Tax Liquidation by Foreign Invested Enterprises
– Handling Missing Fapiao



 Kate (Rong) Hu; Huachao (Jack) Gao


By way of brief background, fapiao is an official receipt of tax payment given to tax payers in China. Each fapiao has a unique serial number and therefore is traceable by tax authorities. When a PRC company, including an FIE, issues a fapiao from its tax machine, a record is entered for the transaction in the machine, which tax authorities can retrieve records from to audit at a later point. Tax liquidation is often the most complex and time-consuming stage in dissolution by foreign invested enterprises ("FIEs"), and resolving the issue of missing fapiao is one of the frequently-encountered problems during the process.


As a result, the instance of missing fapiao is apparent during the tax liquidation process when the tax authority thoroughly audits entries recorded by the machine. The transactions underlying the issued fapiao are subject to taxes. So if a company is unable to account for each fapiao, there are grounds for the tax authority to suspect and presume that the missing fapiao is evidence of tax evasion by the company. In such cases,  the company may raise the defense that the concerned fapiao is lost due to mistake rather than tampering However, the tax authority may still within its enforcement power require the company to make up for the presumed tax payments connected to the missing fapiao in an amount based on the number of missing fapiao.  


To reduce the likelihood of the punishment mentioned above, we first advise a company that has lost fapiao to report the loss to the tax authority at the time when the loss took place during the course of its normal business rather than leaving the issue to be identified in the liquidation process.   


However, if the problem is left unreported during the course of normal business, then the company should prepare and submit proactively a statement to the tax authority reporting the loss with supporting facts, materials and documents that can support a defense. Self-reporting by the business undergoing dissolution is encouraged to avoid the tax authority first discovering a missing fapiao issue, which will undoubtedly increase the suspicion of the authority. 


Note that even if the tax authority is satisfied by a valid defense, there are still formalities for the company to go through before conclusion of the matter by the tax authority including making an announcement in a newspaper. In addition, the company will face a fine imposed by the tax authority in an amount up to RMB 30,000.  


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