Shenzhen Government & Tencent Fight Tax Fraud with Blockchain

The skyline of Shenzhen, Guangdong province, China. Shenzhen is an economic miracle which led to the development of other parts of China.
The skyline of Shenzhen, Guangdong province, China. Shenzhen is an economic miracle which led to the development of other parts of China.

Hong Kong, CHINA – Although Bitcoin and cryptocurrencies are still very much considered taboo by Beijing, blockchain on the other hand is an entirely different kettle of fish. On May 25, Shenzhen, one of China’s first special administration regions which was then expanded to the rest of the country and led to the Chinese economic miracle, announced that it had partnered Chinese technology giant Tencent to use blockchain technology to fight tax fraud. The partnership by the Shenzhen Municipal Office of the State Administration of Taxation and Tencent aims to establish and “Intelligent Tax” Innovation Laboratory focused on tax management modernization and fighting tax fraud with blockchain technology.

According to China Money Network, an independent news site based in Hong Kong, reported that the new organization will leverage cloud computing, artificial intelligence, blockchain and big data to improve tax management and find a technological solution to tax dodging. By some estimates, as much as US$134 billion in tax revenue was lost in 2014 alone. But official figures are hard to come by as China is a large country with diversified business activities and tax collection is difficult at best. But that hasn’t stopped Beijing from trying. As export growth slows, China has turned to domestic consumption as well as grand infrastructure projects including the ambitious “Belt and Road” project which will link China to Europe and North America through a series of roads and railways, to spur economic growth. And as government spending rises, more tax revenues will need to be catered for. Which is why the experiment in Shenzhen is so significant. As the first Chinese city to enjoy autonomy under the economic reforms of former Chinese President Deng Xiaoping, which led to stellar Chinese economic growth when those reforms were adopted across the rest of China, the results from Shenzhen’s experiment with blockchain technology to combat tax fraud will serve as a model for the rest of China to follow.

A fake "fa piao" being held up. "Fa piao" are official government issued receipts for goods and services purchased in China, but with China's counterfeit market second to none, counterfeiters have had no difficulty creating fake versions for all manner of tax evasion as well as fraudulent reimbursement claims.
A fake “fa piao” being held up. “Fa piao” are official government issued receipts for goods and services purchased in China, but with China’s counterfeit market second to none, counterfeiters have had no difficulty creating fake versions for all manner of tax evasion as well as fraudulent reimbursement claims.

One of the biggest problems plaguing China’s beleaguered tax collection system is counterfeit or copied “fa piao” (pronounced fah pee-ow), an official invoice issued by the Chinese tax authorities for goods and services purchased within the country and which helps the government track tax payments. In a country where even Wrigley’s chewing gum can be faked, the underground market for fake “fa piao” is huge and buyers of these counterfeits use them to evade taxes or defraud employers by using them to claim reimbursement for fake expenditures. And just like the underground markets for fake goods that can be found in tourist cities such as Shenzhen, Shanghai and Beijing, “fa piao” vendors ply their trade in crowded urban centers, outdoor marketplaces and even subway exits.

The Tencent headquarters in Shenzhen, Guangdong province, China. Tencent is headquartered in Shenzhen and has since 2015 assisted provincial authorities by facilitating tax payment and filing.
The Tencent headquarters in Shenzhen, Guangdong province, China. Tencent is headquartered in Shenzhen and has since 2015 assisted provincial authorities by facilitating tax payment and filing.

The first product out of the joint laboratory will be the digital invoice solution based on Tencent’s current blockchain. According to deputy director of the Shenzhen Municipal Bureau of State Taxation, Li Wei,

“The digital invoice based on blockchain technology has features such as complete traceability of the whole process and non-disruptive information, which consistent with invoice logic, can effectively avoid false invoices, and improve the invoice supervision process.”

This won’t be the first time that technology company Tencent has come to assist local tax bureaus in China. Since 2015, Tencent has used its ubiquitous WeChat app to allow Shenzhen residents to declare and pay taxes as well as to receive “fa piao.” But ease of payment has never been a key issue for taxpayers. Instead, the immutable ledger offered by blockchain technology will make it more difficult for taxpayers to evade taxes or to file fraudulent expense claims. Although not a silver bullet, it’s a step forward for China’s taxmen to plug its leaky tax collection system.