Can Blockchain End China’s Fake Invoice Industry and Speed Adoption of eInvoicing?

Yinghan Miao
August 20, 2018

The recent news about China issuing its first blockchain-based tax electronic invoice, in the southern city of Guangzhou, spread rapidly across the internet. The joint experiment between fintech enterprises and the tax administration in two cities utilises blockchain technology and its core features to ensure, among other things, the authenticity and integrity of the data in an invoice’s lifecycle.

Utilising blockchain technology in eInvoicing

The digitisation of invoice issuance in China is not new. Indeed, the country started piloting eInvoicing some 5 or 6 years ago, but the roll-out has been gradual, and it is not yet widespread. This relative lethargy in adoption means that counterfeit paper invoices continue to contribute to a major tax evasion problem and businesses still face the challenges of the lengthy expense reimbursement processes – a problem inherent with the use of paper invoices and receipts.

To add to these problems, the adoption of digital invoicing in China has also bought with it a fresh set of challenges. One of these stemming from the fact that an eInvoice, in its physical representation, can be reproduced and reused multiple times for expense reimbursement and to create multiple entries when a company enters them into its accounting books.

The adoption of blockchain technology provides the leverage for the Chinese tax administration to check, verify, rely on, and trace an eInvoice. In the short term, this could help resolve the difficulties brought by eInvoicing to the expense reimbursement processes. While in the long run, it could potentially put an end to China’s counterfeit invoice industry and eventually speed up the digitisation of invoicing and tax collection in the country.

China understands that the digitisation of invoice management and tax collection is inevitable and with businesses demanding change, the government is actively seeking ways to ensure an effective eInvoice roll-out. By experimenting with blockchain invoicing, China’s goal is to establish a trustworthy environment, where the circulation of an invoice, and its associated data, can be accurately recorded and verified by all participants in its lifecycle. Ideally, participants and stakeholders in a given transaction such as the taxpayer, tax administration, banks and other third-parties will be able to access the invoice data in each block. But blockchain can go even further, allowing other business data, such as the trading parties’ identity, credit, and payment information to be included. Any data added, or any changes made to a block can be detected by all participants, and it will always be traceable.

The question marks over the application of blockchain in invoicing and tax collection

While investment into blockchain technology within China is booming, there are many questions over its adoption and its application in the fight against tax evasion that need further clarification, these questions include:

Complexity

A common burden in the adoption of eInvoicing is the complexity, financial cost and human resource needed to facilitate compliance. This has been a major hurdle in the widespread adoption in China. A Chinese blockchain-based solution would need to be effective in reducing current eInvoicing challenges but also user-friendly and financially accessible to ensure mass adoption. Moreover, the performance and stability of this solution has not yet proven to be sustainable. Therefore, a trial period within a group of taxpayers is to be expected.

Standardisation

Will there be a consistent framework that sets out necessary technical and security standards for the national or regional use of blockchain technology in invoicing? It’s generally a standard practice for a framework to be published prior to the use or introduction of a cutting-edge technology to a larger group of users. Usually, this is facilitated by an open consultation period with research and studies to help streamline and standardise the roll-out plan.

This common framework is especially important in China, where paper and electronic invoicing are currently operating in parallel. The introduction of blockchain-based invoicing could further speed up the adoption of eInvoicing, but how it will interact with the existing mechanisms (China’s Golden Tax System and the existing eInvoicing platforms) remains to be seen. Perhap the only way it can be effective will be through a nationwide mandate?

Full transaction capture

Blockchain has many benefits in building a trustworthy invoicing lifecycle, but it’s important to understand that the application of blockchain technology within invoicing should also ideally have the option to capture and embed relevant data regarding the taxable business activity, and the original transaction data, in the pre-issuance phase, within the chain. Many advanced clearance countries have strong real-time control systems for invoicing, and these platforms have components to control the transaction data generated before, and after an invoice has been issued.

Confidentiality

Invoice data and its analysis through advanced AI and Big Data analytics, can give away critical business. We’re starting to see the beginning of a discussion about government use limitations in some clearance countries, but the use of blockchain could further expose registered invoice data to external parties. If 100% confidentiality of invoice data cannot be guaranteed, businesses may be reluctant to migrate to the system.

Although the long-term effect of China’s experiment with blockchain within invoicing and tax collection remains to be seen, this first experimentation by a tax administration will be followed closely by tax authorities and businesses around the world. In theory, the use of blockchain and other distributed ledger technologies could be a natural complement to real-time control systems. We’ll closely monitor the results of this experiment and report back when the results from the first case are made available.

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Author

Yinghan Miao

Yinghan Miao is a Regulatory Counsel at Sovos TrustWeaver. Based in Stockholm and originally from China, Yinghan’s background is in law and IT with a professional focus on international tax law, tax compliance, and cyber security. Yinghan earned her degree in Law in China and her masters in Law and IT from Stockholm University in Sweden.
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