China Fighting Tax Corruption with Blockchain

The country has an invoice system called ‘fapiaos’ which people use in two ways, one is a general receipt for business expenditures which are allowed to be deducted, and the other is for deductions via Value Added Taxes, known as the VAT.

People, companies and ‘state’ run agencies are allowed to issue invoices to the China tax office and receive reimbursement for costs incurred by conducting business.

However, tax evasion in China has become a fine art. Reimbursement of ‘costs’ total in millions of dollars for questionable expenses which are accounted for via the ‘fapiaos’. This happens because fake invoices are available throughout China on the black market.

The rampant availability of fake receipts in cities has become a thriving business at the street level. This allows people to get false invoices for a huge variety of costs and gives them the ability to bill the government which is overwhelmed with the receipts and unable to track all of the claims.

The penalty for tax evasion is fierce in China, but the public appears to largely view the consequences a bit like buying a lottery ticket which they do not plan on winning – or lose in this case. Businesses are clearly willing to take the chance and get reimbursed money.

Part of the problem which has sparked the use of fake invoices is because many people are still paid relatively little in salaries and they seek to add onto their money with tax claims which are hard to track.

---

Suggested Articles

• Looking Beyond Hype into Substance; 4 Blockchain Projects to Consider
• Ripple vs. Stellar: Will There Be Only One Winner?

---

And it should be noted that not only is the public involved in this endeavor, but it has been found upon investigation that government agencies within China also practice the art of the fake receipt. This has led the Chinese government to the obvious conclusion that something must change. And one of the methods believed which could help eliminate the use of fake invoices is to start making people, companies, and others submit their applications for tax reimbursement via a blockchain.

In theory, blockchain would help distinguish fraudulent claims, because not only can distributed ledgers not be tampered with, but it would make those submitting the claims more responsible because of the transparency involved.

Yaron Mazor is a senior analyst at DX.Exchange and Private Equity Manager