How China got businesses to pay taxes: scratch-n-win tickets
A decade ago China was losing about $158 million a year in tax revenues. World Bank figures show that China has steadily increased its tax revenues since 1994.
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Wan also published a study of the lottery receipt’s effect on tax revenues in Beijing and Tianjin from 1998 to 2003. He found that the real growth rates of sales taxes were 21.5 and 10.4 percent for the two cities, respectively, which was higher than in areas that had not used the lottery system. In February 2012, Wan completed a national study of the lottery system on provincial tax revenues in 1998, 2002, 2006, and 2010.Skip to next paragraph
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Wan says that the fapiao program significantly raised the revenues of sales tax, business income tax, and total tax revenues, though less so on value added tax and individual tax revenues.
World Bank figures show that China has steadily increased its tax revenues since 1994, which was 5.6 percent of GDP. The latest figure shows China’s tax revenue at 10.5 percent of GDP in 2009. That year the United States collected 8.5 percent.
Another aspect of the fapiao system that other countries seem to like is that it is not costly to implement. According to Mr. Wan, who cited official state statistics, the total amount of the prize paid out in 2002 was 30 million yuan (almost $5 million), while tax revenues brought in by the lottery receipts was 900 million yuan ($142 million).
The fapiao system is not foolproof: Workarounds, fake receipts, and selling unused receipts still happen.
One of the most common workarounds by small shop owners wanting to avoid paying taxes is by giving a customer a kickback for not collecting the fapiao: free drinks or discounts.
“If I don't want a fapiao I can save as much as 15 percent on digital cameras or televisions,” says Matt Stinson, an expat living in China. “Ask for the fapiao, however, and you pay the full price regulated by the city, which generally means 25 percent more than other markets.”
Fake receipts have also popped up on the black market. There they can be purchased to submit to their employer for work-related expense reimbursements such as travel and food. Some say companies even encourage this behavior so that they can declare higher expenses, and thus lower their on-record profits on which they have to pay taxes.
“These people are billing in their expenses using the fapiao that are deductible from their profits, which lowers their taxes,” says Cory Lam, a senior associate at the accounting firm Dezan Shira Associates. “It is not legal.”
Because nearly all fapiao now have forgery-proof mechanisms (heat sensitive areas and scratch-off passwords that can be verified online), it is more likely that businesses use authentic but unclaimed receipts that the customer didn’t want.
In fact, it is considered an open secret that authentic but unclaimed fapiao also get sold on the black market. Train stations and online forums are notorious for their fapiao sellers.
The scale of these illegal practices is difficult to calculate, but it is more common among small businesses, says Kevin Der Arslanian, a business analyst at China Market Research Group.
“Large multinationals or franchises consistently issue fapiao without being asked because of the risks in not doing so. It is less expensive to monitor large companies but very expensive to monitor small independent shops. So large companies are more careful.”
Most places that print fapiao also print the employer or company's name on the receipt, which might make them difficult to use by other companies and thus, less sellable on the black market later on.
Some former black market sellers say they no longer sell unused fapiao because increased and stricter audits and the ability to trace real fapiao back to its owner make it too risky.
When companies do get caught, the punishments can still be harsh.
Even though tax evasion is no longer punishable by death as of 2011, violators can receive jail sentences of up to seven years and fines up to five times the unpaid amount. Businesses can also lose their licenses, says Ms. Lam. The government particularly likes to target high profile individuals to set an example. Liu Xiaoxing, a famous Chinese actress and businesswoman, named to Forbes’ list of the world’s 50 richest in 1999, spent a year in prison for tax evasion in 2002 and was fined 7.1 million yuan ($1.11 million).