Editor's Note: It is common in practice for upstream suppliers to escape and lose contact with each other, to be recognized as non-normal households, and to be characterized as false invoicing, etc. The invoices obtained by downstream enterprises receiving invoices are usually recognized as abnormal value-added tax deduction vouchers (hereinafter referred to as abnormal vouchers), and they are faced with the problems of input reversal and back tax payment. This paper analyzes the key points of the application for verification of abnormal vouchers from the scope of identification of abnormal vouchers and puts forward risk prevention and control suggestions for readers' reference.

I. Under what circumstances will the invoices obtained be recognized as abnormal vouchers?

Value-added tax (VAT) is a turnover tax, which is levied on the basis of the added value of each link in the production and circulation of commodities, and the sales and purchases in each link are interlocked, while the special VAT invoice is the formal requirement to ensure the normal operation of the deduction chain. In other words, the levy management method of “offsetting with invoices” is the core of realizing VAT collection and payment. According to Article 9 of the Provisional Regulations on Value-added Tax, if “the VAT deduction vouchers obtained do not conform to the laws, administrative regulations or the relevant provisions of the competent tax department of the State Council”, the corresponding VAT deduction vouchers shall be issued to the person who obtained them. ”, the corresponding input tax amount shall not be deducted from the output tax amount.

Abnormal vouchers are a category of non-compliant tax deduction vouchers as stipulated by the SAT. The State Administration of Taxation (“SAT”) has clarified the non-deductibility of abnormal vouchers in the Announcement on Relevant Issues Concerning the Determination and Handling of Value-added Tax Special Invoices Issued by Fleeing (Lost) Enterprises (SAT Announcement No. 76 of 2016) and the Announcement on Matters Concerning the Management of Abnormal Value-added Tax Deduction Vouchers and Other Relevant Matters (SAT Announcement No. 38 of 2019, hereinafter referred to as Announcement No. 38), specifically The scope of abnormal vouchers includes five types.

In addition, Circular 38 further expands the scope of abnormal vouchers, making it clear that if a general VAT payer declares a high proportion of abnormal vouchers for deduction (the cumulative input tax amount of abnormal vouchers accounts for 70% or more of the input tax amount of all VAT special invoices for the same period) and the amount is large (the cumulative input tax amount of the abnormal vouchers exceeds RMB 50,000 yuan), the VAT special invoices corresponding to the vouchers issued by the general VAT payer will be included in the scope of abnormal vouchers, which will similarly result in downstream enterprises not being able to offset the deduction. The corresponding VAT invoices will also be included in the scope of abnormal vouchers, which will also result in downstream enterprises being unable to deduct.

With respect to the treatment of obtaining abnormal vouchers, Circular 38 and the Operating Procedures for Handling Abnormal VAT Deduction Vouchers (for Trial Implementation) (Taxation General Issue [2017] No. 46, hereinafter referred to as Circular 46) stipulate that the competent tax authority of the invoicee party, upon receipt of the abnormal information pushed to the invoicee party, will issue a Notice on Tax Matters to the invoicee party enterprise, informing that the abnormal vouchers obtained by the invoicee party are not allowed to be declared for offsetting for the time being, and that any declaration already declared for offsetting should be treated as VAT input item. If the taxpayers applying for VAT exemption and tax rebate have already applied for export tax refund, the taxpayers applying for VAT exemption and tax rebate have already applied for export tax refund should recover the corresponding tax refunded. If the consumption taxpayers use the taxed consumer goods recovered from outsourcing or entrusted processing as raw materials for continuous production of taxable consumer goods, if the taxpayers have already declared the tax credit, the tax credit of the consumption tax for the current period will be deducted. If the taxpayer has already declared credit for the continuous production of taxable consumer goods by using purchased or commissioned processing recovered taxable consumer goods as raw materials, the consumption tax allowed to be deducted for the current period shall be offset, and if the current period is not enough to be offset, the tax shall be paid back.

II. What are the points to be concerned about in the application for verification of abnormal vouchers?

As mentioned before, taxpayers who have obtained abnormal vouchers cannot deduct input tax for the time being. Circular No. 38 and Circular No. 46 further stipulate the ways of relief, if taxpayers have objections to the abnormal vouchers recognized by the tax authorities, they should apply for verification to the competent tax authorities within 20 working days from the date of receipt of the Notice on Tax Matters and submit the relevant materials, such as the business contract, bank vouchers and transportation and warehousing certificates, etc. The tax authorities shall complete the verification within 90 days from the date of receipt of the verification. The tax authorities shall complete the verification of the abnormal vouchers within 90 days from the date of receipt of the verification application. If no abnormal situation is found after the verification by the tax authorities, and if it is in line with the current regulations on VAT input credit, the competent tax authorities shall issue the Notice on Tax Matters, and the taxpayer shall be allowed to continue to declare the credit in accordance with the current regulations. Specifically, for a taxpayer with a tax credit rating of A, the taxpayer may, upon receipt of the notice of abnormal vouchers, temporarily refrain from processing input transfers and may submit an application for verification of abnormal vouchers within 10 days. The aforementioned verification mechanism is an important way to avoid loss for the invoiced party that obtains abnormal vouchers, and enterprises should apply for verification and submit relevant information within the specified period to avoid missing the opportunity for relief.

Circular 46 stipulates that after receiving the taxpayer's application for verification of abnormal vouchers, the tax authorities will mainly carry out review in four aspects: first, whether the tax declaration situation is in line with the deduction situation, and second, whether the contract, transportation and storage, funds and invoices are consistent; third, to verify the authenticity of the transaction through the upstream and downstream offsite co-inspection; and fourth, to go to the taxpayer's place of production and operation to carry out on-site investigation of the business situation and production capacity. The fourth is to go to the taxpayer's production and operation place to investigate its operation status and production capacity. From the foregoing provisions, the content of the verification of the tax authorities is mainly centered on the key issue of business authenticity, and the four streams of consistency as a benchmark for judgment. In fact, with the continuous development of commercial trade, in order to save costs and improve logistics efficiency, such as renewable resources, bulk commodities and other industries in the trade link to the instruction delivery as the main mode of delivery of goods, the intermediate trade link is not actually involved in the transportation and warehousing, in practice, there is a lack of transportation and warehousing tax authorities to question the authenticity of the business of the trading enterprise on the grounds of the lack of transportation, warehousing information to prove the situation. In the author's opinion, the tax enforcement should fully consider the industry's specificity and customary mode, and if the enterprises are mechanically required to provide unnecessary logistics, warehousing and other information to prove the authenticity of the business, the taxpayers will be put forward overly harsh requirements, breaking the industry's practices and transaction rules, which is against the principle of administrative reasonableness.

In addition, in practice, there are tax authorities that the invoicing party has not declared taxes, is recognized as non-normal households, the invoiced party to offset the invoices that have not declared taxes caused by the loss of state taxes, for the invoiced party to provide the four streams of consistent and other evidentiary materials to allow offset claims are not recognized. In fact, in the case of a real transaction, the invoiced party has paid the price and fulfilled the contractual obligations, and the seller should issue invoices to it according to the law, and the invoices obtained by the invoiced party on the basis of the real business should be allowed to be deducted, and if the invoiced party in such a case is not allowed to deduct the input tax normally, it is actually the obligation of the invoiced party that has been imposed---. In the case where the invoiced party has fully fulfilled its contractual obligations, it is not obliged to or able to supervise the invoicing party to truthfully declare tax on its sales income. Therefore, for the verified four streams are indeed consistent, there is a real transaction, the invoiced party should be allowed to deduct input tax normally, for the invoiced party has not declared tax in accordance with the law for the part of the invoiced party should be recovered from the invoiced party through the statutory procedures.

In the author's opinion, the mechanism of abnormal vouchers is a balanced means for tax authorities to realize VAT tax collection and management, guarantee full tax collection and protect taxpayers' rights and interests under the idea of “controlling tax by vouchers”, in which the risk of upstream abnormality is enlarged and transmitted to the downstream invoiceelected enterprises, and the invoiceelected party's tax authorities ultimately determine the invoice that does not comply with the regulations through verification. invoices. In other words, this mechanism is set up to realize the balance between tax collection and taxpayers' legitimate rights and interests, rather than the fact that as soon as there is an abnormality in the upstream, the downstream should make an input transfer. Therefore, the key to play the role of this mechanism lies in the fact that the tax authorities should review the verification application of the invoiced enterprise in substance, and if it is in compliance with the regulations, the invoiced party should be allowed to carry out input deduction normally, so as to safeguard the legitimate rights and interests of taxpayers and maintain the normal order of transaction activities.

III. After the application for verification is still not allowed to offset the input, the invoiced party should be how to relief?

(i) Determine the upstream abnormal situation and accurately classify the scope of abnormal vouchers

As mentioned above, in practice, there may be cases in which the tax authorities still do not allow deduction after the invoiced party submits the relevant information, and this article discusses the main points of contention and space with the common upstream being recognized as non-normal households and the cause of false invoicing:

For non-normal households, the Announcement of the State Administration of Taxation on Several Matters Concerning Tax Levy and Administration (SAT Announcement No. 48 of 2019) provides that “if a taxpayer is obliged to make a tax declaration but fails to make a tax declaration for all types of taxes for three consecutive months, the tax levy and administration system automatically recognizes the taxpayer as a non-normal household”, and that, in accordance with the Announcement of the State Administration of Taxation on Relevant Issues Concerning Further Improvement of Tax Registration Management” (Announcement of the State Administration of Taxation No. 21 of 2011), the tax authorities shall announce the taxpayer identification number, enterprise name and business address of the non-normal household in the following month after the determination of the non-normal household, and the following chart shows the announcement issued by a local tax authority in Jiangsu Province. When an enterprise receives a notice of abnormal vouchers, such announcement is one of the channels to determine whether the upstream is an abnormal household. As to how to classify the scope of abnormality for invoices obtained from non-normal households, Announcement No. 38 makes it clear that the scope of abnormality is limited to the VAT invoices of the upstream enterprises that “have not declared to the tax authorities or have not paid the tax in accordance with the regulations”, and there are some tax authorities in practice that determine all the invoices obtained by taxpayers from non-normal households as abnormal vouchers in a sweeping manner. In practice, there are some tax authorities who indiscriminately recognize all invoices obtained by taxpayers from irregular households as abnormal vouchers, which actually expands the provisions of Circular No. 38 on the scope of abnormal vouchers and damages the legitimate rights and interests of taxpayers.

For the upstream is recognized as false opening, the invoices obtained by the downstream enterprises are not universally disallowed for input deduction. In fact, on the one hand, Circular 38 gives taxpayers the right to submit information and apply for verification, and if the verification meets the requirements for input deduction, the deduction should be allowed. On the other hand, the Announcement of the State Administration of Taxation on Relevant Issues Concerning Taxpayers' External Issuance of VAT Special Invoices (Announcement No. 39 of 2014 of the State Administration of Taxation) also cuts the responsibility of whether the upstream false invoicing spills over to the downstream input deduction by dividing the responsibility of whether the upstream false invoicing spills over to the downstream input deduction or not, “Taxpayers who evaded tax through inflating the input tax amount of the VAT, but externally issued VAT special invoices that simultaneously comply with the The issuance of VAT special invoices externally does not fall into the category of externally issued false VAT special invoices if the following circumstances are met: i. the taxpayer has sold goods to the taxpayer of the invoiced party or provided VAT taxable labor services or taxable services; ii. the taxpayer has collected the payment for the goods sold, taxable labor services provided or taxable services provided from the taxpayer of the invoiced party or has obtained the vouchers for soliciting the payment for the sales; iii. the taxpayer has issued VAT special invoices to the taxpayer of the invoiced party in accordance with the regulations. The relevant contents of the special VAT invoice are consistent with the goods sold, taxable labor services provided or taxable services, and the special VAT invoice is legally obtained by the taxpayer and issued in its own name”, the special VAT invoice obtained by the invoiced party in compliance with the above circumstances can be used as VAT deduction vouchers for offsetting the input tax amount. Therefore, false invoicing by the invoicing party does not necessarily lead to the downstream enterprises not being able to make normal input tax deduction, and the enterprises of the invoiced party can examine whether their own business is in line with the provisions of Circular No. 39, and strive to apply and recover the economic losses.

(ii) Relief Procedures for Notice on Tax Matters

In practice, it is controversial as to whether the invoiced party obtaining the abnormal vouchers can initiate the relief procedure in respect of the Notice on Tax Matters requiring its inputs to be transferred out. In Administrative Judgment No. 470 (2020) of Guangdong 71, the invoiced party filed an administrative reconsideration of the Notice of Tax Matters on the transfer out of abnormal vouchers, and filed a lawsuit after the reconsideration was upheld. The court held that the notice in question was an act of informing the invoiced party of the reasons for the abnormal VAT credit vouchers and the way to deal with the abnormal vouchers, and that this act belonged to the act of informing the tax authorities of the fact that they had not yet made the final decision on the handling of the matter, and that it was a The court also pointed out that it was improper for the reviewing authority to conduct substantive review on the process behavior and make a review decision to maintain it, but in view of the fact that the notification letter did not have any actual impact on the rights and obligations of the party to be invoiced, the court corrected it. On the other hand, Administrative Judgment No. 146 of (2020) Min 03 line final made the opposite determination, and the court held that, synthesizing the facts in the case, it was clear that the notice in question was not a mere intermediate act, and that it had actual adverse impact on the tax refund rights and interests of the party to whom the invoice was issued, and thus was justiciable.

In the author's view, the key to determining whether the invoiced party can initiate relief proceedings against the Notice on Tax Matters lies in whether its content has actual impact on the legitimate rights and interests of the taxpayer. In practice, the content of most of the Notices on Tax Matters is “the abnormal VAT deduction vouchers obtained by your organization (see the list) shall be handled in accordance with the provisions as follows ...... If the deduction has been declared, all of them shall be transferred out as input tax in the same period of receipt of this Notice. That is to say, on the one hand, such Notice on Tax Matters has specified that the invoicee needs to transfer out input tax, and at the same time, the amount of tax to be transferred out, which has a clear and substantial impact on the legitimate rights and interests of the invoicee; on the other hand, according to the Announcement of the State Administration of Taxation on the Revision of Partial Tax Law Enforcement Instruments (Announcement of the State Administration of Taxation No. 23 of 2021), for the “abnormal VAT deduction vouchers” (see list in detail), the following treatment shall be made in accordance with the provisions On the other hand, according to the SAT Announcement on the Revision of Some Tax Enforcement Instruments (SAT Announcement No. 23 of 2021), for the Notification of Tax Matters including the “Handling of Abnormal VAT Deduction Vouchers”, the tax authorities shall inform the notified person of his/her right to remedies when notifying him/her of the payment of tax or late payment:

In addition, some tax authorities have also specified the relief procedures in the Notice on Tax Matters requiring the invoiced party to carry out a transfer in respect of abnormal vouchers, “If your unit has objections to this Notice, you may apply for administrative reconsideration or file an administrative lawsuit in accordance with the provisions of laws and administrative regulations”.

Therefore, the Notice on Tax Matters requiring the invoiced party to carry out tax treatment on abnormal vouchers essentially affects the legitimate rights and interests of the taxpayers, and should fall within the scope of administrative reconsideration and litigation. If the invoiced party has objections to the notice of the tax authorities requesting it to carry out the transfer of abnormal vouchers, the invoiced party can seek remedies through administrative reconsideration and litigation. If the invoiced party applies for verification of the Notice on Tax Matters and the tax authority does not recognize it, the invoiced party may also initiate administrative reconsideration and litigation procedures to seek remedies in respect of the verification results.

(iii) Requiring the upstream invoicing party to compensate for the economic losses caused by the non-deductible inputs

In the purchase and sale transactions, the issuance of invoices is the legal obligations of the seller, but also the contractual obligations of the seller. If the invoice issued by the seller is recognized as an abnormal voucher, resulting in the purchaser not being able to make normal deductions, the purchaser may request it to compensate for the losses caused by the inability to deduct inputs through civil litigation, which is supported by similar judicial cases in practice, for example, in the judgment No. 1293 of (2020) Min 0125 Minchu, the court held that “Company A and Company B signed a contract on April 9, 2018 signed the contract in question is the true meaning of the parties, the content does not violate the mandatory provisions of laws and regulations, is a valid contract, the two sides should perform their respective rights and obligations according to the contract. In this case, Company A pays the project payment to Company B according to the contract, and Company B should issue the corresponding VAT invoice to Company A. Now, because of the invoice issued by Company B, Company A has to pay the project payment to Company B according to the contract. The invoice issued by Company B was recognized by the tax authority as 'abnormal VAT deduction voucher', resulting in Company A not being able to offset the tax, and Company A should be compensated by Company B for the resulting back tax payment. Therefore, it is lawful and reasonable for Company A to request Company B to compensate for the total loss of tax that could not be deducted, and the Court supports this request”.

Summary

We suggest that enterprises should actively collect information proving the authenticity of the business after receiving the notice of VAT transfer from abnormal vouchers and submit verification applications within the prescribed period. For those that still cannot be properly deducted after verification, they may initiate relief proceedings against the Notice of Tax Matters or request the invoicing party to compensate for the economic loss caused by the inability to properly deduct the VAT. At the same time, attention should also be paid to the scope of identification of abnormal vouchers to avoid undue expansion, and in the case of upstream false invoicing, it is possible to strive for a good characterization at the level of facts, evidence and application of the law to control the scope of economic loss.