Recently, the author's team received a consultation case on whether tax planning has tax risks. A power generation enterprise needs to purchase a large amount of straw for power generation but cannot obtain a compliant invoice. The tax company provided a tax planning solution for it, i.e., to let the power generation enterprise's affiliate recycling enterprise to set up a cooperative in the front-end, and then the cooperative will purchase and sell the straw to the recycling enterprise and issue invoices for agricultural products, and then the recycling enterprise will sell the straw to it and issue VAT invoices to it. Accordingly, the power generation enterprises can obtain legal invoices for cost deduction and input credit for straw procurement. However, in the author's opinion, there is a big loophole in this program, and once this program is adopted, the power generation enterprises will face a very high tax risk. Based on this, this article is intended to analyze the tax risks of this tax planning scheme in detail from this case and put forward a brief solution idea for it, in order to provide useful suggestions for the enterprises facing the same dilemma.

I. Tax planning program: the establishment of professional cooperatives to solve the invoice problem

(I) Reason for the case: the intention to realize the transformation and upgrading of enterprises and cost control

For traditional power generation enterprises, how to optimize industrial upgrading, the development and use of biological and other clean technologies to generate electricity is an important issue facing them. In this regard, a power generation company has introduced a new technology that utilizes direct straw combustion to generate electricity, which allows straw to be burned directly in the boiler, generating high-pressure steam to drive the turbine to do work, which in turn drives the generator to generate electricity. Once the technology in the power generation enterprise comprehensive landing not only makes the enterprise transformation and upgrading, become a new biopower enterprise, and the technology is also conducive to the realization of energy saving and emission reduction, environmental protection benefits, and the national environmental protection strategy in line.

However, enterprises are facing the dilemma of high tax burden and cost due to the inability to obtain invoices. Firstly, the enterprise purchases straw from farmers but the farmers are not willing to go to the tax authorities to open invoices for agricultural products on behalf of the power generation enterprise; secondly, the amount of straw in the local urban area or even in the province can not satisfy its demand, and it is not possible to fill out and use invoices for purchasing agricultural products in the inter-provincial area. In order to realize the transformation and upgrading, and to control the cost and tax burden within a certain range, the enterprise found a tax company to solve the problem of not being able to obtain invoices for the enterprise.

(ii) Solution path: Establishment of a farmer's professional cooperative at the front-end

The solution given by the tax company was to let the power generation enterprise set up a farmer's cooperative in the front-end of its affiliated company (recycling enterprise). The cooperative will purchase straw within the urban area or across the province and sell it to the recycling enterprise and issue a sales invoice for agricultural products to the recycling enterprise. The recycling enterprise will obtain the sales invoice for agricultural products and make input deduction according to the tax rate of 9% or 10%, and then sell the straw to the power generation enterprise and issue VAT special invoice. As a result, the problem of high cost and tax burden caused by the inability of power generation enterprises to obtain invoices can be solved. However, the power generation enterprise also suggested that although the invoice for straw purchase was solved, it needed to go through two layers of transportation, which increased the transportation cost and storage cost of the enterprise. The tax company then proposed that the farmers transport the purchased straw directly to the power company.

(iii) Summary: Beware of "tax financing" turning into "tax worries".

The power generation enterprise still had some concerns about the tax planning program proposed by the tax company, so it found the author's team for consultation. In the author's opinion, the program has major irregularities. According to the "Notice of the Ministry of Finance and the State Administration of Taxation on Relevant Taxation Policies for Farmers' Specialized Cooperatives" (Cai Shui [2008] No. 81) No. 52), farmers' cooperatives are exempted from value-added tax (VAT) on the sale of agricultural products produced by members of the cooperatives, which is treated as the sale of self-produced agricultural products by agricultural producers. However, specific to this case, the straw sold by the cooperative to the recycling enterprise was not the agricultural products produced by the farmers of the cooperative, but belonged to the purchased agricultural products, and did not meet the requirements of the tax policy. Once the tax system warning or a link of problems, the tax authorities or public security organs will comprehensively verify whether the cooperative has the ability to produce agricultural products, etc., and the cooperative is only as an intermediate bridge, does not have the ability to self-produce, it is very easy to be recognized as a shell enterprise, the recycling enterprises and power generation enterprises as the cooperative's downstream enterprises will also face very high tax risks.

II. Inventory of the three major tax risks faced by the tax planning program

(i) All three parties in the transaction chain are facing criminal risks related to tax.

1. Farmers' specialty cooperatives face the criminal risk of falsely opening invoices for tax deduction.

As a matter of fact, there are certain conditions for the establishment of farmers' specialized cooperatives. For example, according to the provisions of the Law on Farmers' Specialized Cooperatives, farmers' specialized cooperatives should have at least five members, of which farmers account for at least eighty percent of the total number of members. In the actual establishment process, there may be fraudulent use of farmers' personal information registration. In the case authorities according to the business registration information to find the registered person to investigate, if the cooperative is found to be fraudulently established in the name of others, will be further confirmed that the cooperative is a shell enterprise.

At the same time, as mentioned above, the cooperative has strict requirements for the application of the aforementioned Cai Shui [2008] No. 81, which must sell agricultural products produced by the members of the cooperative. However, in practice, the cooperative under the tax planning does not have the ability to produce crops and no actual place of business. In practice, the case-handling authorities will check the registered address of the cooperative on the spot, and will find that the cooperative is not registered in the agricultural production area, but in a CBD area, and even the actual place of business can not be found. More importantly, the straw sold by the cooperative to the recycling enterprise was not self-produced, in other words, it should not be subject to the tax incentives of tax exemption at all, and should not issue invoices for the sale of agricultural products. According to Article 205 of the Criminal Law, it is highly likely that the behavior of the agricultural cooperative will be recognized as false invoicing by others, which constitutes the crime of false invoicing for tax deduction, and faces a criminal risk of up to life imprisonment.

2. Recycling enterprises face the criminal risk of falsely issuing special VAT invoices

As mentioned above, cooperatives with fraudulent use of personnel information and no actual place of business are very likely to be recognized as shell enterprises, and recycling enterprises and power generation enterprises may also be recognized as falsely issuing VAT invoices for the purpose of offsetting input tax in the absence of a real transaction of goods with fictitious contracts and bank flows, and also face severe criminal sanctions.

For the recycling enterprise, it is in the middle of the transaction chain, and the straw is transported directly from the farmers to the power generation enterprise, and does not flow to it. Therefore, the recycling enterprise is more likely to be characterized as an enterprise with two ends out of joint, and use the cooperative to obtain false sales invoices of agricultural products to falsely deduct input tax and falsely issue VAT invoices to the outside world.

3. Power Generation Enterprises Face Criminal Risks of Falsely Issuing VAT Specialized Invoices or Illegally Purchasing VAT Specialized Invoices

For the power generation enterprise, even if it can provide the case-handling authorities with relevant evidence such as straw in kind, in practice, the case-handling authorities will usually find the farmer who sells the straw in real terms, and since the farmer does not establish a direct purchase and sale relationship with the power generation enterprise, it is very likely that he does not recognize or know the existence of the power generation enterprise, and will make remarks unfavorable to the power generation enterprise. Accordingly, the case-handling authority will also consider that the power generation enterprise accepts the false VAT invoices for the purpose of tax deduction without any real transaction, which causes serious loss to the state tax and constitutes the crime of false VAT invoices.

To take a step back, even if the case-handling authority recognizes that the power generation enterprise has real business transactions, the goods have authenticity, and the invoices obtained from the recycling enterprise are not over-invoiced or over-invoiced, and there is no subjective purpose of fraudulent tax deduction, and objectively there is no loss of fraudulent tax deduction, it does not constitute the crime of fraudulent invoicing. However, according to the provisions of Article 208 of the Criminal Law, the power generation enterprise also faces the criminal risk of being accused of the crime of illegal purchase of VAT invoices.

(ii) All three parties in the transaction chain are facing the risk of tax-related administrative penalties.

Although the three parties have argued with the case-handling authorities from both tax law and criminal law perspectives that the false invoicing under the tax planning does not constitute a tax-related criminal offense, and the case-handling authorities have also recognized this argument, the scheme is still facing a higher risk of tax-related administrative penalties. Specifically:

1. Agricultural cooperatives face the risk of administrative penalties for false invoicing

According to Article 21 and Article 35 of the Measures for the Administration of Invoices, as long as the falsely issued invoices do not conform to the actual business operation, it constitutes false invoicing under administrative law and faces the administrative risk of administrative penalty for false invoicing. The cooperative's sale of purchased straw disguised as self-produced straw does not comply with the tax exemption policy for agricultural products, but the issuance of invoices for the sale of agricultural products inevitably constitutes false invoicing under administrative law and faces the risk of administrative penalty for false invoicing.

2. Recycling enterprises face the risk of administrative penalties for tax evasion or false invoicing

As a matter of fact, for recycling enterprises, they are easy to be considered by tax authorities as having two tax violations. The first is obtaining falsely issued sales invoices of agricultural products for input credit. The tax authorities may consider the recycling enterprise to have committed tax evasion according to the Circular of the State Administration of Taxation on Issues Concerning the Handling of Taxpayers Obtaining Fraudulently Issued VAT Special Invoice (Guo Shui Fa [1997] No. 134) and impose a fine of up to five times of the amount of tax evaded. Secondly, the act of issuing VAT special invoices to power generation enterprises was deemed to constitute false invoicing, and the tax authorities may also impose administrative penalties on them in accordance with the Measures for the Administration of Invoices.

3. Power generation enterprises face the risk of administrative penalties for tax evasion or false invoicing

For a power generation enterprise, if it obtains false invoices from a recycling enterprise, it may be subject to a fine of up to five times the amount of tax evasion by the tax authorities in accordance with the provisions of Guo Shui Fa [1997] No. 134. It may also be recognized by the tax authorities as false invoicing and administrative penalties may be imposed on it. In practice, tax authorities often impose administrative penalties on enterprises for tax evasion.

(iii) All three parties in the transaction chain are exposed to the risk of paying VAT, surtax and late payment fees.

For the cooperatives, the purchased straw for external sales does not enjoy the VAT exemption policy, and they should pay VAT, surtax and late payment fees according to the tax law. For recycling enterprises and power generation enterprises, the false invoices obtained by them cannot be regarded as legal and valid VAT invoices, and they should transfer the input tax amount and pay the VAT, surtax and late payment fees. In addition, the tax authorities may also require the recycling enterprise and the power generation enterprise to pay the enterprise income tax and late payment fees in accordance with the "Measures for the Administration of Pre-tax Deduction Vouchers for Enterprise Income Tax".

III. Adjusting the business model under tax planning based on business authenticity

It should be emphasized that the tax planning scheme must be based on business authenticity as the bottom line. Under the current strong regulatory trend of "nine dragons ruling the tax", the business model built purely for the purpose of obtaining invoices for offsetting inputs and cost deductions will certainly not be able to withstand the rigorous scrutiny of the regulatory authorities, and the risk of tax implications is extremely serious. In this regard, for the above tax planning program, the author puts forward several suggestions for reference.

(i) Establishing cooperatives where farmers produce crops

The biggest drawback of this tax planning scheme is that the cooperatives do not have the ability to actually produce crops, and the straw sold to the recycling enterprises is not self-produced. Therefore, it is suggested that power generation enterprises can first carry out field surveys in the surrounding provinces where they are located, and organize local farmers to set up cooperatives that fully comply with the legal requirements in several areas with large straw production, and then sell the straw generated from self-produced crops to recycling enterprises, so as to prevent the risk of non-compliance with invoices from the source.

(ii) Organize and retain business information in the whole process

In practice, the establishment of recycling enterprises at the front end of waste-using enterprises is the business norm. In the tax planning program, the tax company did not let the power generation enterprise directly obtain invoices from the cooperative but set up a recycling enterprise at the front end of the isolation layer, in order to block the tax risk for the power generation enterprise, the idea is not improper. However, no matter how many segregation layers are set up by the power generation enterprises at the front end, since VAT is a chain tax with the feature of transferability and obvious risk conduction, the risk is likely to spread and extend to the upstream and downstream once a problem occurs in one of the main parties of the transaction chain. Therefore, for the power generation enterprises, the business authenticity as the criterion, the whole process of business information organization and preparation is the correct approach, once any tax risk, can be used as evidence of defense.

In fact, the author believes that, in addition to the power generation enterprises to stay with the recycling enterprises between the purchase and sales contracts, commissioned bill of lading, or transfer of goods right certificate, in and out of the warehouse documents, transportation documents, vehicle information, and other clichéd proof of the authenticity of the business of the materials, power generation enterprises need to require the recycling enterprises to send people or in the co-op to recruit personnel, stationed in the co-op, is responsible for the delivery of straw, billing, and farmers to communicate with the other matters. , to build a more comprehensive chain of evidence for business authenticity.

(iii) Obtaining immediate refundable income to broaden the profit points of enterprises

The use of crop straw for power generation is usually in line with the requirement of the policy of "instant levy and instant refund". However, in the specific application process, power generation enterprises should pay special attention to the Announcement on Improving the VAT Policy on Comprehensive Utilization of Resources (Announcement No. 40 of 2021 by the Ministry of Finance and the State Administration of Taxation) and the Preferential Catalogue of VAT on Products and Services for Comprehensive Utilization of Resources (2022 Edition) and other policy provisions, and pay attention to whether the invoices are obtained in compliance with the requirements, and whether the power generation by using straw complies with the technical standards and relevant conditions, in order to obtain the instant tax refund. In order to obtain the immediate refundable income, expand the enterprise's income and obtain higher profits.

IV. Summary

In today's highly developed market economy, as an economically rational person, there is nothing wrong with making legal and reasonable tax planning through appropriate transaction arrangements in pursuit of obtaining maximum benefits at minimum costs. However, if the transaction arrangement wanders on the edge of legality and illegality, breaks through the rationality of business and infringes the tax interests of the country, such tax planning may be inappropriate and may also incur criminal risks. Therefore, in the process of tax planning, enterprises should be extremely cautious and consider the tax risks and how to build a more legal and reasonable transaction model from multiple perspectives, so as to achieve a win-win situation that does not harm the tax interests and maximizes the profits of the enterprise.