China Uses Blockchain Technology to Fight Fake Invoice Industry

Scanning with a smart phone

By Jay Derenthal

Buying a fake invoice in China is easy.

A 2013 New York Timesarticle revealed that, though decidedly illegal, high-quality replicas and diverted original “paid” invoices are sold openly by hawkers on city streets and at transportation hubs, and also online and via text messaging. Chinese middle managers, living on the country’s relatively low salaries, often supplement their income by using fake invoices, called “fapiaos” (tax bureau-registered digital receipts) to embezzle corporate and state funds. Small business owners commonly use fake invoices to reduce a company’s tax burden.

Chinese tax authorities impose a compulsory system of “fapiaos,” digital invoices registered at local tax bureaus, for tax paying and tax deductions. The fapiao system, implemented during the industrialization of China in the 1980s, is widely considered to be hopelessly corrupt. According to a state-sponsored article published by the State Administration of Science, Technology and Industry for National Defense, the government expects the number of digital invoices to swell to a point that, by 2022, its ability to track invoices and collect taxes would become untenable. Blockchain invoicing could be immensely helpful to both tax authorities and industry.

China’s first-ever blockchain-verified “paid” invoice was issued by Guomao Rotary Restaurant in the city of Shenzhen on August 10, as reported by the independent Economic Observer Network, marking the launch of a pilot project that is part of China’s wide-ranging effort to replace a nationwide system of invoicing rife with over-reporting, false reporting and counterfeiting with a blockchain-based system.

The Shenzhen Municipal Taxation Bureau teamed with Tencent, the world's sixth-largest internet company by revenue, using its WeChat platform to run a chain-of-custody blockchain system that aims to make electronic bill paying immutably traceable and verifiable. China’s State Administration of Taxation approved the project for retail business invoice issuance, delivery, inspection, reimbursement and tax filing. Small business consumers can submit invoices and declare tax deductions on the blockchain platform, which automatically generates invoices for completed transactions with detailed information including the retailer’s tax code, bank account details, address and telephone number.

Chinese tax authorities are also working with the state-owned manufacturer of rockets and missiles, China Aerospace Science and Industry Corporation Ltd. (CASIC), on a blockchain-based invoicing system. The CASIC blockchain invoicing system was created by Aerospace Information Co., a division of CASIC that, according to Bloomberg, “develops and offers software for implementation and maintenance of anti-counterfeit tax-control invoicing, remote tax filing, and online authentication.”

The trial is now expanding to the city of Beijing, the provinces of Anhui, Hubei and Shandong, and the Ningxia autonomous region. The official Communist Party of China's People's Daily news service reported that the system will provide digitization of invoicing information to improve the efficiency of accounting processing.

CASIC’s target use case is much wider than the Chinese aerospace industry. Blockchain technology is expected to simplify the use of digital invoices for tax purposes across the country and significantly reduce accounting costs.

The announcement of the CASIC project came less than a week after the Communist Party of China published a book titled "Blockchain — a Guide for Leaders," a collection of educational articles on the theoretical and practical aspects of blockchain technology and its potential use cases.

Though it’s evident that the Chinese government wants its populace to know that blockchain technology will bring a day of reckoning to the fake invoice industry, no details were given by the government on the types of blockchains used in the two projects, nor their consensus protocols or tokenomics or lack thereof.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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