December 7, 2024

Coin of Realm in China Graft: Phony Receipts

“Receipts! Receipts!” calls out a woman in her 30s to passers-by as her two children play near the city’s south train station. “We sell all types of receipts.”

Buyers use them to evade taxes and defraud employers. And in a country rife with corruption, they are the grease for schemes to bribe officials and business partners. Making them and using them is illegal in China. Some people have been executed for the crime. But demand is so strong that a surprising amount of deal-making takes place out in public.

It is so pervasive that auditors at multinational corporations are also being duped. The British pharmaceutical company GlaxoSmithKline is still trying to figure out how four senior executives at its China operation were able to submit fake receipts to embezzle millions of dollars over the last six years. Police officials say that some of the cash was used to create a slush fund to bribe doctors, hospitals and government officials.

Signs posted throughout this city advertise all kinds of fake receipts: travel receipts, lease receipts, waste material receipts and value-added tax receipts. Promotions for counterfeit “fapiao” (the Chinese word for an official invoice) are sent by fax and through mobile phone text messages. On China’s popular e-commerce Web site, Taobao.com, sellers even promise special discounts and same-day delivery of forged receipts.

“We charge by percentage if you are looking for invoices written for a large amount of money,” said one seller in an interview, quoting 2 percent of the face value of the receipt as his fee. Another seller boasted, “I once printed invoices totaling $16 million for a construction project!”

Detecting fake or doctored receipts is a challenge for tax collectors, small businesses and China’s state-run enterprises. While there are no reliable estimates of how much money is involved in the trade, as China’s economy has mushroomed and grown more sophisticated, so has the ability to falsify receipts.

With considerable tax revenue at stake, the Chinese government has announced periodic crackdowns. In 2009, the authorities said they detained 5,134 people and closed 1,045 fake invoice production sites. A year later, they said they “smashed” 1,593 criminal gangs and raided 74,833 enterprises that had filed false invoices with the government.

In one of the biggest cases this year, a businessman in Zhejiang province was jailed for helping 315 companies evade millions of dollars in taxes by issuing fake invoices, a crime sometimes punishable by death.

That could be the fate of Liu Baolu, a government official from northwest China’s Gansu province. In February, he was sentenced to death with a two-year reprieve for using fake receipts to embezzle millions of dollars.

As harsh as the crackdowns sound, experts say they are often ineffective. One reason, analysts say, is that even government officials take part in black market activity. In 2010, for instance, the National Audit Office said it caught central government departments embezzling $21 million with fake invoices.

And state employees, whether they work for government agencies or state-owned enterprises, seem as eager as anyone else to bolster their compensation by filing fake invoices.

“Their salaries are relatively low,” said Wang Yuhua, an assistant professor of political science at the University of Pennsylvania and the author of a study on bribery and corruption in China. “So they supplement a lot of it with reimbursements. This is hard to monitor.”

China’s fapiao system took root in the late 1980s and early 1990s, when the government began requiring companies to use official receipts issued by the tax authorities for every business transaction. The receipts usually come with a number and government seal.

Article source: http://www.nytimes.com/2013/08/04/business/global/coin-of-realm-in-china-graft-phony-receipts.html?partner=rss&emc=rss

Your Money: New Tax Laws Cover Cost Basis of Investments

Instead, reporting those numbers on your tax return was generally based on the honor system: You reported how much you bought the stock for, and if you lost track or couldn’t remember, you made your best guess. The tax collectors didn’t have an automated way of checking your calculations.

Those days are over, at least in part. For the second consecutive tax season, a new law requires your investment brokerage firm to report to the I.R.S. the price you paid for certain taxable investments, known as your cost basis, a figure that also takes into account items like reinvested dividends, stock splits and company mergers. With your cost basis in hand, you can then figure out how much you’ve gained or lost when you sold the investment, which is then reported on the Schedule D tax form.

“I considered the Schedule D as the last bastion of the Honest John system,” said Nico Willis, chief executive of NetWorth Services, a company based in Phoenix, that calculates cost basis for investors. “The spotlight is now on, and as a result, that is making things a lot more complicated because you just can’t guess anymore.”

The new reporting rules, signed into law as part of the big bailout legislation in 2008, are being phased in over a few years and don’t necessarily apply to all of your taxable holdings: banks and brokers were required to begin tracking and reporting the cost basis of stocks in taxable accounts bought in 2011 or later. Mutual funds, dividend-reinvestment plans and certain exchange-traded funds purchased beginning in 2012 are subject to the new rules. That means this is the first tax year these funds will be reported to the I.R.S. Reporting for bonds and option contracts doesn’t begin until next year.  

Technically, the changes should eventually make it easier to figure out capital gains or losses. But for now, you’re more likely to be befuddled by the fact that the sale of some of your taxable investments is covered, while the sale of others is not, though all of this is broken down on your 1099-B tax form prepared by your bank or brokerage firm. Given the added complexity, tax experts suggest going over everything carefully to avoid setting off an inquiry from the I.R.S.

“If you bought a mutual fund 10 years ago that you are still holding onto and reinvesting the dividends, you will have a combination of covered and noncovered securities,” said Joel M. Dickson, a tax specialist at Vanguard. “It can be a little confusing. And the onus is still on the investor to report their cost basis, regardless of whether it is covered or not covered” by the new rules.

The new rules will also require you to pay closer attention to which specific shares you want to sell. Before, most investors just waited until tax season to select which lots, or groups of shares purchased in the same transaction, they sold first. (Even though, technically, they were supposed to decide at the time of the sale.) And naturally they would pick the ones that would be best for their tax situation. Now, you need to decide how you want to calculate your cost basis within three days of the trade settling, tax experts said, and brokerage firms including Vanguard and Charles Schwab said they would lay out the choices at the point of sale.

The method you choose can have a pretty drastic impact on your tax bill, at least in some cases. Let’s say you bought $1,000 of Bank of America stock, or about 62 shares, back in August 1980 (the company was then known as Nations Bank). And assume you reinvested all dividends back into the same stock. Now, 13 years later, your stock holdings are worth about $19,000. If you sold $10,000 of the stock earlier this week, or about 830 shares, you would have the option of generating a giant gain, or a big loss, all depending on what method you use. For instance, if you sold the oldest shares first, you would log a capital gain of more than $7,100. But if you sold the newest shares first, you could post a loss of more than $14,000, according to calculations by NetBasis, the unit of NetWorth Services that provides cost basis calculations for investors.

If you don’t pick a specific method, most brokerage firms will revert to their default, whereby they sell your oldest shares first, known as first in first out, or FIFO. (This applies to stocks and exchange-traded funds.  For mutual funds, the default method is a bit different; they use the average cost of the shares held.)

“When people buy stock over time, FIFO may not be the best option,” said Thomas B. Cooke, a tax and business law professor at Georgetown University’s McDonough School of Business. “That makes it very incumbent on investors when they get their confirmation statement to make sure the right stock was sold.”

You can choose from several different methods: You can sell the newest lots first, for instance, or you can unload the highest- or lowest-cost shares first. Or, your brokerage firm may have a tool to help you decide. At Schwab, for instance, a tax lot optimizer will choose the lots that let you take losses first. (Of course, if you are selling all of your stock, choosing a method is a moot point.)

Article source: http://www.nytimes.com/2013/03/16/your-money/new-tax-laws-cover-cost-basis-of-investments.html?partner=rss&emc=rss