Full digitization and the management of electronic invoices has long been the goal of most nations and their taxation departments. Keeping a digital stranglehold on taxation is becoming the endgame for countries like China and a host of Western nations. It was recently announced by tax authorities in China that a pilot program for fully-digitalized electronic invoices (FDEIs), known as Fapiao would be taking place in selected areas from 1 December 2021. This news came out of Shanghai, Inner Mongolia, and Guangdong and it could have massive implications on the future of the Chinese taxation sector.
The State Taxation Administration has designed a nationwide online taxation platform that synchronizes the issuing and delivery of FDEIs for free, while also validating them simultaneously. It’s completely different from other pilot taxpayer programs for dealing with electronic invoices and aims to finally cut out the arduous amount of physical paperwork that was used in the previous system. This new pilot aims to initiate the “full digitalization” of electronic invoices that will have major knock-on ramifications to the future of the Chinese taxation system and its daily operations.
Understanding Electronic Invoices
We should never underplay the vital role of recording official documents and transaction details. It’s one of the most important things in the commercial world and is essential in the collection of indirect taxes. China already has a domestic computerized system that tracks and monitors the use and issuing of invoices that cover nationwide transactions. This has been in place since value-added tax (VAT) was introduced back in 1994. The system would issue paper invoices from a template of invoices.
In the current system, a business has to apply to the tax authorities to get blank tax templates that has assigned invoice numbers. The blank columns are filled in with the prerequisite data from the business. Businesses then need to use special devices and software that print out the transaction details on the invoice, and only then can they be processed and issued. The new system is an attempt to modernize these processes for easy tracking.
Understanding FDEIs New Features
What is the new invoice layout?
Electronic invoices in the previous pilot programs were only available in OFD or PDF form. These are, and are still, the standard format that was designed by the Chinese tax authorities.
But the new FDEI can be in the form of electronic and digital data and it does not need to be converted into a PDF for example. It’s up to businesses if they want to print out the FDEIs in physical form, but the documents being recorded in an FDEI are now required in the new system. There are specific self-customization FDEI options for businesses, but the old OFD format is expected to be phased out soon.
The Issuing of Invoices
With many other pilot systems, the issuing of invoices with special software and printers was still in place. Even with pilots that used electronic invoices, the taxpayer still needed some kind of USB security key to issue an electronic invoice. But with the new FDEI pilot system, there’s no need for those devices and software. You can simply issue an FDEI via the online platform. In the future, it is expected that a business will be able to issue an FDEI with some kind of mobile app. This new pilot system completely eliminates the need for physical invoices.
The new FDEI pilot scheme means that the ceiling on the transaction price for an invoice or a few invoices that businesses can issue in a month will be replaced by a ceiling that is based on transaction amounts in the FDEis that are issued in a month by businesses. This ceiling will then be analyzed by a computer that creates the new pre-set rules according to the business in question and its own tax compliance rating score and the company’s industry status.
Businesses will not need to obtain blank invoice copies with invoice numbers anymore under the new FDEI pilot program. The invoice will now get an FDEI number that will then be assigned automatically via the system anytime an FDEI is created.
The Process of Delivering Invoices
The PDF and ODF electronic invoice formats used by other pilot programs were routinely delivered via SMS. But with the new FDEI system, it can now be sent through a special ‘tax digital accounts’ feature on the platform. When an FDEI is issued, it will then be sent automatically to the recipient of the ‘tax digital account’. It can then be read or even downloaded from the account in its authentic form.
Tracking the Status
Pilot taxpayers will get FDEIs when they purchase something. And the platform will mark them as such to keep a check on the current status of the invoice. This status tracking feature knows if the FDEI has been posted in the accounts when it comes to bookkeeping. If you are a pilot taxpayer who needs the FDEI issued for sales purposes, it will track the status via the platform and it can determine whether it was used by the recipient to support a VAT tax input credit.
What are Red-Letter Invoices? When and How Are They Issued?
If you need to reverse a sale where the invoice was already created and issued, you will now need an invoice that shows the negative sales number, which is called a ‘red-letter invoice’. One of these will have to be issued in this situation. It’s much easier to now issue a red-letter invoice with the new and streamlined FDEI pilot when compared to some other previous pilot programs.
In the event that an FDEI is not already marked as being posted in the accounts of the recipient for bookkeeping or to support a refund or credit of VAT, the sellers (usually the businesses that created the FDEI) can issue an immediate red-letter invoice with the new pilot program. This will reverse the initial sale without the need to complete additional paperwork that is needed in other pilots.
If a posted FDEI has already been made to the recipient’s account for bookkeeping or to support a refund or credit of VAT, the sellers or even the recipient can then start a process to create and issue a red-letter invoice/FDEI. Although this is subject to confirmation by a counterparty, a form will be created for the sellers to make and issue a red-letter invoice as and when needed. With the other pilot programs, it’s only the recipient that can start this process.
Other Issues to Remember
Tax authorities are looking to bring in ‘full digitalization’ with the introduction of this new FDEI pilot program. It will track the entire cycle of an invoice to list all the transactions with these new digital technologies. This is all for taxation administration reasons but it will also allow businesses to optimize and improve their current system using this exciting new tech. Invoice management will suddenly become cohesive and improve overall business solutions. Although the initial new FDEI pilot program will be trialed in some areas, it is expected to be rolled out nationwide at some point in the not-too-distant future. The trial will iron out any operational creases and give more guidance as and when it’s rolled out domestically. It is recommended that all businesses keep an eye on the pilot program and monitor it closely even if you are currently not using it.
How This Streamline Process Can work for you?
The main aim of the FDEI pilot program is to streamline the system and to eliminate anything that bogs down the performance. We’ve already mentioned that physically printed invoices will be a thing of the past and you won’t have to apply for blank invoice copes and numbers anymore. All special devices and printers will become obsolete and not needed. It will aid more flexibility in the system while working to centralize invoicing functions and eliminate locational restrictions.
All the arduous and cumbersome hassle of the previous system will be removed. No more reporting sales first and then delaying the invoice until a client requests one. Convenience is the key to the new FDEI program. And if this affects your business directly, it might be safe to consider changing your process soon by issuing FDEIs right away when the sale is made. It will save lots of time and work.
Can I Self-Customize Invoice Features for my Business?
Yes, you can. If your business prefers to use more info on your invoice, you will be able to free up limited invoice space with the ‘remarks’ section. The FDEI program aims to improve your operations by allowing numerous self-customized elements on the FDEI. You will be able to add elements that fit your business model such as using extra codes of contract, delivery notes, additional stock numbers, or other details that suit you. It might be safe to plan ahead in this regard.
Developing a System to Archive FDEIs
Any business owner or bookkeeper will inform you that invoices need to be archived by the business for up to 30 years. That would be a lot of paper. Introducing electronic invoices and forms make it easier to store and archive them without taking up any space. In 2020, the Ministry of Finance stated that qualified enterprises need to archive and maintain their records in electronic forms only. This is called ‘e-archiving’. However, at the time of writing, the rules on e-archiving have not been discussed. It’s not been decided whether they should be archived in PDFs or other formats at this time. But it is recommended that businesses should already be thinking about solutions that automate FDEI archiving.
As the FDEI pilot program is only being tested across a few regions in China, nothing is yet set in stone, so close monitoring of the situation is advised at the current time. No doubt that more official announcements will be made by the State Taxation Administration in the coming weeks and months with any updates and confirmations going forward.