Issuing Special Red-Letter Value-added Tax Invoices in China

By Dezan Shira & Associates
Editor: Rainy Yao

Starting April 1, 2015, China has implemented an updated and improved Value-added Tax (VAT) Invoice Management System, which substantially simplifies procedures for issuing the special “red-letter” VAT invoices and allows taxpayers to issue special VAT invoices directly through the invoice management system. In China, taxpayers are required to use a unique printer that is approved by the tax authorities to issue special VAT invoices through the so-called Anti-forgery Tax Control System – a tax software that is implemented by the tax bureau. A special red-letter VAT invoice, meaning the reversal of sales, needs to be issued when the output VAT entered into the Anti-forgery Tax Control System by a seller is negative. 

In this article, we introduce China’s updated VAT invoices management system and walk investors through the procedure for handling the issuance of special red-letter VAT invoices in China.

Updated VAT Invoices Management System

With the implementation of the updated VAT invoice management system, all issued VAT invoices will have records in the tax authorities’ management system. One of the most noteworthy changes made to the upgraded VAT invoices management system is that taxpayers are now allowed to apply to the tax bureau for issuing special red-letter VAT invoices online. The tax bureau will then examine and approve the application via the VAT invoice management system. Taxpayers may later issue the red-letter invoice online through the invoice system upon the approval of the local tax bureau.

Previously, taxpayers were required to go to the tax bureau in person and submit an application form for the issuance of special red-letter VAT invoices. After verification of the application, the tax bureau would issue a notice which serves as the evidence of approval. The sellers were also required to submit a photocopy of the relevant accounting vouchers to the tax bureau for filing after the issuance of the special red-letter VAT invoices. The filing procedure was repealed in 2014. 

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Issuing Special Red-letter VAT Invoices

Based on the Guoshuihan [2006] No.1279 and the Guishuifa [2006] No.156 released by the State Administration of Taxation (SAT), special red-letter VAT invoices can be issued under one of the following circumstances: 

• A buyer returns a whole batch of sold goods to the seller and the special VAT invoices issued to the buyer for the sale of the goods cannot be cancelled for certain reasons (i.e., the situation does not satisfy the conditions for invoice voiding);
• A buyer returns part of the sold goods;
• A seller gives discounts to the buyer, mainly due to the following reasons:
• Poor quality of the goods
• The buyer’s cumulative purchases reach a certain volume during a specified period
• The market price decreases, thus the seller makes adjustments to the price to compensate the buyer
• The special VAT invoices issued by the seller are incorrect and are not able to be cancelled. 

Voiding a Special VAT Invoice

To avoid the hassles of issuing a special red-letter VAT invoice or reversing a sale afterwards, taxpayers may choose to void a special VAT invoice instead. However, while a general VAT invoice can be voided at any time, voiding a special VAT invoice needs to be done within the same month in which the invoice is issued. The following criteria need to be met in order to void a special VAT invoice: 

• The date of receiving the returned special VAT invoice (including the deduction copy and the invoice copy) falls within the same month in which the invoice is issued;
• The seller has not recorded the issuance of the invoice;
• The invoice has not been verified or the verification result shows “taxpayer identification code does not match” or “special invoice code does not match.” 

Further, the invoice may be voided immediately if any errors are found at the time of issuance.

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