How China got businesses to pay taxes: scratch-n-win tickets
A decade ago China was losing about $158 million a year in tax revenues. World Bank figures show that China has steadily increased its tax revenues since 1994.
There are 55 ways you can get the death penalty in China, and it once included killing pandas and tax evasion. So when it comes to setting trends for positive reinforcement, China rarely comes to mind.
A recent study, however, shows that China's quiet experimentations with carrot-and-stick measures throughout the past few decades has not only paid off, but has set off a trend across the nation and across Asia, even catching the interest of some experts in Japan and America. China’s most successful measure? A lottery receipt system to keep track of transactions and get businesses to pay their taxes.
Positive reinforcement programs, like China's lottery receipt program, can make governance better, say experts like Richard Thaler, a professor of economics and behavioral science at Chicago University's Booth School of Business. Typically, the governments use "exhortation and fines" to make citizens behave, but, "these efforts are usually ineffective," he wrote in an oped. Though lotteries like the one in China are only one way positive reinforcement can work – England got its citizens to recycle 35 percent more by allowing them to earn points for free merchandise – Mr. Thaler writes, "The moral here is simple. If governments want to encourage good citizenship, they should try making the desired behavior more fun."
Like many developing countries, China’s cash-based economy makes it difficult for authorities to track transactions and easy for people to evade paying taxes.
A decade ago China was losing one billion yuan ($158 million) a year in tax revenues according to Junmin Wan, a Chinese scholar at Japan’s Fukuoka University, citing calculations study in the journal Tax Notes International.
In 1994, the Chinese government took serious measures to address this and implemented the Golden Tax Project, which involved updating its computer systems to increase the efficiency of tax collection. The Golden Tax Program also included a lottery receipt or fapiao experiment, which incentivizes consumers and businesses to declare taxes by having receipts, printed via specially designed forgery-proof machines, double as lottery tickets.
The program was launched in 1998 in Haikou, the capital of Hainan Province. By 2002, 80 major cities were using the lottery receipt and today, it is enforced nearly nation-wide. Taiwan was the first to implement the lottery receipt program off the mainland in 1950.
How it works
Businesses purchase special machines that print special receipts known as fapiao in addition to regular receipts, called shouju, that cash registers provide. Every time a receipt is printed, a transaction is recorded and taxes must then be paid on it. To ensure owners actually use the machines, the government got creative: The fapiao that the machines print out are essentially scratch-and-win tickets with prizes ranging from 5- to 50,000 yuan ($.75 to $8,333). For perspective: A subway ticket in China is 2 yuan, and a monthly phone bill is about 60 to 127 yuan for an iPhone.
Following the implementation of the program, the frequency of customers asking for receipts increased dramatically, according to a 2009 survey conducted by Mr. Wan. Those who had never requested receipts began asking for them one out of every two transactions. The frequency of those who requested receipts before the fapiao program was implemented increased by 30 percent after hearing about the program.
Wan also published a study of the lottery receipt’s effect on tax revenues in Beijing and Tianjin from 1998 to 2003. He found that the real growth rates of sales taxes were 21.5 and 10.4 percent for the two cities, respectively, which was higher than in areas that had not used the lottery system. In February 2012, Wan completed a national study of the lottery system on provincial tax revenues in 1998, 2002, 2006, and 2010.
Wan says that the fapiao program significantly raised the revenues of sales tax, business income tax, and total tax revenues, though less so on value added tax and individual tax revenues.
World Bank figures show that China has steadily increased its tax revenues since 1994, which was 5.6 percent of GDP. The latest figure shows China’s tax revenue at 10.5 percent of GDP in 2009. That year the United States collected 8.5 percent.
Another aspect of the fapiao system that other countries seem to like is that it is not costly to implement. According to Mr. Wan, who cited official state statistics, the total amount of the prize paid out in 2002 was 30 million yuan (almost $5 million), while tax revenues brought in by the lottery receipts was 900 million yuan ($142 million).
The fapiao system is not foolproof: Workarounds, fake receipts, and selling unused receipts still happen.
One of the most common workarounds by small shop owners wanting to avoid paying taxes is by giving a customer a kickback for not collecting the fapiao: free drinks or discounts.
“If I don't want a fapiao I can save as much as 15 percent on digital cameras or televisions,” says Matt Stinson, an expat living in China. “Ask for the fapiao, however, and you pay the full price regulated by the city, which generally means 25 percent more than other markets.”
Fake receipts have also popped up on the black market. There they can be purchased to submit to their employer for work-related expense reimbursements such as travel and food. Some say companies even encourage this behavior so that they can declare higher expenses, and thus lower their on-record profits on which they have to pay taxes.
“These people are billing in their expenses using the fapiao that are deductible from their profits, which lowers their taxes,” says Cory Lam, a senior associate at the accounting firm Dezan Shira Associates. “It is not legal.”
Because nearly all fapiao now have forgery-proof mechanisms (heat sensitive areas and scratch-off passwords that can be verified online), it is more likely that businesses use authentic but unclaimed receipts that the customer didn’t want.
In fact, it is considered an open secret that authentic but unclaimed fapiao also get sold on the black market. Train stations and online forums are notorious for their fapiao sellers.
The scale of these illegal practices is difficult to calculate, but it is more common among small businesses, says Kevin Der Arslanian, a business analyst at China Market Research Group.
“Large multinationals or franchises consistently issue fapiao without being asked because of the risks in not doing so. It is less expensive to monitor large companies but very expensive to monitor small independent shops. So large companies are more careful.”
Most places that print fapiao also print the employer or company's name on the receipt, which might make them difficult to use by other companies and thus, less sellable on the black market later on.
Some former black market sellers say they no longer sell unused fapiao because increased and stricter audits and the ability to trace real fapiao back to its owner make it too risky.
When companies do get caught, the punishments can still be harsh.
Even though tax evasion is no longer punishable by death as of 2011, violators can receive jail sentences of up to seven years and fines up to five times the unpaid amount. Businesses can also lose their licenses, says Ms. Lam. The government particularly likes to target high profile individuals to set an example. Liu Xiaoxing, a famous Chinese actress and businesswoman, named to Forbes’ list of the world’s 50 richest in 1999, spent a year in prison for tax evasion in 2002 and was fined 7.1 million yuan ($1.11 million).