July 2022
Yanting Pei and Teresa Huang
To alleviate the pressure brought by the pandemic on enterprises, the state has issued several documents since March 2022 to implement a large-scale retained VAT credit refund policy, allowing eligible small and micro enterprises as well as enterprises in the “manufacturing industry,” the “scientific research and technology service industry,” the “electricity, heat, gas, and water production and supply industries,” and the “software and information technology services industry,” the “ecological protection and environmental management industry,” and the “transportation, warehousing, and postal industries” (hereinafter, the “Manufacturing and Other Industries”) as well as the “wholesale and retail industry”[1] to apply for the refund of retained stock and incremental VAT credits by a specified time. Meanwhile, however, the state also emphasizes the need to prevent the occurrence of fraudulent tax refunds. To this end, the State Administration of Taxation, the Ministry of Public Security, the Supreme People’s Procuratorate, the General Administration of Customs, the People’s Bank of China, and the State Administration of Foreign Exchange jointly issued the Circular on Strictly Cracking Down on Illegal and Criminal Acts of Fraudulent Refunds of Retained Tax Credits (Shui Zhong Ji Cha Fa [2022] No. 42) (hereinafter, the “Circular”) on May 17, 2022, stating that the crackdown on illegal and criminal acts of fraudulent refunds of retained tax credits will be a regular focus of the mission to suppress false tax filing and tax fraud, and efforts will be concentrated on joint crackdown.
I. Contents of the Circular:
Pursuant to the Circular, the above-mentioned six central authorities will jointly select key sources of cases involving fraudulent refunds of retained tax credits and initiate the joint investigation by the six authorities in different jurisdictions. According to the work needs and the specific case situation, each jurisdiction will organize and launch the investigation of cases, jointly investigate and collect evidence, and actively promote joint inspection and investigation of suspected tax-related legal violations and crimes and related criminal activities through joint enforcement action, joint case investigation, etc. In particular, the tax authorities are mainly responsible for leading the investigation of cases, the public security and procuratorial authorities will be responsible for the investigation, apprehension, and prosecution associated with criminal cases, the customs will assist in the provision of data and information, and banks and the foreign exchange management authority will assist in the recovery and investigation of funds. This shows that the coordination of the six authorities will greatly improve the possibility of discovering criminal facts and the efficiency of handling cases.
In addition, the Circular also pointed out that in order to vigorously create a social atmosphere where the people “dare not, cannot, do not want to” commit tax fraud, the disclosure of cases will be enhanced with typical cases disclosed by class and category. Therefore, if there are indeed acts involving fraudulent refunds of retained tax credits, this will have a significant negative impact on the image of enterprises.
II. Significance of issuance:
The issuance of the Circular also demonstrates once again a stricter enforcement environment for the tax compliance of enterprises. Although enterprises are facing severe economic pressure due to the pandemic, they are still suggested to pay attention to compliance risks and should not take any risks out of desperation. According to the Law of the People’s Republic of China on the Administration of Tax Collection, tax fraud and fraudulent export tax rebates are punishable by a fine equivalent to up to five times the amount of the payable unpaid tax. Pursuant to Articles 204, 205, and 208 of the Criminal Law of the People’s Republic of China, fraudulent export tax rebates, false issuance of special VAT invoices or other invoices used for fraudulent export tax rebates or tax deduction, false invoicing, illegal purchase of special VAT invoices, purchase of forged special VAT invoices, and other acts may all constitute crimes and incur criminal liability.
III. Practical reminders:
With respect to the crime of falsely issuing special VAT invoices, which often occurs as a tax compliance risk, the Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of the Decision of the Standing Committee of the National People’s Congress on Punishing the Crime of Falsely Issuing, Forging and Illegally Selling Special VAT Invoices stipulates that those who engage in any of the following acts are “falsely issuing special VAT invoices”:
(1) issuing special VAT invoices for others, for oneself, allowing others to do so for oneself, and causing others to do so without sales of goods or provision or acceptance of taxable services;
(2) issuing special VAT invoices containing untrue quantities or amounts for others, for oneself, allowing others to do so for oneself, or causing others do so even though there are sales of goods or provision or acceptance of taxable services; or
(3) carrying out actual business activities, but having others issue special VAT invoices for oneself.
With respect to conviction and sentencing, the Circular of the Supreme People’s Court on Issues Relating to the Conviction and Sentencing Standards for False Issuance of Special VAT Invoices (Fa [2018] No. 226) provides that if the amount of the tax on a falsely issued invoice exceeds RMB 50,000, the wrongdoer may be subject to imprisonment of up to three years or detention and a fine of RMB 20,000 to RMB 200,000. If the amount of the tax on a falsely issued invoice exceeds RMB 500,000, such invoice may be regarded as a falsely issued special VAT invoice with “a larger amount.” If the amount of the tax on a falsely issued invoice is more than RMB 2.5 million, the amount can be considered “huge.”
In fact, the State Administration of Taxation has recently announced a series of cases involving the investigation of fraudulent refunds of retained tax credits, [2] in which enterprises concealed sales revenues, reduced output tax amounts, and made false filings, etc., which were identified by the tax authorities through big data analysis with administrative fines imposed. Therefore, enterprises are once again reminded to pay attention to tax compliance to avoid administrative tax penalties or the pursuit of criminal liability.
[1] Pursuant to the Announcement of the General Administration of Taxation of the Ministry of Finance on Expanding the Scope of the Policy of Full Refund of Retained VAT Tax Credits (Announcement No. 21 of the General Administration of Taxation of the Ministry of Finance in 2022), the scope of the policy of full monthly refund of retained incremental VAT tax credits and one-time refund of retained stock tax credits is expanded to include the “wholesale and retail industry,” the “agriculture, forestry, animal husbandry and fishery industry,” the “accommodation and food and beverage industry,” the “residential services, repair and other services industry,” and the “education,” “health and social work,” and “culture, sports and entertainment” industries (including individual industrial and commercial households), which are collectively referred to as the “wholesale and retail industry and other industries.”
[2] The Fifth Inspection Bureau of Beijing Municipal Tax Service investigated and dealt with a case involving a fraudulent refund of retained tax credit (chinatax.gov.cn) (http://www.chinatax.gov.cn/chinatax/n810219/c102025/c5175734/content.html); the tax authority of Hainan Province investigated and dealt with a case involving a fraudulent refund of retained tax credit by a commercial enterprise (chinatax.gov.cn) (http://www.chinatax.gov.cn/chinatax/n810219/c102025/c5175732/content.html);the tax authority of Tongliao City of the Inner Mongolia Autonomous Region investigated and dealt with a case involving joint fraudulent refunds of tax credits (chinatax.gov.cn) (http://www.chinatax.gov.cn/chinatax/n810219/c102025/c5175731/content.html).