China: Crowdsourced Tax Enforcement

Riddle me this: how does a government enforce tax collection in a cash-only society? Cash has the wonderful property of being anonymous, and therefore hard to track. As a result, cash businesses often under-report revenues, thereby dodging a portion of tax payments.

China is primarily a cash-driven economy; few local places will accept payment cards of any kind (event rent payments are made in cash — a big, fat stack of cash, as the largest bill in China has an equivalent value of about US$15). As such, China has a big challenge around collecting taxes.

A solution to the problem is to go with a tax pre-payment system. At the beginning of every month, every business is required to pay an estimated tax. Proof of tax payment is issued in the form of “fapiao” (发票). They look a bit like the one below:

This fapiao represents tax paid on 10元 (元 is like the $ symbol, and colloquially pronounced “kuai”), so the restaurant I got this from probably paid about 1-2 kuai for this fapiao. When you settle your bill in a restaurant, in addition to getting the itemized receipt, you are supposed to receive a stack of fapiao of equivalent face value.

At the end of the month, the restaurant claims a tax refund on any remaining fapiao. As a result, fapiao are basically as good as money to the restaurant; hence, the fapiao are printed on watermarked paper with anti-counterfeiting measures, and employ serial numbers you can validate by sending an SMS to a government hotline. Also, restaurants have a strong incentive to omit a few fapiao from your stack, or completely forgo giving you the fapiao (they love it when foreigners dine, because they don’t know about fapiao — they get big business and they get the tax refund on it!).

So, how does one enforce the distribution of fapiao to customers? China’s clever solution is to make every fapiao a lottery ticket. If you look at the above photo carefully, you’ll see two metallized patches on the fapiao. You can scratch these off, and underneath might reveal a prize! Of course, the one I have above is a losing ticket — it just says “thank you”, with a serial number; but the prize can be thousands of kuai.

And so, China has crowdsourced tax enforcement, by potentially rewarding citizens with a cash reward for asking for all of their tax pre-payment receipts, and using them up by scratching off the prize areas. The cost of this massive force multiplier is vanishingly small, as all they are offering is the chance to win; I have only ever seen one winning ticket in the past couple of years, and it was for about 2 kuai. Still, it is a nice cultural touch to the end of a big meal, everyone sitting in a circle, scratching their fapiao to see if they won a prize for playing the part of a Chinese tax enforcement agent.

Of course, with every new system, new problems come in. One is that the waitstaff might nick a couple of fapiao en route to the customer. So now, to get your fapiao you usually have to go in person to a special counter that manages its distribution. And, of course, the restaurant can offer a bribe in place of the fapiao. Just this past month when I was visiting Harbin, I went to collect my lottery tickets and the lady at the register glanced at my 80 kuai receipt and offered to pay me 4 kuai instead of giving me fapiao! I was a bit surprised at how brazen the offer was, but in retrospect, I clearly was not from around there, and thus unlikely to be an auditor.

18 Responses to “China: Crowdsourced Tax Enforcement”

  1. RyanE says:

    Thanks for the cool post.

    I wondered what those lottery-like receipts I was seeing in China were. I was one of those ignorant foreigners.

    :)

  2. Aissen says:

    Very interesting, indeed. I also learned that RMB/yuan has another name, written “kuai” on the wikipedia article. Where is that used in China?
    I also learnt that in cantonese it can also have 3 other names in the “Etymology” section of said wikipedia article.

    • bunnie says:

      Sorry, I had mis-typed the pinyin for kuai as quai. I’ve corrected it in the article.

      The reference to the colloquial pronunciation was an effort to stay correct while not having to go into the detail that 元 actually is the character for “yuan” but is usually said as “kuai”. I’ve heard it referred to as “yuan” in formal announcements but informal speech always says it as “kuai” — sort of how $ represents “dollars” but is often informally said as “bucks”.

      Likewise, the RMB (Ren Min Bi) term is a bit like the US “Federal Reserve Note” term. Those words are printed on every US dollar bill but you really don’t ask people to pay you in “federal reserve notes”, even though that would be a technically correct request. Likewise, few people refer to their money in China as Ren Min Bi. Which sheds some light on why some forex outfits prefer “RMB” and others prefer “CNY”, where CNY stands for Chinese Yuan. A native Chinese speaker would probably find it more intuitive to abbreviate their currency as RMB, where as an English speaker trying to remain consistent with the “USD” term would use “CNY”.

      The initial consonant of “kuai” sounds like “quid”, so my brain just typed it as a “qu” instead of a “ku”. However, “quai” as pinyin would sound closer to “try” or “chu’ai”, which is totally incorrect. I make this mistake very often, swap q’s for ch’s and k’s and vice versa depending upon the situation. Thanks for the correction!

      • Alex says:

        Grammatically, kuai4 is actually a classifier (like ‘flock’, ‘heap’) rather than a noun.

    • Windix says:

      As a Chinese, i can tell you that “Kuai” to “RMB/Yuan” likes “Bucks” to “Dollars” :)

      Also “Jiao (0.1 Yuan / 10 Fen (cents)” is normally called “Mao”.

      An example of RMB 2.34 in oral Chinese reads as “Liang (2) Kuai San (3) Mao Si (4)”

  3. André says:

    If I understood it correctly, it kinda works like the system we have here in Brazil. The government gives tax deduction for people who keep their receipts as long as their ID was printed into them (a service the shops are required to offer). This way it’s harder for the companies to lie about sales and pay less taxes than they should, as the government is being directly informed about them.

  4. mrb0y says:

    Thanks for sharing! Your perspective on experiences in China are so entertaining. So did you take the quai?

  5. b's perlfriend says:

    There’s also an underground market for fake receipts. In Shenzhen, you can find people standing on the corners selling books of fake fapiao.

  6. Stephen G says:

    Is this for a type of sales tax where all merchants pay the same rate (per dollar of revenue)?

    • bunnie says:

      I think so. This fapio is specifically for restaurants, which I imagine would share the same tax rate across the board.

      I’ve noticed hotels would use a different from, without the lottery ticket. But in those cases there are other ways to determine taxable revenue; for example, from the guest registration logs.

  7. william dutton says:

    They have this in Taiwan. But instead of a scratchy, all receipts go inti the big monthly draw, this reduces the price of the watermarked receipt. These receipts are around 3cm wide and come in big rolls which most shops print on.

  8. […] China: Crowdsourced Tax Enforcement Riddle me this: how does a government enforce tax collection in a cash-only society? Cash has the wonderful property of being anonymous, and therefore hard to track. As a result, cash businesses often under-report revenues, thereby dodging a portion of tax payments.China is primarily a cash-driven economy; few local places will accept payment cards of any kind (event rent payments are made in cash — a big, fat stack of cash, as the largest bill in China has an equivalent value of about US$15… […]

  9. Terry says:

    I came across this page looking for information about income tax, haha (yes it is that time of year). I found this article interesting because I’m originally from Japan (I live in Canada now) and Japan is pretty much cash society too. I was surprised how money was “controlled” in a way in Canada when I first came here. Nobody used cash (except buying small things). I started to wonder how the Japanese government is controlling money (or tax) or battling with tax fraud. I didn’t know much about tax while I was living there because in Japan the employer does everything for you…

  10. ben says:

    As you made refernce to, you can ask for a discount on your bill in lieu of a receipt. Most restaurants will give you a few kuai off. Only time my friends or I ask for a receipt is if we are unhappy with the service.

  11. 马泰 says:

    I know a certain Hunan restaurant chain (named after a famous chinese leader from Hunan) who always offer a free bottle of Coca Cola instead of Fapiao.

    I have, however, won the fapiao a couple of times.

    Both for 10 kuai, which was used to top up my phone!

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  13. zhou says:

    Actually, 元 is pronounced ‘yuan’ instead of ‘kuai’, kuai is kind of like buck, in Chinese ‘kuai’ is 块