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Tax Evasion in China. The Trillion Yuan Heist

Tax Evasion in China. The Trillion Yuan Heist
"In any market, especially one as competitive the Chinese market, the % margin spent on tax makes an enormous difference to a company's bottom line, and therefore to their ability to grow and invest"

By Andy Clayton.


The Chinese market is not only famous for being “bigger that you can understand", but also "more competitive than you can imagine".



Competition in China is cut throat and can often seem rigged in favour of the local companies in China. Some advantages of Chinese companies, such as better customer understanding, or stronger abilities at cultivating relationships, are hard to learn quickly. But there is one area of 'advantage' that is not hard to throw open the door on: gaming the tax system in China. In any market, especially one as competitive the Chinese market, the % margin spent on tax makes an enormous difference to a company's bottom line, and therefore to their ability to grow, invest, attract investment, and ultimately enrich shareholders.  Local companies in China are past masters at the tricks used to gain a margin advantage over less flexible foreign competitors in China.



Here, we throw the door open on the world that many local Chinese companies operate in. In the heart of the system sits something that needs to be fully understood: Fapiao.



1. The Worlds most significant, yet least understood traded paper

Not many outside of China realise this, but there is a paper currency - a commodity - that forms a core part of transactions in an economy that still accounts for more than a third of global economic growth. It involves transaction of paper in exchange for payment; is actively traded on both grey and black markets; and by individuals and companies. They are called ‘fapiao'. They are printed VAT Invoices, though comparisons can be misleading, so we will simply call them what they are - fapiao.



2. What is a 'Fapiao'?

Every company in China, when registering with the Chinese Tax Bureau, must purchase a special printing machine. This machine connects to the Tax Bureau in China, and every time that a company receives a payment, they are supposed to print fapiao from this machine. This ensures that the Tax Bureau is aware of the full income of every company in China. 



3. Why do Fapiao's exist?

Fapiao are the Chinese Tax Bureau's main instrument of control over tax collection. In the UK and other Western markets, companies issue their own commercial invoices, then declare their books at the end of the year, on pain of a thorough audit. In China it happens the other way round - control at the point of transaction is tight, due to the physical issuance of the paper invoices ('fapiao'), whereas the year end audit is closer to a rubber stamping exercise. As long as company headline figures, particularly around profit and corporation tax, look acceptable, local Chinese companies are not held to much scrutiny on the details (although supervision at this stage of the process is gradually tightening up). 



The consequences of this system are multifarious, and it often leads to confusion amongst foreign companies in China as many Chinese counterparts get involved in the following practices:



  • 2 Prices: with Fapiao and without 

Particularly when dealing with smaller Chinese companies, there are often two prices available for the purchase of goods or services - one including fapiao, and a lower one without. To British ears this sounds suspicious, but given the constraints of the tax system in China then you can start to understand the logic behind this practice. 



In many cases, such as dealing with freelancers or small companies with limited fapiao, there may be no fapiao on offer at all, as only a company can be tax registered. This creates a significant headache. Not only does it reduce VAT that can be reclaimed on issuing sales fapiao, but it also increases the profitability of the company (because of the missing cost fapiao), leading to a ruinous corporation tax bill.  



  • Paying into Company Accounts and Personal Accounts

For companies that cannot or do not issue fapiao, the question then arises of how they receive money for the sale of goods or services in China. Fapiao are not the only point of control for the Chinese Tax Bureaus. The company's bank account is of course open to scrutiny, and all transactions therein are by default taken to be company revenue or cost transactions.



Many local companies in China therefore require alternative accounts to receive funds for which fapiao have not been issued. Personal accounts are commonly used for this purpose. General Managers of Foreign Companies in China are usually highly uncomfortable with this kind of arrangement, but in China it is still common to have to make payments to personal accounts.



  • Running 2 Sets of Books 

" the audited books are the sum total of sales fapiao issued, minus the total of all the cost fapiao they have been able to collect, regardless of provenance, and bear little relation to the true profitability of the company. " 

With multiple streams of income and cost, both 'on book' and 'off book', this makes company accounting irreconcilable. The only way these companies in China can square this circle is to run multiple sets of books - the 'real' management accounts, and the accounts presented for audit at year end. 



Managers of companies worldwide are familiar with the concept of 'getting the books ready for year-end', which typically involves tying up loose ends, confirming the nature of transactions, and allocating costs and income to the correct accounts. This requires a degree of skill wherever you are operating. However, nothing compares to the fiction that are the audited books of many Chinese companies.



Simply put, the audited books are the sum total of sales fapiao issued, minus the total of all the cost fapiao they have been able to collect, regardless of provenance, and bear little relation to the true profitability of the company. Hence, the rush to bring in fapiao for costs (and sometimes at any cost - see final point on fake fapiao below) 



  • Stretching the Directors Loan Book

There is a means of moving money between company and personal accounts, which is an important conduit in the structure outlined above, and that is the director's loan account.



If you check the balance sheet of any company in China, one oddity you may notice is wild swings in the Directors Loan account. This is because it is used as the means for getting money on and off the books. At any given time, many companies in China are either busy finding ways to repay loans to the Directors account, if they are able to obtain a surplus of cost fapiao; or paying money back in from the account, in the event that they have off-books income.



Many bosses of Chinese SMEs have a keen eye for this number, and will select deals in part based on whether it helps them with their Directors Loan balance issue.



  • Split Compensation Structures for Employees 

It is common practice amongst many Chinese SMEs to set up employee compensation structures as a mix of 'base' and 'reimbursement' pay. The purpose of this is to minimise the declared salary of the employee for both social security and income tax purposes. Ultimately, the cost to the company is reduced, thereby giving them a significant advantage, enabling them to undercut those who are fully compliant when quoting for a job. The argument to employees is that it increases their take home pay, which is compelling when there is often little value seen in payments to social security service.



This then puts the employee (or the Company, if they have agreed to cover it) in the position of having to 'procure' fapiao. Staff in China often obsessively hoard taxi bills, restaurant bills, even getting VAT invoices from the weekly shop, all to hand in as the 'cost' portion of their salary.



  • Applying for an Increase of Fapiao

The fapiao blank stock - the 'empties' to be printed on - have to be purchased from the local Chinese Tax Bureau. Incredibly, this requires a special application purchase, especially to increase the value of the fapiao allowed to be issued. This situation can lead to companies not being able to issue fapiao, therefore take payment, and therefore pay tax, because the Chinese Tax Bureau refuses to issue more stock!



So, Chinese finance managers up and down the country carefully manage their fapiao stock, and have to be fully aware of upcoming surges in income and prepare accordingly. 



  • Negotiating over Fapiao

" Few companies in China would make a payment until a fapiao (or at least scanned copy thereof) has been received"

The China business environment tends to have a lower level of trust than the UK, US or European economies. Actual exchange of payment for fapiao is a source of much negotiation and choreography. Few companies in China would make a payment until a fapiao (or at least scanned copy thereof) has been received. As Chinese VAT is paid monthly, and corporation tax in China quarterly, the cost of insufficient fapiao can quickly rack up.



Larger companies will often insist on painful payment terms, sometimes requiring several months after receipt of fapiao before making payment. This can be incredibly challenging for the supplier in China, as the income of the transaction is already declared to the Chinese Tax Bureau, regardless of whether funds have been received or not.



  • Chasing Fapiao

It is astonishing the time and effort bosses of Chinese companies have to put in to the chasing and acquisition of fapiao. Given the margins involved, these are often negotiations at the highest level. Many meetings and dinners between Chinese CEOs revolve around this topic. Many Chinese companies will have suppliers they regularly use as much because of the ability to issue extra fapiao, as because of their product or price.



This creates an elaborate supply chain of connections. Certain industries, such as restaurants, take large volumes of cash, and therefore can end up with surplus sales fapiao, and then may sit at the bottom of a complex fapiao food chain. 



  • Fake Fapiao

A level below this, there is a huge black market for the supply of fapiao. Many street corners in China are adorned with name cards for the vendors of fapiao. A large proportion of the spam SMSs received around China are for this purpose too. This is an area trodden with great caution. Many of these fapiao are issued by 'suitcase companies' set up hastily and shut down equally fast, existing briefly only for the purpose of maximum fapiao production. Fapiao are traceable, so when the suitcase company gets shut down, the Tax Bureau in China follows the trail to all the companies found using them, which leads to big trouble. 



In the past fake fapiao were used much more commonly, so the practice is still ingrained with many Chinese finance managers as acceptable. We have come across numerous foreign companies in China where, unbeknownst to them, their internal finance team were procuring fake fapiao, with initial un-benign consequences, which came back to haunt them later on. 



The distinction of 'fake' fapiao is quite blurred though. For example, paying an existing supplier a few extra % for surplus fapiao often happens, but would not be considered 'fake', even though that would not happen in the UK. These days, as a general rule, companies would generally only obtain fapiao from companies with whom they could prove some kind of trading relationship.



 4. Countless Shades of Grey 

A friend of ours, a local Chinese, recently completed a phd on the Chinese tax system. His comprehensive study attempted to catalogue the full range of taxes companies operating in China are bound to pay. His astonishing result showed that, if a Company operating in China were to pay all taxes legally due, these would total 112% of revenue. That's right, for every RMB 100 of sales a company makes, they technically owe The State RMB 112, (so why bother starting?).



In reality, only a proportion of these taxes are actually collected, but the fact is no-one in China is fully compliant. This explains a lot of the local practices described in this article. Like it or not, there are often only countless shades of grey.




Andy Clayton is CEO of LNP China. LNP China offer an easy and secure solution for companies from overseas to thrive when doing business in China by managing all back-office operations, which allows firms to operate and trade in China without having to go through the time, cost, and risk of setting up and running their own company. Since 2007, LNP China have supported over £25 million of exports for their clients in China.


Performing due diligence on Chinese...

Performing due diligence on Chinese Companies.

Irrespective of where you are in the world and who you are about to do business with, due diligence is essential to protect yourself. In China things can be a little more difficult due to language issues and access to information but not impossible. Here is our checklist of things to do based on 20 years of doing business here.

  1. Ask for a copy of the company’s business license, this provides the most basic of information relating to the company:  Official company name, date of formation, business scope and name of business owner.


  1. If possible, check with local State Administration for Industry and Commerce (SAIC) on the legitimacy of the business details you have been provided.


  1. Points to notice on the license would be: Is the business scope in keeping with the type of business you will be conducting? Is the registered capital in keeping with the business you will be conducting: typically a Consulting company might have just 100,000 rmb in registered capital, whilst with a manufacturing company you would expect a few million rmb.


  1. Who is the person you are talking with? Is he using a company email or a personal one. Whilst it is not uncommon for legitimate people to be using  personal emails such as or it should make you a little more cautious as to who they really are. Consider if you dealing with an official company representative or a middleman/broker? Does my contact have binding legal authority over the company?


  1. Take a look at the company website. Compare the information that is available on their English to their Chinese language site, and note any discrepancies you may find. See where the company is located, dose this match up with the registration address. If not it`s worth asking a few more questions.


  1. If your being asked to make a payment, is it to a Personal bank account with somebody`s name or to the official Company account with the company name? Whilst it is not unusual to use personal accounts in China to mitigate tax, ask to be given the company Bank details just as a further check on legitimacy. Further all Chinese companies should be able to provide you with a official Chinese Invoice issued by the Tax administration (not a Invoice printed on a company letterhead), if they say they are unable to it would be for one of 2 reasons: they are mitigating tax (in which case you may negotiate) or simply they are unable to since they are not tax registered.


  1. With a manufacturer do they have a quality control system in place? Do they have an international quality accreditation? If so, ask for a copy and check with the authorization organization. It is also worth checking the company against:

The International Suppliers Blacklist:

Trademark Office of the SAIC

State Intellectual Property Office


  1. Depending on the amount of money involved in your transaction:

Consider hiring a verification company to pay a visit to your Chinese supplier. Commonly 30% is usually acceptable as a retainer and the balance, 70%, with the B/L.  Also consider other ways to pay such as Letter of credit, to reduce the risk.


In the case of any dispute, a written procedure for Arbitration (either in China or elsewhere) instead of the Chinese Courts is always preferable: it will save you lots of money and time.


  1. Lastly consider the time spent at meetings and banquets as part of the process. You might think this is laborious, but the Chinese are using this time to establish whether you will make a suitable and trustworthy partner and whether they want to enter into a long-term business relationship with you. It is wise to be doing the same.


Whilst the realities of doing business with China can seem daunting they are not insurmountable. Do not presume anything, but do ask for information and proof. Again if your not comfortable with anything, ask and always use your instinct.

Top 10 Tips for learning Chinese

Top 10 Tips for learning Chinese


The following Article and PDF book are provided by SN Mandarin:  combining a Private school's flexibility & efficiency and University's Student Visa support & academic certification,is a highly recommended Chinese language school for you to learn Chinese. SN Mandaring also have a free E-book availabe for download here




By Jane Feng, chief teaching officer at SN Mandarin

‘It took you at least three years to learn your mother tongue so don’t expect to become proficient in Chinese in a few months’


1. Don’t be afraid of characters

Beginners, and even people who have lived in Shanghai for four or five years, are often reluctant to learn characters. Characters are important and they’re not that difficult if you learn them in the right way. They are not an obstacle to your learning they are a support that will help you to master Chinese. 


2. Use it or lose it

I teach my students to use the language, not to understand the language. At SN Mandarin we use real life teaching materials so students can communicate with local people very easily and have a sense of achievement, and so want to learn more.


3. Set goals

Students will get a sense of achievement if they set goals like – learn 300 characters in six months. And then they won’t realise it, but they’ll get to the point where they are the Chinese expert among their friends.


4. Get in the lab

In our school we have a language lab where you can read a sentence and the computer tells you if it’s correct or not, and plays it back to you along with the correct way to say it. It’s very important because students can memorise characters themselves, but they can’t learn pronunciation by themselves.


5. Be in China
A lot of the ex-pats are in Shanghai, but aren’t really in Shanghai, in China.  They’re life and working environment is all ex-pats. There’s not a lot of difference from their life in London or in Paris or in New York. The restaurants, the apartment, the office are all international - so it’s really had to be motivated to learn Chinese. Even if they think they want to learn. They need to use the language in a real Chinese environment and realise that with Chinese life in Shanghai will be much more convenient.


6. Be patient

It took you at least three years to learn your mother tongue so don’t expect to become proficient in Chinese in a few months of lessons. It takes about 40 hours to learn basic street level Chinese and it takes one year to master it if you study two hours a day.


7. Drop in on Chinese corner

At our school we have a Chinese language corner every day, Monday to Friday, for an hour and a half. We chose a topic to discuss and a teacher is always there. Usually 10 or 20 students come. It’s good for listening to hear students from other countries speak Chinese. 


8. Read the classics

Even for beginners I would recommend reading. There’s a series called Han Yu Feng that is only 15RMB/book with a CD from bookshops on Fuzhou Lu. As soon as students know 300 words they can read the red covers and when they know 500 words then can read the green covers. For intermediates there’s a good series called Book Worms that is actually for Chinese students to learn English. They are more than 40 classic novels re-written in simple English with the Chinese translation on the next page.


9. Go internet shopping

Using Chinese characters to search online is a great way to learn. I encourage my students to buy things on Taobao because they have to communicate with the shop boss in Chinese and they can buy stuff at a very good price! 


10. Make friends with your Chinese teacher

Chinese teachers are very happy to be friends with their students. And the best teachers get to know their students’ personalities so that they know the way they learn. You have to know Chinese people to know Chinese life and language.


Last but not least


Don’t watch TV
Some teachers will say watch the CCTV news but at the very beginning meaningless listening is not very useful. It’s much better to listen to simple sentences from your class on your CD.  It may be a little bit boring but it’s really useful for improving your listening. Especially if you follow the pin yin. It helps with pronouciation, listening and writing - so one stone three birds. For intermediate students watching movies in Chinese (no subtitles), listening to songs and watching TV can be helpful.



Tips for doing business in China

Tips for doing business in China


  • Firstly, consider what your company’s objectives are in China and carefully research your target market before developing a formal business plan. Discuss your strategy with a local representative who understands the market and economic conditions.
  • Consider the unique selling points of your product or service and whether there is actually a market for that product or service in China. If there is, you need to ensure you can be competitive in China and, more importantly, whether you have the time, resources and stamina to handle the demands of communications, frequent travel, product delivery and after-sales service.
  • All foreign investments need to be registered with the appropriate local and state authorities, which can be time-consuming and bureaucratic. Exporters will also need to deal with Chinese tax, accountancy and employment law, and China’s transport infrastructure and commercial legal system.
  • Understand the basic Chinese regulations which govern your industry or investment in China. Companies are often constrained in how flexible they can be due to the regulatory environment.
  • It is recommended that you have a website including product description, indicative FOB price, and unique selling points for your product or service.
  • It may be helpful to talk to other Australians with business experience in China, for example, Australia China Business Council members in Australia; China Australia Chamber of Commerce members in China and Austrade’s network of export advisers in both Australia and China.
  • The Internet can be an invaluable tool when it comes to researching country and market information before you even begin to formulate your strategy.


Market entry strategy:

  • When determining your market entry strategy, consider recent market trends and keep in mind your long-term and short-term requirements for infrastructure, labour and your customer base. Remember China is changing at a rapid pace and it is essential your research and market information is up-to-date.
  • Don’t automatically assume Beijing or Shanghai should be your target markets. Many other regions of China are substantial markets in themselves and competition can be less intense. It is therefore advisable to treat China as a global region in its own right and focus your initial market entry approach on a particular region or city.
  • It may be highly beneficial to employ an agent or distributor with marketing skills who has excellent knowledge of local market conditions and preferably speaks English. A good agent can greatly reduce set-up costs and time taken to enter the market. As well as having someone on the ground to look after your interests, you will have access to good local knowledge and contacts.
  • It may be highly beneficial to have your own well-briefed interpreter available to assist with discussions, formal presentations and explanation of technical issues.
  • Potential Chinese business partners are often more interested in the cost-effectiveness of the product rather than the product itself, so it’s important to be able to demonstrate how the product can save money.
  • Choose the right partners. In-market contacts are often more important than product and price.



  • Always seek good quality independent legal, tax, and professional advice before signing anything that could have implications for your company. If you are setting up in China, it is important to get the business and tax structure right from the start.
  • Use a qualified legal firm with a presence in China to review all contracts. Failure to gain full information about a potential partner’s credit and professional background could lead to serious problems further down the road.
  • If you are concerned that your product is in danger of being copied, seek legal advice on how best to protect your intellectual property (IP).
  • Halve your expectations, and double your time and budget. Chinese business people prefer to establish a strong relationship before closing a deal.
  • Be prepared for tough negotiations and to deal with grey issues. Be firm, polite, and creative, but be prepared to say no.



  • Building up good business relationships and trust is very important in China, so expect to spend a lot of time at meetings and banquets with your potential business partners.
  • Business meetings always start promptly, so it’s important to arrive early for the standard formal introductions. It is usual to be introduced to the most senior person at the meeting first, followed by the others in descending order of seniority.
  • A handshake is the standard way to greet men and women, whatever their age or seniority. Note that the Chinese respect their elders, so an extra show of courtesy in the presence of an older person will reflect well on you.
  • Business cards (ming pian) are essential in China, and it’s a good idea to have your card translated into Chinese on the reverse side. Present your card with both hands with the Chinese side face up. It’s a sign a respect to spend a few moments examining the business cards you receive rather than putting them away immediately.
  • When meeting potential business partners, it is helpful to know some Mandarin. Simple phrases such as ‘Ni hao’ (hello) ‘Zao shang hao (good morning) and Xia wu hao (good afternoon) can go a long way. Note that surnames are placed first, eg. Mr Yao Ming should therefore be addressed as ‘Mr Yao’.
  • A great deal of business in China is conducted over dinner, where very senior people may attend who were not at previous negotiations, but are key to the approval of a business deal. However, business dinners or lunches can also indicate a general warming of a relationship, and in this case, their role should not be over-stated.
  • Never begin eating or drinking until you host does. It is polite to try all dishes that are offered to you, but you can discreetly leave anything you don’t like at the edge of your plate. Don’t place your chopsticks pointing into the bowl – always place them horizontally on the hold provided.
  • Dinner speeches and frequent toasts are standard, with locally produced wines or ‘bai jiu’ spirit the usual drinks for toasts. It is customary for toasts to be made by both sides during the meal.
  • The Chinese generally like to give small and inexpensive gifts. It’s a good idea to bring small gifts with an Australian theme for your hosts and wrap them in colours such as red, yellow or gold, which are regarded as lucky in China. It is not customary for your hosts to open the gifts in front of you, unless you encourage them to do so.
  • Chinese negotiators are shrewd and know that foreigners will be reluctant to travel home from China empty-handed. They are willing to stretch out discussions, which can wear their foreign counterparts down. Be sure that your interpretations of any business deal are consistent with theirs and that everyone understands their duties and obligations.
  • Expect to encounter delays or frustration during your business dealings in China, but it’s important to remain patient and polite. The Chinese don’t like to ‘lose face’ so losing your temper or showing frustration will only set you back.
  • If you are beckoning to someone, motion towards you using your hand and palm pointed downwards – never palm up. Furthermore, don’t use your index finger or point when speaking.
  • Try to speak with your counterparts in short, simple, and jargon-free sentences.
  • Be aware that business in China slows down during the Chinese New Year – usually from late January to early February, and for periods such as National Day (1 October) and May Day (1 May). It’s best to avoid arranging meetings during these times.


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