Editor's Note: In practice, the invoices issued by the upstream enterprises are characterized as false invoices, and the tax authorities will generally send the Notice of Confirmed False Invoicing and related materials to the downstream tax authorities of the invoiced party enterprises, and the tax authorities of the invoiced party enterprises will use this as evidence to determine that the invoices obtained by the invoiced parties are false invoices, and the invoiced party enterprises may face the legal consequences of paying back taxes, late payment fees and fines as a result. This article starts from a case of administrative litigation filed by an invoiced enterprise against the tax processing decision made by the competent tax authority of the invoicing party, and briefly analyzes the remedial measures that can be taken by the invoiced enterprise under different circumstances.

I. Actual case: the invoice issued by the upstream enterprise was characterized as false invoicing, and the downstream enterprise filed a lawsuit on the processing decision made by the competent tax authority of the upstream enterprise.

(I) Brief description of the case

In October 2022, the Inspection Bureau of N Municipal Taxation Bureau issued a Tax Treatment Decision (hereinafter referred to as Treatment Decision No. 1) to Company A, finding that Company A had falsely issued VAT invoices. in December 2022, the Inspection Bureau of N Municipal Taxation Bureau issued a Notice of Confirmed False Invoicing to the Inspection Bureau of D Municipal Taxation Bureau. After investigation and verification by the Inspection Bureau of D Municipal Taxation Bureau, it issued a Tax Handling Decision to Company B, finding that the invoices obtained by Company B from Company A did not comply with the legal provisions, and that Company B should pay back taxes of RMB2,803,189.8. Upon receipt of the Handling Decision, Company B did not file an administrative reconsideration and an administrative lawsuit against the Handling Decision, but rather, with the N Municipal Taxation Bureau as the Defendant, it filed an administrative lawsuit against the Handling Decision of No. 1 received by Company A. The court of first instance and the court of second instance both ruled in favor of Company B. The court of first and second instance held that Company B had no interest in the Disposal Decision No. 1 and dismissed Company B's lawsuit and appeal. Company B applied for retrial and the court of retrial held that Company B had an interest in the Disposal Decision No. 1 and revoked the administrative rulings of the court of first and second instance.

(II) Focus of the case: the determination of the subjective qualification of the plaintiff of Company B

In this case, N Municipal Taxation Bureau made the No. 1 processing decision of the administrative counterpart is A company, usually, A company on the No. 1 processing decision, can apply for administrative reconsideration and litigation, B company on the No. 1 processing decision to litigation, according to the “Administrative Litigation Law” and its judicial interpretations of the relevant provisions of the administrative litigation law, the B company should be with the No. 1 processing decision of the existence of an interest in the decision in order to As a qualified plaintiff administrative litigation, the focus of the case is whether there is an interest between Company B and No. 1 processing decision.

Company B considered that in the Processing Decision No. 1, the N Municipal Inspection Bureau determined that the invoices issued by Company A to Company B were false invoices, which led to the damage of Company B's legitimate rights and interests of input tax deduction, and therefore it was an interested party.

The N Municipal Inspection Bureau, the Court of First Instance and the Court of Second Instance took a negative attitude to this, holding that: the N Municipal Inspection Bureau did not create the rights and obligations of Company B in the specific administrative act of making the processing decision No. 1, and at the same time, the processing decision did not have an impact on the legitimate rights and interests of Company B. Although the processing decision No. 1 made by the N Municipal Inspection Bureau to Company A had an adverse impact on Company B, the connection was only factual and did not belong to the law of administrative litigation. The Court of Appeal held that Company B was a party to the administrative litigation law and that Company B was a party to the administrative litigation law.

The Court of Review held that Company B was an interested party because the Tax Handling Decision No. 1 determined that Company A's act of issuing VAT invoices to the outside world was false VAT invoicing, which resulted in the VAT invoices obtained by Company B from Company A could not be used as legal and valid VAT deduction vouchers for offsetting its input tax, and that Company B, although not an administrative counterparty of the Tax Handling Decision in question, was not a party to the Tax Handling Decision, but it had an adverse impact on Company B as a taxpayer. Although Company B was not the administrative counterparty of the tax processing decision, the tax processing decision had actual impact on the legitimate rights and interests of Company B as a taxpayer, and Company B had an interest in the tax processing decision, and Company B had the subjective qualification to initiate administrative litigation.

B. If an invoice is characterized as false invoicing, can the invoiced party file an administrative reconsideration or an administrative lawsuit against the tax authorities of the invoicing party?

(I) Judgment of subject qualification: whether the invoiced enterprise has any interest in the tax processing decision

Whether the invoiced party meets the qualification of the applicant for administrative reconsideration or the plaintiff in administrative litigation mainly depends on whether it has an interest in the specific administrative act. According to the provisions of the Administrative Reconsideration Law, the Administrative Litigation Law and relevant judicial interpretations, whether the invoiced party enterprise is qualified to apply for administrative reconsideration of the tax processing decision made by the upstream tax authority in respect of the invoicing enterprise's false invoicing or to initiate administrative litigation shall be judged by whether the tax processing decision affects the rights and obligations of the invoiced party enterprise. If the rights and obligations of the invoiced enterprise are jeopardized by the tax processing decision made by the upstream tax authority, the invoiced enterprise shall be qualified to apply for administrative reconsideration or initiate administrative litigation.

(ii) Judgment of Interest: Whether the tax processing decision affects the rights and obligations of the invoiced enterprise

In practice, when the invoice issued by the upstream enterprise is characterized as false invoicing, the tax authority will generally send the Notice of Confirmed False Invoicing to the competent tax authority of the downstream invoicee enterprise, and then the tax authority of the downstream enterprise will mostly use this as the evidence to determine that the invoice obtained by the downstream enterprise is a false invoice, and the downstream enterprise will face the risk of being characterized as a false invoice, tax evasion, or even transferred to the judiciary as a result. At the VAT level, according to the Circular of the State Administration of Taxation on Issues Concerning the Handling of VAT Special Invoice Obtained by Taxpayers by False Invoice (SAT [1997] No. 134), the Announcement of the State Administration of Taxation on Issues Concerning the Levy of Supplementary Taxes by Taxpayers by False Invoice (SAT Announcement No. 33 of 2012), the Circular of the State Administration of Taxation on Issues concerning the Handling of Special Invoice Obtained by Taxpayers by False Invoice Circular of the State Administration of Taxation on Issues Concerning the Handling of VAT Special Invoice Obtained by Taxpayers in Good Faith” (Guo Shui Fa [2000] No. 187) and other documents, the VAT special invoice obtained by the payee enterprise in good faith shall not be regarded as a legal and valid tax deduction voucher for VAT to offset its input tax; at the level of income tax, according to the ‘Measures for Administration of Vouchers for Deduction before Enterprise Income Tax’, the fraudulent VAT invoice obtained by the payee enterprise may not be regarded as a voucher for deduction before tax. Therefore, the tax treatment decision made by the upstream tax authorities may result in the VAT invoices obtained by the Invoicee Enterprise not being able to be used as legal and valid tax deduction vouchers for offsetting its input tax and pre-tax deduction for enterprise income tax. Accordingly, in the event that the aforesaid tax processing decision has actual impact on the rights and obligations of the invoiced enterprise as a taxpayer, the invoiced enterprise has an interest in the aforesaid tax processing decision and has the right to apply for an administrative reconsideration or file an administrative lawsuit.

(iii) Judgement on the statute of limitations: whether the payee applies for administrative reconsideration or institutes administrative litigation within the prescribed period of time

If the party to whom the bill is addressed files an administrative reconsideration or administrative litigation as an interested party, it shall do so within the prescribed time limit. If an administrative lawsuit is filed, the company of the billed party shall file the lawsuit within six months from the date it knows or should know that the administrative act has been made, and the maximum period of time shall not exceed five years. If the defendant claims that the plaintiff has exceeded the time limit for filing the lawsuit since the date when the plaintiff knew or should have known of the administrative act, the burden of proof shall be on the plaintiff to prove the fact that he/she knows the time limit for filing the lawsuit. If an application for administrative reconsideration is filed, the company of the party to be invoiced shall file the application within 60 days from the date of knowledge of the specific administrative act. If the respondent is able to prove that the applicant knows that the administrative act has been made, it shall be calculated from the date when the evidence proves that it knows.

Third, the obtained invoices are characterized as false invoicing, the countermeasures that may be taken by the party to be invoiced should be specifically analyzed

(i) Strive for the withdrawal of the Notice of Proven False Invoicing

In the case of co-inspection, the “Notice of Proven False Invoicing” sent by the competent upstream tax authorities and the corresponding evidence information is the direct cause of the downstream enterprises facing audits, and some of the enterprises hope to realize the “curved road to save the country” through the prosecution of the “Notice of Proven False Invoicing”. However, the actionability of the Notice of Proven False Opening is controversial. From the point of view of the type of instrument, the Notice of Proven False Opening is a document of cooperation between tax authorities in different places, which is used by tax authorities as an internal audit trail, and does not have a direct impact on the rights and obligations of the counterparty, therefore, it is mostly inadmissible in the court in practice. In addition to the relief on the Notice of Proven False Invoicing, the recipient enterprise can make a statement or defense to the tax authority to which it belongs to prove that the VAT invoice issued between it and the upstream enterprise is based on the real business and does not constitute false invoicing, and push for the withdrawal of the Notice of Proven False Invoicing. As in the following case, the tax bureau of Company A issued a Notice of Proven False Invoicing to the competent tax authority of Company B. As Company A had fled and lost contact with Company B, Company B was unable to contact Company A to verify the situation, and therefore Company B filed an objection with the competent tax authority, claiming that the VAT invoices issued to it by Company A were not false invoices. After investigation and verification, the competent tax authority of Company B sent the “Letter of Reply to Tax Violation Cases” and the “Report on Tax Audit Cases” to the tax bureau of Company A, which determined that there was a real transaction of goods between Company A and Company B, and then the tax bureau of Company A withdrew the “Notification of Confirmed False Invoicing” issued by the tax bureau.

(ii) Striving for the Characterization of Good Faith Acquisition of False Invoices

In terms of the legal nature of the Notice of Proven False Invoicing, it is applicable to the “concurrent investigation of confirmed false invoicing cases”, i.e., the upstream tax authorities have already made the determination of false invoicing to the enterprise, and therefore, the downstream tax authorities in practice usually make adjustments to the value-added tax (VAT) and enterprise income tax (EIT) of the invoiced enterprise. In view of this, in addition to actively seeking the tax authorities' determination that the invoices obtained by the enterprise do not constitute false invoicing, the enterprise shall not be liable for VAT and EIT if it complies with the following conditions: (1) there is a real transaction between the purchaser and the seller; (2) the seller is using a special invoice of the province in which the seller is located; (3) all the contents such as the name of the seller, the stamp, the quantity of the goods, the amount of goods, the amount and the amount of tax stated in the special invoice are in line with the actual situation; and (4) there is no evidence showing that the purchaser Knowing that the special invoices provided by the seller were obtained by illegal means, the buyer may actively strive to qualify as obtaining false invoices in good faith, and at the same time, submit to the tax authorities relevant explanations of the impossibility of exchanging or reissuing the invoices in order to strive to avoid the unfavorable consequences of the increase in the enterprise income tax.

(iii) Filing administrative reconsideration or litigation in respect of the administrative processing decision made by the competent tax authorities of the invoicing party

As mentioned above, when an enterprise of the invoiced party is still recognized as having obtained a false invoice for the purpose of claiming back taxes, late payment fees or even penalties through the above two methods because the invoice obtained by the invoiced party has been characterized as a false invoice, it may, within 60 days from the date of knowing that the upstream tax authority has characterized the invoice issued by the upstream enterprise as a false invoice, file an administrative reconsideration or an administrative litigation in respect of the specific administrative act, so as to strive for the re-instatement of the tax on the invoice issued by the upstream tax authority to the downstream enterprise. characterization of the invoices issued by the upstream enterprise to the downstream enterprise.

(iv) Filing administrative reconsideration or administrative litigation against administrative acts such as suspension of invoicing

In practice, there is also a situation where the upstream tax authorities mark the invoices issued by the upstream enterprises as abnormal vouchers, and the competent tax authorities of some downstream enterprises require them to carry out input tax transfer for the said invoices. If the downstream enterprises do not carry out input tax transfer, they may face consequences such as invoices being suspended, which in turn affects the production and operation of the enterprises. Taking the suspension of invoicing as an example, according to Article 72 of the Tax Administration Law and Article 8 of the Provisions on the Use of VAT Special Purpose Invoices, the tax authorities may suspend the invoicing of an invoice if the recipient enterprise has committed a tax violation as stipulated in the Tax Administration Law or has falsely issued VAT special purpose invoices and at the same time refuses to be dealt with by the tax authorities. It can be seen that, in terms of procedure, if the enterprise has tax violations, the tax authorities shall first make tax treatment, and the invoices can only be suspended if the enterprise refuses to accept the treatment. The tax authorities in the case of the tax authorities in the absence of processing on the suspension of invoicing behavior in violation of the legal procedures, the enterprise can bring administrative remedies to safeguard their legitimate rights and interests.