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Increased Penalties for Invoice Fraud

20 February 2011

In China, a simple receipt does not suffice to record a purchase in a company’s accounting books. Only official tax invoices (called fapiao in Chinese) are accepted, making fraud with these invoices a particular problem to (foreign) businesses operating in China.

In recent years, efforts to combat invoice fraud have been intensified, as exemplified by the Supreme People’s Court, the Supreme People’s Procuratorate and the Ministry of Public Security in the Notice on Severely Cracking Down on Invoice-related Violations and Crimes of 6 January 2010.

On 20 December 2010, the State Council approved the amendments to the Procedures of the People’s Republic of China for the Management of Invoices (“Procedures”), which will become effective on 1 February 2011 and are designed to regulate fake invoices and other invoice-related offences more strictly. Besides clarifying a number of invoice-related offences, the Procedures also impose more severe penalties on using fake invoices.

Expanded Scope for Invoice Fraud

The previous version of the Procedures, adopted in December 1993, was unable to adequately deal with various kinds of offences that have become increasingly common in recent years. Existing violations such as the issuing of invoices inconsistent with actual business operations have therefore been supplemented with a number of new violations, including prohibitions on:

  • issuing invoices on behalf of others
  • introducing others to companies that sell invoices;
  • where an invoice is known to be fraudulent or this should have been known, buying, issuing, keeping, carrying, sending or transporting that fraudulent invoice;
  • substituting other vouchers for invoices in the accounting books.

To assist companies and the public to avoid such violations, the competent tax authorities are to provide more convenient channels to check the authenticity of invoices. Also, information technology is given a central role in combating false invoicing.

The Invoice Rules simplify the procedures for purchasing invoices, and guide taxpayers to reject fake invoice and use invoices in a lawful way. The qualification examination procedure for purchasing invoices is cancelled: upon presentation of the Tax Registration Certificate, the ID card of the person in charge and the invoice stamp, the taxpayer should be issued an invoice book within 5 working days. Also, companies or individuals who need invoices temporarily can apply to the tax authority, which can also entrust third parties to issue invoices on their behalf.

Punishment Increased

One of the main purposes of the amended Procedures is to punish invoice fraud more severely. The maximum penalty for invoice fraud, which includes the forgery, unlawful amending or transfer of invoices, had been increased from CNY 50,000 to CNY 500,000. All illegal income will be confiscated without exception; and where the act constitutes a crime, criminal liability shall be imposed in accordance with the law. Secondly, the Procedures have added a number of clauses on legal liability:

  • Where a company or individual unlawfully issues an invoice on behalf of another party this also constitutes invoice fraud, punishable as per the above provisions;
  • Where a company or individual knows or should have known of fraudulent invoices, purchasing, issuing, keeping, carrying, sending or transporting fraudulent invoices, or has introduced others to third parties for the purchase of fraudulent invoice, they can be fined at CNY 10,000 to CNY 50,000, or between CNY 50,000 and CNY 500,000 if the circumstances are serious.

Finally, the competent tax authority has been given the right to publicize which units or individuals have violated the Procedures twice or in serious circumstances.

Comments & Suggestions

The Procedures increase the importance of handling tax issues in full compliance with the law. More than ever, companies should carefully regulate their internal procurement and payment practices, checking the serial number and barcode of doubtful invoices via the available online system, and pursuing the liability of in-charge employees that turn a blind eye to acts of invoice fraud.

Second, a company’s management should consider including relevant provisions into their employment handbooks. For example, where an employee for reimbursement purposes uses a fake invoice or other receipts without due reasons, this could be deemed as a serious violation of the company rules that allows the employer to terminate the employee’s labor contract immediately and without severance pay.

On the other hand, it remains to be seen how the amended Procedures will be enforced by local tax authorities. In our experience, the response will vary from region to region, moreover local tax authorities will have to consider their policies on a number of important issues that the Procedures leave open. Companies are advised to keep abreast of local rules and policies, and where appropriate to initiate a dialogue with their supervising tax authority not only to ensure compliance but also to learn how to minimize the risk and perhaps, even benefit from some of the new rules.