CHINA - VAT invoice compliance and management
China’s VAT reform has been years in the making and VAT invoice compliance and management has been a hot topic for a long time. To simplify the VAT invoice process, China’s tax bureau recently introduced many favourable policies, such as cancellation of the special VAT invoice verification process, use of tax classification coding for goods and services, and announcement of e-invoices.
But, at the same time, the tax bureau as happlied stricter supervision to both VAT general invoices and VAT special invoices. For example, on the face of all general invoices the taxpayer identification number (TIN) must be included, or the tax bureau will not consider the invoice valid supporting documentation for tax purposes. In addition, the frequency of tax audits for VAT invoice compliance has increased significantly. Taxpayers and their suppliers or customers are all being negatively affected when VAT invoice non-compliance arises during a tax audit.
Though it seems that simplification of the invoice procedure provides convenience for taxpayers, the tax bureau still holds a rather conservative attitude towards VAT invoices, especially when it comes to verifying the authenticity of invoice information. The VAT invoices must be consistent with the facts underlying the transaction, which means the sellers must only issue a VAT (general and special) invoice that contains the precise sales volume, total amount, and so on. And, such transactions must relate to an actual business.
If these requirements are not satisfied, there’s a risk that in a tax audit the tax bureau may disallow the VAT credit. In addition, for non-compliant VAT invoices they will levy a late payment surcharge and penalty. Even worse, management and related financial personnel may be held responsible and may be punished, including being charged with criminal offences in extreme situations when the tax bureau conclude the invoice is fake or if they deem the circumstance severe. If they determine VAT invoices are non-compliant (for example, they consider the invoices fake or issued for illegitimate reasons), the enterprise’s reputation and credit will be seriously affected, with negative consequences for the taxpayer and for key management. Given all this, it’s clearly quite important for taxpayers to have in place good invoice management and risk management.
Management should strengthen its focus on invoice compliance in its daily operation (for example, put in place good internal controls and monitor the issuance of VAT invoices and credit procedures). When preparing accounting documents, personnel should pay attention to the invoicing data (names, the description of goods or services and amounts, and so on).
Also, taxpayers should work with an experienced tax professional who can review their VAT invoice compliance on a random basis to reduce potential risks.
BDO in China is experienced in providing international and national tax services. We will follow the rapidly changing Chinese regulatory environment and keep clients posted on the changes.
For further information in relation to any of the above, please do not hesitate to contact us.