Recently, a trading company was audited by the tax authorities for obtaining "proved false" invoices, and the case reflects a common risk faced by trading companies: the downstream recipient company is implicated because the upstream invoicing party issued invoices that were proved to be false. Then, the competent tax authorities of the upstream enterprise issued the Notice of Tax Co-operation and Notice of Proven False Invoicing, can the competent tax authorities of the downstream invoiced enterprise make different determinations and come to the opposite conclusion that the business is real? Does the invoiced enterprise have to pay back the tax? Can the real costs be deducted? In this paper, a case as an introduction to the above issues to be analyzed for the reader's reference.

I. Introduction of the case

During the period from the end of 2019 to April 2020, Shanghai Company A (the invoiced party) signed a purchase contract with Shenzhen Company B and Shenzhen Company C (the invoicing parties), agreeing to purchase a total of 2,500 tons of "304 cotton bales" (stainless steel scrap) and send them to Company D. In April 2020, Company A issued 157 contracts with Company B and Company C. Company B and Company C issued 157 contracts with Company B and Company C. Company A issued 157 contracts with Company B and Company C. Company A issued 157 contracts with Company B and Company C. In April 2020, Company A declared deduction to Shanghai Baoshan District Taxation Bureau with 157 invoices issued by Company B and Company C.

On May 30, 2022, the competent tax authorities of Company B and Company C in Shenzhen sent to the Audit Department of Shanghai State Taxation Bureau a notice of confirmed false invoicing of Company B (128 invoices) and Company C (29 invoices) and a Notice of Tax Co-operation and Investigation, together with a list of the false invoices (157 invoices in total). The main content of the notification form was: "We hereby inform you of the VAT invoices confirmed to have been falsely issued (see the Annex for details), please deal with them in accordance with the relevant provisions, and feedback the relevant situation and the results of the tax treatment to our bureau." Thereafter, the Inspection Division of the Shanghai State Taxation Bureau forwarded the aforesaid materials to the Baoshan Tax Bureau.

On 16 July 2022, Baoshan Taxation Bureau filed a case for special tax inspection of Company A. On 23 July 2022, Baoshan Taxation Bureau issued a notice of tax inspection to Company A. On 5 September 2022, the Defendant Baoshan Taxation Bureau issued an audit report, which was intended to qualify the acceptance of the qualitatively fraudulent VAT invoices as "abnormal invoices" and make an input entry entry for the invoices.  103.93 yuan, total price and tax: 14,680,772 yuan) and 29 VAT invoices issued by Company C (total amount: 286,179.57 yuan, total tax: 486,570.43 yuan, total price and tax: 3,348,750 yuan), which were all certified for deduction and are now all certified for deduction, and Baoshan Taxation Bureau served the "Decision of Tax Processing" to request Company A to Baoshan Taxation Bureau sent a "Tax Treatment Decision" to require Company A to collect RMB2,619,674.36 of value-added tax, RMB130,983.72 of urban maintenance and construction tax, RMB78,590.23 of surcharge on education fee and RMB52,393.49 of surcharge on local education fee. At the same time, Company A was served with a Notice of Tax Matters, informing Company A to provide tax-related information relating to the vouchers for pre-tax deduction of enterprise income tax, and that if the vouchers were not provided by the deadline, tax adjustments would be made in accordance with the relevant provisions of the Enterprise Income Tax Law of the People's Republic of China.

II. Analysis of the legal issues at issue in this case

(I) In practice, the invoicing party constitutes false invoicing, and the invoiced party may strive for two kinds of qualitative treatment.

In the case of false invoicing, tax laws and regulations for the invoicing party and the invoiced party's evaluation is not the same, in the invoicing party constitutes false invoicing, the invoiced party based on the real transaction, can fight for the characterization of the following two cases:

First, The invoicing party constitutes false invoicing, and the invoiced party constitutes good faith acquisition of false VAT invoices. The basis of the invoiced party obtaining the false invoices in good faith is the relevant provisions of the Circular of the State Administration of Taxation on the Handling of Issues Concerning Taxpayers Obtaining False VAT Invoices in Good Faith (Guo Shui Fa 〔2000〕 No. 187) and the Approval Reply of the State Administration of Taxation on the Issues of Adding Late Payment Charges to Taxpayers Obtaining False VAT Invoice with Good Faith that the Tax has been Deducted (Guoshuifan 〔2007〕 No. 1240). In this case, the invoiced party shall not be punished for tax evasion or fraudulent export tax rebate, and shall not be subject to the relevant provisions on late payment fees and fines, and shall be allowed to offset the input tax if it can obtain legal and valid special invoices from the seller again.

Second, the invoicing party constitutes false invoicing, the invoiced party is not dealt with, and the input tax can be deducted. The basis for obtaining false invoices by the invoiced party based on real transactions is the provisions of the Announcement of the State Administration of Taxation on Relevant Issues Concerning Taxpayers' External Issuance of VAT Special Invoices (Announcement of the State Administration of Taxation No. 39 of 2014), which stipulates that: i. the taxpayer sells goods to the invoiced party taxpayers or provides VAT taxable labor services or taxable services; ii. the taxpayer collects the sold goods or provided taxable labor services from the invoiced party taxpayers; iii. the taxpayer receives the taxpayers' tax and other taxpayers' money from the invoiced party taxpayers; iv. Second, the taxpayer has collected from the taxpayer of the invoicee the payment for the goods sold, taxable services provided or taxable services rendered, or has obtained the documents requesting for the payment for the sales; third, the taxpayer has issued to the taxpayer of the invoicee the relevant contents of the VAT invoice in accordance with the regulations, which are in line with the goods sold, taxable services provided or taxable services rendered, and the VAT invoice is legally obtained by the taxpayer and issued in its own name. In this case, Company A can claim this situation, Company B and C sell goods to Company A, collect money, and issue VAT invoices in its own name in line with the goods sold, based on the VAT invoices obtained by Company A from Company B and C are real transactions, so the VAT invoices obtained by Company A can be used as offsetting vouchers to offset the input tax.

(II) If the recipient enterprise disagrees with the abnormal vouchers recognized by the tax bureau, it shall submit an application for verification.

According to the relevant provisions of the Announcement of the State Administration of Taxation on the Management of Abnormal VAT Deduction Vouchers and Other Relevant Matters (Announcement No. 38 of 2019 of the State Administration of Taxation), the tax treatment of obtaining abnormal vouchers can be categorized into two modes:

1、 Tax treatment in the case where no deduction of consumption tax or VAT has been made and no export tax refund has been declared yet

According to the provisions of Item 5 of Article 3 of the Announcement of the State Administration of Taxation on the Management of Abnormal VAT Deduction Vouchers and Other Relevant Matters (Announcement of the State Administration of Taxation No. 38 of 2019), taxpayers who have objections to abnormal vouchers recognized by the tax authorities may submit verification applications to the competent tax authorities. Upon verification by the tax authorities, the taxpayer can continue to declare credit or re-declare export tax refund if it is in line with the current VAT input tax credit or export tax refund regulations; the taxpayer can continue to declare credit of consumption tax if it is in line with the provisions on consumption tax credit and has paid consumption tax.

2、 Tax treatment in case of already offsetting consumption tax, value-added tax and already applying for export tax rebate

According to the provisions of Item 4 of Article 3 of the Announcement of the State Administration of Taxation on the Management of Abnormal VAT Deduction Vouchers and Other Relevant Matters (Announcement of the State Administration of Taxation No. 38 of 2019), taxpayers with tax credit grade A who have obtained abnormal vouchers and have already declared deduction of value-added tax, handled export tax refund or deducted consumption tax may, within 10 working days from the date of receipt of the notification from the tax authorities, submit an application for verification to the tax authority in charge of the case. Submit an application for verification. Upon verification by the tax authorities and in compliance with the relevant regulations on input tax credit for VAT, export tax refund or consumption tax credit, the taxpayers may not transfer out the input tax credit, recover the refunded tax, or offset the consumption tax allowed to be deducted in the current period. If the taxpayer fails to submit the verification application after the deadline, the taxpayer will lose the right.

According to the above relevant provisions, if the invoice issued by the upstream supplier is recognized by the tax authority as false invoicing or the upstream enterprise has fled (lost contact), and the invoiced enterprise is recognized by the tax authority as having obtained abnormal vouchers and is required to make transfer of input tax and payment of tax, the invoiced enterprise should actively communicate with the tax authority, explain the facts of the case and provide relevant materials, including but not limited to VAT invoice information, business contracts, transportation and storage certificates and bank statements, etc., which can be used for verification of the invoice. The recipient enterprise shall actively communicate with the tax authorities to explain the facts of the case and provide relevant materials, including but not limited to VAT invoice information, business contracts, transportation and warehousing certificates, and bank statements, etc., which can prove the authenticity of the transactions, and can also invite the tax authorities to conduct on-site inspections and prepare relevant materials for the sale of goods, so as to restore the upstream and downstream transaction chains, and to use the real sale of goods to support the real purchase of goods/raw materials.

(III)Acquisition of special invoices recognized as abnormal vouchers does not necessarily lead to back payment of enterprise income tax

The Announcement of the State Administration of Taxation on Matters Relating to the Management of Abnormal VAT Deduction Vouchers (SAT Announcement No. 38 of 2019) and the Announcement of the State Administration of Taxation on Issues Relating to the Determination and Handling of VAT Special Invoices Issued by Fugitive (Lost) Enterprises (SAT Announcement No. 76 of 2016) are documents issued by the tax authorities in respect of the management of VAT, while the management of the EIT is governed by the EIT Law. management is to follow the Enterprise Income Tax Law and its implementing regulations as well as the Measures for the Administration of Vouchers for Pre-tax Deduction of Enterprise Income Tax (SAT Announcement No. 28 of 2018), the VAT treatment and the EIT treatment after the taxpayers obtain the non-compliant invoices are not the same. The details are elaborated as follows:

Firstly, the taxpayer obtaining special invoices is recognized as abnormal vouchers is only temporarily frozen the right to offset VAT input tax, export tax refund, offset raw materials paid consumption tax, whether the compliance is still subject to verification by the tax authorities; and even if the verification is not passed, it can still initiate legal remedy procedures such as reconsideration and litigation, and if the abnormal vouchers are lifted before the EIT settlement period, the taxpayer offsetting VAT input tax If the abnormal vouchers are lifted before the enterprise income tax remittance period, the taxpayers' rights to offset VAT input tax, export tax rebate, and consumption tax paid on raw materials will be restored, and normal pre-tax deductions can be made; if the abnormal vouchers are lifted after the remittance period, the taxpayers can also make special declarations to make up for the deduction in the year of the expenditure.

Secondly, even if the abnormal vouchers can not be lifted, "Measures for the Administration of Vouchers for Pre-tax Deduction of Enterprise Income Tax" also gives the taxpayers the right to use external vouchers other than invoices for deduction, i.e., due to the other party's cancellation, revocation, revocation of business license according to the law, recognized by the tax authorities as a non-normal household, and other special reasons, taxpayers are unable to reissue, exchange invoices, and other external vouchers, can be based on the inability to reissue or exchange the invoices, Other external certificates of the reasons for the supporting information (including industrial and commercial cancellation, the withdrawal of institutions, included in the non-normal business households, bankruptcy announcements and other supporting information), the relevant business activities of the contract or agreement, the use of non-cash payment vouchers, proof of transportation of goods, goods into the warehouse, out of the warehouse of the internal vouchers, accounting records and other information such as the authenticity of expenditures and other materials for pre-tax deduction.

(IV) If the "abnormal invoice" is suspected of false invoicing, it should be defended from the perspective of authenticity of the transaction.

If the tax authorities identified as abnormal vouchers, the risk of being recognized as false invoicing and transformed into criminal liability cannot be ruled out. Regardless of whether the taxpayer applies for verification of the "abnormal voucher" identification, the tax authorities will first investigate the authenticity of the business in the identification and review process, and will turn to the audit process if they find clues of false invoicing (Article 3 (4) of the Operational Procedures for Handling of Abnormal Value-added Tax Deduction Vouchers (for Trial Implementation)): the issuing party and the recipient of the abnormal vouchers are suspected of false invoicing, false accounting, and false accounting.  Therefore, the enterprise should make full use of each complaint, the opportunity to defend, from the transaction is true and there is no false opening to prepare the defense information.

1、Confirm that there is a real transaction of goods

The invoiced party in the transaction process should focus on preserving the two sides of the contractual materials of goods transactions (such as purchase and sales contracts, transportation contracts, etc.), the product in and out of the warehouse, weighing sheets, etc..

2、Confirming the real payment of goods

The invoiced party in the payment of goods to the upstream enterprises, should use the public account, save the bank transfer certificate and other documents to confirm that the payment of goods has been actually paid. The payment should also be consistent with the amount recorded in the contract and VAT invoice.

3、 Obtaining legal and valid VAT deduction vouchers

When accepting invoices issued by upstream enterprises, the invoiced party shall require them to issue VAT special invoices that are consistent with the real goods transactions, and the invoicing party, name of goods, amount and quantity shall correspond to the real transactions.

III. enterprises should pay attention to prevent invoice risk in daily transactions

(I) to do a good job in advance risk prevention and investigation

Obtaining invoices must originate from the real transaction, and real transaction business should also ensure that all aspects of the procedures are complete. First, the invoice information should be corresponding; second, the transportation of goods should be traceableA; third, the collection unit should be consistent. Before the transaction, enterprises should raise the awareness of prevention, pay attention to the problem of "abnormal vouchers" in the mind, and do a good job of risk prevention beforehand. It is recommended that taxpayers make necessary understanding of the counterparty before the transaction, and assess the corresponding risks by examining the counterparty's business scope, scale of operation, business qualifications and other relevant circumstances. Once it is found that the goods provided by the supplier enterprise are abnormal, vigilance should be aroused to do further tracing, and the supplier enterprise can be required to provide relevant supporting materials, and try not to purchase the goods with significant doubts. In the transaction, the payment for the goods must be transferred through the bank account, and to verify whether the bank account and the information contained in the invoice is consistent. Upon receipt of an invoice, the enterprise is required to request the invoicing party to provide relevant information and carefully compare the information related to the invoice. If there is any doubt about the invoices obtained, they should suspend the payment and declaration of input tax deduction, and seek help from the tax authorities in time to verify the invoices. Especially for large purchases of goods, or long-term supply of units, it should be a key review.

(II) Standardize the invoice terms in the contract

According to the tax administration and invoice management laws and regulations, "the payee shall issue invoices to the payer", because the laws and regulations have been clearly defined, so in the process of business activities in the enterprise when signing the contract will seldom be included in the invoice terms of the contract. From the view of judicial practice, some regional courts believe that invoice obligation belongs to the obligation of public law, does not belong to the scope of civil law adjustment, so once the enterprise encounters disputes arising from the invoice problem will fall into the dilemma of public remedy. In order to minimize the enterprise invoice dispute, hereby put forward the following suggestions:

First, to clarify the invoicing obligations of the payee, enterprises should consider the invoice factor when choosing suppliers, and give priority to suppliers who can provide the prescribed invoices.

The second is to clarify the time for the payee to provide invoices. There are different settlement methods for the purchase and sale of goods or the provision of labor services, and when enterprises purchase and accept them, they must combine them with their own situation, specify the settlement method in the contract, and clarify the time for the payee to provide invoices.

Thirdly, the type of invoice provided by the payee is clear. The type of invoice that enterprises involve most in daily transactions is the VAT special invoice and VAT ordinary invoice, which involves the question of whether the enterprise can offset the tax as well as the pre-tax deduction and listing. Different types of invoices have different functions, so the type of invoice issued by the payee must be clearly agreed in the contract.

Fourth, clear invoices are not issued in a timely manner, issued non-compliant invoices and other resulting liability, civil contracts to take the meaning of autonomy, as long as the agreement on liability does not violate the relevant provisions of laws and regulations, are legally binding on all parties to the contract are binding on all parties to the contract, in the contract terms and conditions of the explicit agreement on the liability can be played to settle disputes and stop the role of the controversy.

(III) retain the relevant evidence to avoid losses

Invoiced enterprises in the purchase of goods should pay attention to the retention of relevant evidence materials, once the invoice problems, in order to support the authenticity of the business transaction, the evidence can play a vital role, and invoices is an important proof of pre-tax deduction of enterprise income tax, in general, no invoices, the corresponding costs can not be deducted before the tax. Although the Announcement of the State Administration of Taxation on the Issuance of Measures for the Administration of Pre-tax Deduction Vouchers for Enterprise Income Tax (Announcement No. 28 of 2018 of the State Administration of Taxation) has expanded the scope of pre-tax deduction vouchers to a certain extent, according to Article 13 of the Announcement, the invoices should still be used as valid deduction vouchers if the invoices can be obtained, i.e., invoices should be used as the pre-tax deduction voucher of the enterprise income tax in principle. In practice, the tax authorities of the cost and expense deduction audit (inspection), "other valid vouchers" as the basis for deduction of the recognition of the conditions are still very harsh, did not obtain the invoice, still face the risk of not being able to realize the pre-tax deduction. Therefore, enterprises should organize and retain information such as purchase contracts, accounting vouchers, bank electronic receipt of payment, etc. to confirm the authenticity, legality and reasonableness of expenditures incurred, especially by the invoiced enterprises, so as to avoid being implicated by the upstream invoicing enterprises due to insufficient evidence, and facing the risk of tax reimbursement, late payment, fines, and even criminal liabilities.