if you are looking for invoices written for a large amount of money,” said one seller in an interview, quoting 2 percent of the face value of the receipt as his fee. Another seller boasted, “I once printed invoices totaling $16 million for a construction project!”
Detecting fake or doctored receipts is a challenge for tax collectors, small businesses and China’s state-run enterprises. While there are no reliable estimates of how much money is involved in the trade, as China’s economy has mushroomed and grown more sophisticated, so has the ability to falsify receipts.
With considerable tax revenue at stake, the Chinese government has announced periodic crackdowns. In 2009, the authorities said they detained 5,134 people and closed 1,045 fake invoice production sites. A year later, they said they “smashed” 1,593 criminal gangs and raided 74,833 enterprises that had filed false invoices with the government.
In one of the biggest cases this year, a businessman in Zhejiang province was jailed for helping 315 companies evade millions of dollars in taxes by issuing fake invoices, a crime sometimes punishable by death.
That could be the fate of Liu Baolu, a government official from northwest China’s Gansu province. In February, he was sentenced to death with a two-year reprieve for using fake receipts to embezzle millions of dollars.
As harsh as the crackdowns sound, experts say they are often ineffective. One reason, analysts say, is that even government officials take part in black market activity. In 2010, for instance, the National Audit Office said it caught central government departments embezzling $21 million with fake invoices.
And state employees, whether they work for government agencies or state-owned enterprises, seem as eager as anyone else to bolster their compensation by filing fake invoices.
“Their salaries are relatively low,” said Wang Yuhua, an assistant professor of political science at the University of Pennsylvania and the author of a study on bribery and corruption in China. “So they supplement a lot of it with reimbursements. This is hard to monitor.”
China’s fapiao system took root in the late 1980s and early 1990s, when the government began requiring companies to use official receipts issued by the tax authorities for every business transaction. The receipts usually come with a number and government seal.
But the tax receipt system was quickly exploited. Gangs began producing high-quality imitations of the official invoices using specially designed printers with markings that bore a striking likeness to red government seals.
And at many companies, rogue employees started colluding with advertising, consulting and travel agencies to forge or falsify receipts for the purpose of embezzling corporate funds.
So widespread is receipt fraud that clerks at many hotel gift shops agree to falsify receipts so they show up as room charges. And at least one mutual fund company in Shanghai asks its employees to turn in fake receipts every month to claim half their salary — an accounting fraud that reduces tax liability for the company and the employee.
In the Glaxo case, Chinese investigators say the drugmaker’s top Chinese executives worked closely in recent years with a Shanghai travel agency to falsify documents. For instance, airline ticket receipts were filed for trips that never took place and when executives listed 100 guests at a conference, perhaps only 80 showed up, making it possible to file false inflated receipts and thus embezzle from Glaxo’s London headquarters.
Six other global drug companies, including Merck, Novartis and Roche, acknowledge that they used the same travel agency in the last three years, though none of those companies said their executives did anything improper.
Travel agency schemes in China are not new. A few years ago, the Securities and Exchange Commission filed complaints against several other big companies for doing essentially the same thing in China.
In one complaint, the S.E.C. said that from as early as 2004 to the beginning of 2009, I.B.M.’s employees in China created “slush funds” with its travel agencies and business partners, partly to “provide cash payments and imported gifts, such as cameras and laptop computers to Chinese government officials.”
In a separate complaint, the S.E.C. said that between 2005 and 2010, Wyeth, a division of the drug company Pfizer, had “submitted false or inflated invoices for organizing large-scale consumer education events.”
In a 2013 report, “Doing Business and Investing in China,” the consulting firm PricewaterhouseCoopers said the “use of fake fapiao and supporting documentation is the most common mechanism to extract cash from firms, either as fraud to enrich employees or as a means to fund bribes.”
“Some private travel agencies in China are small mom-and-pop companies that go under the radar,” said Susan Munro, a lawyer in Beijing for Steptoe & Johnson.
Despite its ubiquity, it is remarkably hard to catch. Analysts say the cost of monitoring is high and would involve the tedious work of verifying millions of receipts by calling hotels, airlines and office supply stores and scrutinizing countless transactions for signs of fraud.
Another challenge is that many of the receipts sold are official receipts that, for example, no one claimed from a hotel. The unused receipts are then resold to dealers and enter the black market.
It happens here in Shanghai, where companies that advertise by fax that they sell receipts also offer, with some specificity, to buy unused receipts.
“Due to our diverse accounting service for other companies, we now need invoices from various industries (13% or 17% VAT),” one ad sent out last week by the Shanghai Fangyuan Accounting Agency reads, referring to the value-added tax receipts. “If your company has leftovers of 13% or 17% VAT invoices, we can offer good rates to buy them.”
WeChat’s Fapiao Helper’: A User’s Guide for this Helpful App
By China Briefing
Editor: Jake Liddle
From July 1, 2017, the State Administration of Taxation (SAT) has mandated that corporate tax identification numbers will be required in addition to company name in order to issue general fapiao or special VAT fapiao.
In reaction to the new requirements for fapiao issuance, WeChat has launched a new function that allows users to input relevant corporate tax information, and present it to service providers to issue fapiao.
Tammy Tian, Corporate Accounting Services Manager at Dezan Shira & Associate’s Beijing office says: “We advise all of our clients to familiarize themselves with this mini app, it’s a great way to save time when asking for a fapiao.”
WeChat’s new function, titled ‘My Receipt Payee Title’, can be found under the ‘Me’→‘My profile’ section of the instant messaging app, where corporate tax information can be input and stored for future use.
The following fields are required to be filled out:
- Company name*;
- Tax identification code;
- Company address*;
- Mobile phone number;
- Registered bank branch*;
- Bank account number.
* Please note these fields must be provided in Chinese.
Once the relevant information is filled out, a QR code is generated and included on a ‘card’, which can be scanned by service providers to quickly and efficiently issue a fapiao with the correct information.
What’s more, once completed, the tax information ‘card’ can be shared with colleagues and saved into their personal information section for further use. This can be done by going to the ‘Discover’ section of WeChat, entering the ‘Mini Programs’ manager, and selecting the ‘Fapiao Helper’ (‘发票小助手’) program. Inside, the tax information is listed, and in the top right hand corner, from the drop down menu, the information can be forwarded to individual WeChat contacts or groups.
The WeChat’s Fapiao Helper function makes for a quicker and more effective transaction when requesting a fapiao, removing human error arising from manual input of tax information, which leads to invalid fapiao.
“Tax and accounting teams should consider sharing this app with their colleagues; it will remove some of the guesswork from the new fapiao requirements.” Tian added.
This article was first published on China Briefing.
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