Fāpiào, Game Theory and Compliance

The goal: Eliminate revenue fraud.

The vulnerability: Humans love to gamble – Chinese people more than most.

What changed: The Chinese government added scratchable prize areas to official VAT receipts.

The exploit: They turned regular punters into de facto tax collectors.

The result: China was losing an estimated $158 million (one billion yuan) a year in undeclared tax. The GTP program transformed revenue figures and allowed the Chinese government to claw back much of what had been slipping through the cracks.

Game Theory and the Golden Tax Project (GTP)

Value Added Tax was introduced in China in 1984 as a way to generate revenue, but was consistently subject to fraud and tax avoidance. In a cash economy it’s always possible for the merchant to pocket the cash and leave revenue undeclared.  By the early 90’s, China was losing an estimated $158 million (one billion yuan) a year in undeclared tax.

In 1994, officials decided to address the issue with the ‘Golden Tax Project’ (GTP), a range of reward and punishment programs designed to move merchants away from leaky cash-based systems.  GTP used connected payment systems and began to experiment with fāpiào (发票), government-approved VAT receipts. The GTP program transformed revenue figures and allowed the Chinese government to claw back much of what had been slipping through the cracks.

So what made the Golden Tax Project so successful?

GTP had a number of transformative elements, but the most successful component by far was the development of fāpiào. Fāpiào has evolved into an outrageously complicated and corrupt system, which even tax experts have a hard time figuring out. However, we’ll do our best to give you the short version. 

Fāpiào can only be manufactured on special ‘forgery proof’ machines. Businesses are obliged by law to purchase fāpiào and hand them to customers on payment for anything VAT-related. Fāpiào don’t just communicate the sale of goods, however—they double as scratch cards. The lottery incentive was tested in 1998 in Haikou, the capital of Hainan province. Over the next few years, the system was rolled out to 80 more, and today it’s enforced nationwide.

The ‘fāpiào’ system itself is nuanced and has many tiers of complexity. However, the simplest and cleverest iteration of the system is this: If a consumer pays cash, and a formal receipt isn’t issued, well, the vendor could easily pocket the cash without declaring the income. However, when the consumer gets the receipt, with VAT declared, they get their lottery chance, and an approved document for many valid work related expenses. Thus the consumer becomes the enforcer, literally doing tax officials work for them. Consumers are also encouraged to report vendors who try to avoid handing over fāpiào, via a  reporting hotline. 

Once you have been given your fāpiào, you can scratch off the small prize area (some fāpiào have two chances to win). It might say ‘谢谢你 Thanks, you’re not a penny richer’ or you may have won anything from 5 – 50,000 yuan. You can then tootle on over to the nearest tax office and claim your winnings, though you may need to show some ID.

In 2002 the government enabled electronic fāpiào, though these have been reluctantly adopted, because a labyrinthine system of black-market fāpiào has evolved over time. You may be offered fake, or unallocated fāpiào on the street – despite the fact (we shit you not) that this is a crime punishable by death. Restaurants might also incentivise you in return, offering small prizes at the end of your meal (as long as you don’t ask for your receipt). 

In 2017, when Chinese tax authorities mandated the inclusion of unique business ID numbers to fāpiào, China’s most popular social media platform WeChat (one billion users and counting) added a ‘ fāpiào Mini-Helper’ to its extensive list of mobile payment features. It’s likely that Chinese adoption of blockchain’s transactional intelligence into the fāpiào system will close many of the remaining loopholes, but as far as subversive exploits go, this one’s world-class because it’s just as effective today as it was when first launched. So much so that, in China, it has become the norm, has spawned a multitude of research papers on behavioural change and economic incentivisation, and has prompted similar initiatives across other nationalities and systems.

Five fāpiào insights for your go-to-market strategy

  1. Engage the Innocent: Look at all the actors in your system – those with skin in the game, and those who are innocent bystanders. In China, the beef was between the SAT (State Administration of Taxation) and merchants not declaring their full revenues. The bystanders were neutral actors, until the SAT gave them a reason to care. Who are the innocents in your system and how can you subvert their behaviour to your own benefit?
  2. Think carrot and stick: Driving behavioural change is hard, but if you apply both incentives and punishments at the same time, you are more likely to be successful. With consumers now motivated to demand receipts, and with strict penalties and fines for non compliance, change was achieved. 
  3. Get what you can upfront: Many  businesses didn’t have their own government approved  fāpiào machines and so were forced to buy their  fāpiào in avance. This is a win win for China, because not only are they getting their share, they’re getting it even before the merchant has sold anything! What can you ask for upfront that you’re not getting right now?
  4. Consider the Nash Equilibrium: Nash equilibrium is achieved when the optimal outcome gives no single actor an incentive to deviate from their chosen strategy. Tax authorities in China can tilt this equilibrium by increasing or decreasing the prizes available. They can increase the incentives on the table to keep the system balanced, and when compliance becomes the norm, slowly dial down the prizes should they so wish.
  5. Observe the devious: Human beings are wonderfully devious –  like those restaurants that counter- incentivise customers to not ask for fāpiào. So you will need to observe those creative deviants. Learn everything you can from them because that’s where your next subversive hack is going to come from!