China puts emphasis on e-invoicing and tax compliance

An important further step has now been made in relation to VAT, which is China’s most important tax in terms of revenue. Under the new rules, taxpayers must input invoice data into tax authority systems and obtain a unique code before an enterprise can issue a valid business-to-business (B2B) VAT invoice for which the counter-party can claim a VAT input credit; referred to as a ‘special’ VAT invoice.

In parallel, China has been a rapid adopter of e-invoicing, allowing companies to integrate their internal enterprise resource planning (ERP) systems with those of the tax authorities and automatically issue e-invoices to customers. However, to-date, e-invoicing was limited to so-called ‘general’ VAT invoices, which can be used to claim a corporate income tax (CIT) or individual income tax (IIT) deduction, but not a VAT input credit.

The new rules will allow for further reduction in usage of paper processes and physical contact with the tax authorities. Up to now, large and mid-sized businesses had special machines to print off the ‘special’ VAT invoices that had been pre-cleared with the tax authority system; these would then be couriered to customers. Smaller businesses would often, instead of acquiring these machines, dispatch staff to the tax authority office to pick up the ‘special’ VAT invoices. The need for such time-consuming, costly, and physical contact intensive activity is now removed with ‘special’ VAT e-invoices.

Businesses are now in the process of determining whether to use self-developed e-invoicing platforms for integration with tax authority systems and issuance of the ‘special’ VAT e-invoices or to use the increasing number of third-party e-invoicing platforms; for the great mass of businesses the latter is expected.