China’s anti-corruption campaign is going digital and blockchain could potentially be the technology the nation turns to in its war against corruption. Ridding the country of corruption has been a cornerstone of President Xi Jinping’s reign, although the government has its reservations towards cryptocurrencies, it is now considering using the blockchain (the underlying technology behind cryptocurrencies) to tackle fraud cases associated with ‘fapiao’(meaning invoice in Mandarin) which has become prevalent in the country.
Fapiaos are official legal receipts that function as proof of payment for goods/services and are issued by the government body known as China Tax Bureau. However, these receipts also need to be provided by sellers for any goods or services available for purchase in the country. Moreover, tax authorities mandate all business operating within the country to pay tax in advance by using fapiao receipts. The receipts are printed and distributed by the State Administration of Tax (SAT), and then companies are compelled to purchase the fapiao related to their business activities.
This invoice system was established in the 1980s and has served as a platform for the Chinese government to track and monitor tax payments, and to prevent tax evasion; clearly, fapiaos form a vital aspect of China’s tax law structure and business compliance. However, despite its prevalent use in the country, the fapiao system has been found to be very corrupt. It is no secret that there is a proliferation of fake fapiaos in China as ads for these fake receipts can be found in every nook and cranny; there are even reports that residents receive adverts for fraudulent invoices as SMS/text messages on their mobile phones.
Due to the propagation of these counterfeit documents and the easy access to the black market, individuals are now able to obtain any kind of fake receipts including value-added tax (VAT) receipts. These false invoices could either be a replica of the original or an authentic fapiao that hasn’t been claimed yet, and are often used by people to carry out fraudulent activities like cheating employees or evading tax. Fapiao corruption isn’t limited to individuals alone, corporations and even government agencies have been involved in the scheme as well.
For instance, in 2009 a tax audit performed by Qinghai tax bureau revealed that 20 companies submitted 1,154 fake fapiao receipts to the tax bureau for an aggregate claim of RMB4.94 million. Also, in 2010, a report released by the National Audit Office claimed that central government agencies were involved in an embezzlement invoice scheme totaling a staggering figure of $20 million.
The Chinese government has realized that its conventional strategy for enforcing compliance and curbing invoice corruption is not working, now it is turning to technology, specifically, blockchain technology to solve this problem.
To this end, the Shenzhen National Tax Bureau has partnered with Tencent, the developer of popular social media app – WeChat, to create an “intelligent tax” innovative lab to promote technological methods for enforcing tax compliance. This new system will incorporate a range of emerging technologies including artificial intelligence, blockchain, cloud computing and big data.
EEO, a local news agency recently reported that China’s first digital blockchain-based invoice was issued in the city of Shenzhen. According to the report, Tencent created a comprehensive and usable pilot blockchain ecosystem designed explicitly for merchants, tax authorities, and consumers.
In describing the project benefits, Tencent’s general manager of blockchain, Cai Yunge said their new system had attained “a frictionless link between consumer scenarios and tax services.” Under this approach, Tencent’s WeChat app acts as a platform for facilitating payments while generating an invoice for inspection by tax authorities in “one click.” Tencent has taken advantage of Wechat’s popularity to ensure there is wide adoption of this technology. The company has incorporated new functions into the app allowing users to input relevant tax information and submit it to service providers who in turn issue them fapiaos. Business users can securely store corporate tax information on their app account and retrieve it at a later date. Uploading tax information to the app requires the user to fill out a form; after which a QR code is generated on a ‘card’ which can then be scanned by service providers, enabling them to issue fapiaos accurately.
Aside from curbing the problem of fapiao corruption, Tencent’s new blockchain approach to invoice generation will also reduce invoice processing time since processing a typical invoice involves numerous stages. A blockchain e-invoice will only require a short waiting period after a single click in WeChat app; a mechanism is also available for tracking its reimbursement status in real-time through the app. This technique eliminates forgery, over-reporting, and printing of fake invoices. It has also been touted as an effective method for enhancing privacy and mitigating excess costs by streamlining the entire processes.