There are many controversies about how to deal with the enterprise tax allowance in bankruptcy proceedings. Bankrupt enterprises usually do not meet the conditions of tax refund due to insolvency and other reasons, and they generally have no output tax to deduct because of the suspension of business. In practice, in the case that the bankrupt enterprise has no VAT arrears, some managers advocate offsetting the tax arrears of other taxes of the bankrupt enterprise with the tax credits, while some tax authorities think that the tax credits of VAT can only offset the tax arrears of other taxes. This involves the connection and application of tax legal rules and civil and commercial laws. Starting from a judicial case, the author will discuss the definition of the nature of the value-added tax allowance in bankruptcy procedures, and further discuss the application of the right of set-off in the bankruptcy field for readers' reference.

I. Judgment: the value-added tax retained is the assets of the bankrupt enterprise, which can offset the tax owed by other taxes.

(I) Basic facts of the case

On May 29, 2018, Company A entered bankruptcy proceedings after the court ruled. On November 7, 2018, the court ruled that Company B, Company C, Company D and Company E merged with Company A for bankruptcy and reorganization. During the process of creditor's rights declaration, after verification, Company A owed 329,257,062.97 yuan for consumption tax, enterprise income tax, property tax and land use tax. During the period of bankruptcy and reorganization, with the permission of the court, Company A continued to operate, and paid VAT of 1,714,138.60 yuan in advance in order to apply for invoices. It was also verified that Company B, a subsidiary of Company A, overpaid the enterprise income tax by 5,000,000 yuan. As of November, 2018, Company A has retained value-added tax of 86,860,689.92 yuan in the tax authorities, and its unpaid tax does not include value-added tax. In the special audit report on the merger of Company A, the remaining value-added tax is listed as "other current assets" of Company A. The tax authorities declared tax claims of 329,257,062.97 yuan. The administrator verified that the tax was 235,682,234.45 yuan, but did not confirm the declared tax of 93,574,828.52 yuan (namely, 1,714,138.60+5,000,000+86,860,689.92). The tax authorities refused to accept it, and filed a lawsuit with the court, requesting to confirm that the tax claim was 322,542,924.37 yuan.

(II) The focus of the dispute and the views of all parties

The focus of the dispute in this case is whether the value-added tax of Company A can offset the unpaid taxes of other taxes.

First, the company believes that the confirmation of creditor's rights of bankrupt enterprises should give priority to the application of bankruptcy laws and regulations and judicial interpretation. The value-added tax allowance in this case is the asset of Company A, and the administrator can exercise the right of set-off to set off the value-added tax allowance against the company's unpaid tax principal without damaging the company's property.

Second, the view of the tax authorities: The Notice on the Issue of General VAT Taxpayers Using Input Tax Credits to Deduct VAT Arrears (Guo Shui Fa [2004] No.112, hereinafter referred to as "Document No.112") stipulates that "If taxpayers have tax credits at the end of the period because the output tax is less than the input tax, they should use the tax credits at the end of the period to deduct VAT arrears." However, the tax underpaid by Company A does not include value-added tax, so the value-added tax allowance of 86,860,689.92 yuan of Company A cannot be deducted from taxes other than value-added tax.

Third, court of First Instance: The audit report listed the value-added tax as other current assets of the enterprise, and both parties also recognized that the value-added tax left in this case belongs to the assets of Company A.. On the one hand, there are cases of unpaid taxes in bankrupt enterprises; On the other hand, bankrupt enterprises have specific assets in the tax authorities, which can be considered as mutual debts. The Inland Revenue Department believes that the value-added tax can be deducted and can only be deducted. This view cannot be established. The administrator will give priority to the remaining value-added tax to deduct the unpaid tax, which essentially increases the value of distributable property and benefits the debtor's property. According to Article 113 of the Enterprise Bankruptcy Law, the tax creditor's rights are priority creditor's rights, and the remaining value-added tax will be given priority to deduct the underpaid tax. As a result, the tax creditor's rights will be paid off, the repayment rate of ordinary creditor's rights will be improved, and the interests of ordinary creditors will be safeguarded. Therefore, the value-added tax retained by Company A in the tax authorities can offset its unpaid tax. The tax authorities refused to accept the appeal.

Fourth, court of Second instance: Both parties agree that the 86,860,689.92 yuan VAT tax credit is the enterprise assets of Company A, which is essentially the creditor's right of Company A to the tax authorities, so this case belongs to the situation of mutual debts. The manager of Company A reduced the amount of VAT tax credit owed by Company A in the Review Opinion on Creditor's Rights of Bankruptcy and Reorganization of Company A, which is an initiative to exercise the right of set-off and benefit the property of Company A through debt offset, which is in line with the manager. Although the Inland Revenue Department claims that according to the provisions of Circular No.112, the value-added tax allowance should be deducted from the value-added tax arrears, but it cannot be deducted from other taxes that it owes, but there is no clear prohibition on the general taxpayer to use the value-added tax allowance to deduct taxes other than value-added tax in Circular No.112. At the same time, according to the basic principle of law application, this case should give priority to the relevant laws, regulations and judicial interpretations of enterprise bankruptcy, so the value-added tax of RMB 86,860,689.92 left by Company A in the tax authorities can be used to offset its unpaid taxes.

II. Does the VAT allowance belong to bankruptcy property?

The author thinks that whether the value-added tax allowance can offset the tax arrears of other taxes in bankruptcy proceedings needs to define the nature of the value-added tax allowance first, and then explore whether it belongs to the bankruptcy property of bankrupt enterprises, and then discuss whether it can be offset.

(I) The value-added tax allowance is the assets of the enterprise.

Assets refer to resources formed by past transactions or events of an enterprise, which are owned or controlled by the enterprise and are expected to bring economic benefits to the enterprise. When the output tax amount of an enterprise in the current period is greater than the input tax amount, the tax allowance will be generated. Value-added tax is a tax on the newly added value or added value of goods in the production or circulation of goods, which belongs to extra-price tax. The value-added tax allowance is not included in the accounting profit and loss accounting of enterprises. Under the assumption of going concern, the tax allowance can offset the subsequent output tax of enterprises and reduce the tax payable, which conforms to the definition of assets and actually has the attributes of assets.

In addition, from the policy level, we can also see that the value-added tax allowance is an asset of the enterprise. Since 2019, the Ministry of Finance and State Taxation Administration of The People's Republic of China have successively issued a number of policies to promote the development of VAT tax refund, and the scope of application and the proportion of tax refund have been continuously expanded. The Announcement of the General Administration of Customs of the Ministry of Finance on Deepening the Reform of Value-added Tax (Announcement No.39 of the General Administration of Customs of the Ministry of Finance and the State Administration of Taxation in 2019) clarifies that debtor enterprises that meet the tax refund conditions can apply to the tax authorities for tax refund. Value-added tax credit and tax refund plays an important role in reducing the occupation of working capital of enterprises and relieving the operating pressure of enterprises. The tax credit is changed from offsetting the output tax of enterprises to an asset that can be returned and obtained cash flow.

(II) The tax allowance is the property of the bankrupt enterprise, and the administrator can exercise the right of set-off.

The Enterprise Bankruptcy Law stipulates that "all the property belonging to the debtor when the bankruptcy application is accepted, as well as the property acquired by the debtor after the bankruptcy application is accepted and before the end of the bankruptcy procedure, are the debtor's property". As mentioned earlier, the tax allowance is an asset of the enterprise, so it is also the property of the bankrupt enterprise in the bankruptcy procedure.

Article 41 of "Provisions of the Supreme People's Court on Several Issues Concerning the Application of the Enterprise Bankruptcy Law of the People's Republic of China (II)" stipulates that "a creditor exercising the right of set-off according to the provisions of Article 40 of the Enterprise Bankruptcy Law shall put forward a set-off claim to the administrator. The administrator shall not take the initiative to offset the mutual debts between the debtor and the creditor, unless the offset benefits the debtor's property. " That is, the administrator can take the initiative to exercise the right of bankruptcy set-off for the benefit of the debtor's property without damaging the rights and interests of creditors.

As for the above-mentioned case, the tax authorities entered the bankruptcy proceedings of Company A as creditors and declared the taxes owed by Company A, while the tax allowance belongs to the assets of Company A, which is the creditor's right of Company A to the tax bureau, so Company A and the tax authorities belong to the situation of mutual debts. During the period of bankruptcy and reorganization, Company A didn't produce, so it didn't have to pay value-added tax, and it couldn't offset the value-added tax with the retained value-added tax. If it couldn't offset the other taxes owed, the assets would not be included in the reorganization procedure, which would harm the interests of other creditors. However, offsetting the unpaid taxes of other taxes with the retained tax of Company A essentially increased the value of distributable property and benefited the debtor's property, which was in line with the provisions on offsetting mutual debts. Therefore, the administrator can actively exercise the right of offset.

III. Can the tax allowance in bankruptcy proceedings offset the tax owed by other taxes?

After discussing that the tax allowance belongs to the property of bankrupt enterprises and the administrator can claim the right of set-off, it is necessary to further explore the scope of set-off, that is, can the tax allowance of value-added tax be offset against the tax owed by other taxes in bankruptcy proceedings?

In the aforementioned case, the tax authorities, based on Circular No.112, argued that "if a taxpayer has a tax credit at the end of the period because the output tax is less than the input tax, the tax credit at the end of the period should be used to offset the value-added tax arrears", and that the tax credit can only offset the output tax of value-added tax. In fact, Article 79 of the Detailed Rules for the Implementation of the Law on Tax Collection and Administration stipulates that "when a taxpayer has both tax refund and tax arrears, the tax authorities may first deduct the tax refund and interest from the tax arrears; If there is a balance after deduction, it will be returned to the taxpayer. " That is to say, the current laws such as the Tax Administration Law do not explicitly prohibit ordinary taxpayers from deducting taxes other than value-added tax with the value-added tax allowance.

From the perspective of legal application, after entering the bankruptcy procedure, the relevant laws, regulations and judicial interpretations of enterprise bankruptcy should be given priority. The administrator's behavior of claiming the right of set-off conforms to the provision of the second paragraph of Article 41 of the Provisions of the Supreme People's Court on Several Issues Concerning the Application of the Enterprise Bankruptcy Law of the People's Republic of China on the administrator's initiative to offset mutual debts, which does not damage the tax priority creditor's rights enjoyed by the tax authorities, but also improves the repayment rate of ordinary creditor's rights and safeguards the interests of ordinary creditors. Therefore, in bankruptcy proceedings, the administrator can claim to offset the unpaid taxes of other taxes with the tax allowance.