Coin of Realm in China Graft: Phony Receipts

The New York Times’ David Barboza describes China’s booming trade in fake fapiao tax receipts:

To begin to comprehend China’s vast underground economy, one need only visit this city’s major transportation depots and watch as peddlers openly hawk fake receipts.

“Receipts! Receipts!” calls out a woman in her 30s to passers-by as her two children play near the city’s south train station. “We sell all types of receipts.”

Buyers use them to evade taxes and defraud employers. And in a country rife with corruption, they are the grease for schemes to bribe officials and business partners. Making them and using them is illegal in China. Some people have been executed for the crime. But demand is so strong that a surprising amount of deal-making takes place out in public.

It is so pervasive that auditors at multinational corporations are also being duped. The British pharmaceutical company GlaxoSmithKline is still trying to figure out how four senior executives at its China operation were able to submit fake receipts to embezzle millions of dollars over the last six years. Police officials say that some of the cash was used to create a slush fund to bribe doctors, hospitals and government officials. [Source]

On Twitter, Danwei’s Jeremy Goldkorn suggested that the Times article tells only half the story, arguing that fapiao are “misunderstood by many economists and journalists who do not do business here,” and may be “the world’s best tax collection system for developing countries.” In a recent ChinaFile discussion of what’s going right in China, he described fapiao as “a work of genius which allows a massive more-or-less unregulated informal economy to thrive and still contribute taxes to the state.” As long ago as 2004, he wrote an appreciative explanation of fapiao for The Beijinger:

On the surface, the fapiao system seems like an awful waste of paper, just another link in a chain of bureaucracy. But the system is an elegant solution to collecting tax in a country full of entrepreneurs who start businesses on the fly, where no one has a credit history and where it is very difficult to find out if a company is trustworthy or not.

Let’s take an example: Mr Dong is an entrepreneur who has started buying computer parts in southern China, and bringing them to Beijing to assemble and sell. He doesn’t have a company yet, but he wants to start working. He should not really be allowed to sell goods or services; he does not have a registered company and therefore will not be taxed, nor is there any way for his customers to know what his legal identity is.

But if his customers demand fapiao, he will probably have to pay his friend Mr Liang, who has a legal company, to issue the fapiao for him. This means that Mr Dong will pay Mr Liang for the tax due on the fapiao, as well as a commission for the service. The customer who buys a computer from Mr Dong now has a fapiao with the name of a registered business on it that is ultimately legally responsible for the sale. The buck stops with Mr Ling.

Furthermore, the tax bureau gets to collect the tax due on the transaction, despite the fact the Mr Dong’s business is still completely outside the formal economy. […] [Source]


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