The pharmaceutical industry has a bearing on people's livelihood, and is one of the areas that receive the most attention from regulators. In order to solve the problem of pharmaceutical companies in circulation to extract funds for commercial bribery, drug prices are too high, in 2017, the State Council Medical Reform Office began to implement the "two-invoice system". The "two-invoice system" has compressed the original multiple circulation links of medicines, and to a certain extent, it has cracked down on the phenomenon of price increases at various levels after the drugs leave the factory. However, the reform did not completely solve the chronic problems of the pharmaceutical industry, and the tax-related risks faced by pharmaceutical enterprises have not been eliminated. In recent years, the tax authorities at all levels announced the typical tax cases, there is no lack of pharmaceutical enterprises. This year, the General Administration of Taxation "officially announced" that pharmaceuticals are still the key area of supervision. In view of this, this article combines the current policies and regulations and typical cases to analyze and summarize the tax-related risk points in the pharmaceutical industry, so as to put forward tax compliance recommendations for pharmaceutical enterprises and help their healthy development.

I. Policy Observation: Pharmaceuticals Remain a Key Industry for Tax Supervision and High Incidence of False Openings

(I) SAT: Pharmaceuticals is a key industry with high incidence of false driving

On May 26, 2023, the State Administration of Taxation (SAT) held a regular press conference. Huang Yun, director of the General Office of the General Administration of Taxation, said in response to a reporter's question that the tax department will continue to focus on high-risk key industries, key areas in accordance with the law to resolutely crack down on various types of tax evasion and fraudulent violations, has been "focusing on pharmaceuticals, agricultural products and other high incidence of false invoicing industry, pushing the false invoicing case source 890 households". It can be seen that the State Administration of Taxation will continue to focus on the pharmaceutical industry, which has a high incidence of false invoicing.

(II) Continuing to correct malpractices in the purchase and sale of medicines in 2023

The "Correction of Unethical Practices in the Field of Pharmaceutical Purchase and Sales and Medical Services" is a long-term special rectification activity jointly carried out by the health sector, tax, police, audit, municipal supervision and other departments, aiming at cracking down on commercial bribery and corruption in the field of pharmaceutical purchasing and sales, as well as jointly combating tax-related violations.In 2018, the focus was on the implementation of the "two-invoice system" and the illegal behaviors of emerging CSO companies. implementation of the "two-invoice system" and the illegal behavior of emerging CSO companies; in 2019, the focus will be on behaviors such as inflated sales expenses, R&D expenses, and the standardization of academic conferences; in 2020, the focus will be on the illegal behavior of CSO companies colluding with pharmaceutical manufacturers to cash in on fictitious expenses; and in 2021, the focus will be on the illegal behavior of relying on the the centralized procurement market for medicines and medical consumables, etc.; and in 2022, it will focus on the illegal acts of pharmaceutical companies using bills to cash in, fictitious business matters to cash in, and the use of pharmaceutical promotion companies to set up empty and fictitious activities to cash in.

In May of this year, the National Health Commission issued the "Notice on the main points of the work of correcting unhealthy practices in the field of medicine purchase and sale and medical services in 2023" (National Health Medical Emergency Letter [2023] No. 75) document, which requires "verification and inspection of tax-related violations found in the field of medicine purchase and sale in accordance with the law and regulations, and cleaning up and remedying online-related illegal practices. " It is foreseeable that in the next few years, the pharmaceutical industry will remain a key industry for tax audits, and the tax risk will always be high for pharmaceutical enterprises that have illegal and illicit behaviors and intend to use the loopholes of the current laws and regulations to make profits and reduce their tax burden.

(III) Many well-known pharmaceutical companies enter the scope of tax audit

Recently, many provincial and municipal tax bureaus have released the list of key audit targets for 2023, and a number of well-known pharmaceutical companies have been included in the audit list. For example, the provincial key audit list released by the Guizhou Provincial Taxation Bureau, Yibai Pharmaceutical, Guizhou Bailing well-known pharmaceutical companies within the list.

Again, the Jiangxi Provincial Tax Bureau in January this year announced its audit object directory database, a number of pharmaceutical enterprises, pharmacies, hospitals, etc. were included in the audit list, which, Jiangzhong Pharmaceuticals, Renhe Group, Qingfeng Pharmaceuticals, and other well-known pharmaceutical enterprises in the list.

(IV) The crime of false VAT invoicing has become a high incidence of criminal offenses in pharmaceutical enterprises

By categorizing the tax-related criminal judgments of pharmaceutical enterprises on websites such as Judges.com and Beidafarb, the number of cases of the crime of falsely opening VAT invoices and invoices used for fraudulently obtaining export tax refunds and tax deductions was the highest in 2022, as high as 79; and the number of cases of the crime of falsely opening invoices totaled 8.

In addition, in May this year, the General Administration of Taxation published a tax case notification showing that the Inspection Bureau of Lanzhou Municipal Taxation Bureau, in conjunction with the public security economic investigation department, investigated and dealt with a case of falsely issuing VAT special invoices to pharmaceutical enterprises, and the criminal gang, through controlling a medical technology company, utilized the upstream Internet platform enterprises to fictionalize their business, and falsely issued 3,872 VAT special invoices with the entries of information services, marketing fees, etc., to the pharmaceutical manufacturers, with a price-tax The total amount was 353 million yuan. It can be seen that the pharmaceutical industry is still the hardest hit area of false VAT invoices.

II. "Summary of Tax-Related Risks in the Pharmaceutical Industry under the Two-invoice System

(I) Under the "two-invoice system", pharmaceutical enterprises falsely issue or accept falsely issued VAT invoices for the purpose of deducting input tax or costs and expenses

The reason why pharmaceutical enterprises are in urgent need of cost and expense or input deduction (credit) vouchers is that there are invisible expenditures such as commercial bribery. In practice, we have noticed that pharmaceutical enterprises or distributors will adopt the following means to obtain false invoices for offsetting inputs and deducting costs:

1.with the so-called consulting services enterprises, business management organizations to reach a false contract, accept their false VAT invoices, sales commissions, rebates into legitimate consulting fees, meeting fees, etc., to extract funds for commercial bribery. Due to the virtual nature of such services, thus making it difficult for tax authorities to supervise them. However, some tax authorities will also seize the virtual nature of the service and consider that the pharmaceutical enterprises cannot provide proof of the authenticity of the service, thus penalizing them.

2.Some pharmaceutical enterprises need to issue special invoices when selling drugs. In order to reduce the tax burden by input deduction, they collude with the upstream API producers and issue false purchase invoices of agricultural products through the upstream, and falsely issue VAT special invoices as input tax for pharmaceutical enterprises, so as to reduce the purpose of underpayment of tax.

Under the "two-invoice system", as the sales expenses in the pharmaceutical sales process can no longer be digested and distributed in the traditional way of multiple invoicing, false or acceptance of false VAT invoices has become a means of violating the law for pharmaceutical enterprises.

(II) Tax evasion by means of off-the-books operation, false listing of costs and expenses, and long-term non-recognition of income, etc.

Some pharmaceutical enterprises conduct off-the-books operation by means of private personal account collection, cash collection, private "small treasury" to hide sales revenue and other hidden means; some pharmaceutical enterprises achieve the purpose of paying less enterprise income tax and value-added tax by listing more expenditures on the account books, fictitious advertisement and promotion expenses, meeting expenses, etc. This way is often realized by means of false invoices, which may have the risk of illegal tax evasion and avoidance. This way is often realized through false invoicing, and there may be a competition between the crime of tax evasion and the crime of false invoicing. In addition, after the implementation of the "two-invoice system", medical institutions need to settle the payment of goods directly with pharmaceutical manufacturers, and both parties generally adopt the credit sales mode of transaction, which, according to the provisions of the time of incurring VAT obligations, shall be the date of contractual agreement on the collection date or the day of the goods issuance. Therefore, the time for pharmaceutical enterprises to issue VAT invoice should be the time when they receive the payment or issue the goods, and since the medical institutions often pay the payment beyond the agreed time, in the case that the pharmaceutical enterprises have not yet received the payment after issuing the goods, some of them do not recognize the income according to the regulations, or the recovered amount is still hanging in the current account, so as not to recognize the sales income and achieve the purpose of avoiding the payment of VAT.

To sum up, no matter what means pharmaceutical enterprises adopt, they are facing the criminal risk of being pursued for the administrative responsibility of tax evasion and even the crime of tax evasion.

(III) Tax-related risk of utilizing Internet platform for promotion and sales

In the process of financing in the capital market, pharmaceutical enterprises rely on the Internet platform for promotion and sales, which is the focus of regulators' attention and inquiries. For example, Qinghai Jingzhu Tibetan Medicine Hi-Tech Industry Co., Ltd. was asked by the supervisory department of the listed company of the share system about the specific mode, content and counterparty of the marketing promotion, etc. According to the reply, its counterparty is Smooth Office Information Service Co., Ltd. which is a flexible labor platform, and was recognized by the tax authorities as having enterprise income tax risk due to the failure of obtaining the invoice of cost during the period of remittance and settlement. Once the flexible labor platform has tax-related problems, it will inevitably affect the financing process of the pharmaceutical enterprises.

III. Tax compliance path of pharmaceutical enterprises under the strong regulatory situation

In the strong regulatory situation, pharmaceutical enterprises in the past business process of hidden tax risks in the tax authorities under the monitoring of the exposure of the tax compliance of pharmaceutical enterprises is imperative, this paper puts forward the author's insights for the benefit of readers.

(I) the establishment of pharmaceutical enterprises tax compliance rules and regulations

Pharmaceutical companies should be based on their respective size and business model to establish their own tax compliance rules and regulations system, at least need to include tax compliance concepts, basic principles and the basic framework of the tax compliance system. At the same time, it is necessary to formulate tax compliance policies and employee manuals, which are the guidelines for enterprises and employees to comply with the relevant legal norms of the tax law and the internal norms of the enterprise, and to form the awareness of tax compliance in the whole enterprise.

(II) Construction of tax compliance management organization of pharmaceutical enterprises

The important condition for pharmaceutical enterprises to comply is to have a sound compliance management organization, and because of the professionalism and complexity of taxation, for small-scale enterprises, tax compliance can be achieved by the directors or executives; and the larger scale of the enterprise needs to be specialized, the division of labor is necessary, but no matter how to set up, the person in charge of tax compliance needs to be responsible for the implementation of various taxes, tax policies, and assess the rationality and norms of the tax policies in the enterprise landing. and assess the rationality and standardization of each tax policy in the enterprise. For example, some pharmaceutical enterprises provide false declaration materials to meet the conditions of the tax preferential policies for high-tech enterprises, and there is a tax risk of being administratively penalized by the tax authorities. Therefore, the person in charge of tax should legally and compliantly assess the R&D expense collection and the number of intellectual property rights of the enterprise, and timely communicate the tax compliance situation of the enterprise with the leadership, and discard the tax audit that has already been included in the "blacklist" by the tax audits. "Abandon the "tax planning" method that has been blacklisted by the tax audit.

(III) Innovative development mode, realizing the integration of "industry, finance, law and tax"

In the context of the "two-invoice system", it is recommended that pharmaceutical companies build a model of separation of purchase and sale to ensure the independence of upstream and downstream transactions, in order to prevent the risk of fraudulent invoicing from spreading to the enterprise. At the same time, it is recommended that pharmaceutical companies integrate business, finance, legal affairs and tax law to prevent tax risks. In business, the business sector should assess the corresponding risks before the transaction, under the premise of ensuring the authenticity of the business to be able to stand on the legal compliance tax planning perspective and the counterparty to sign a contract; legal and financial departments based on business activities, contracts, invoices, compliance checks, carry out the accounts and tax processing, the formation of accounting, tax information provided to the management of the business decision-making in order to adjust the business model. In this process, both signed contracts, invoices and tax certificates and accounting books are the basis and evidence for tax planning and tax compliance risk prevention. Once the enterprise is implicated in tax-related risks, it can actively communicate with the tax authorities to explain the authenticity of the business and compliance.

(IV) Consult tax professionals to deal with tax-related risks

On the one hand, pharmaceutical enterprises can consult tax lawyers to help them build a tax compliance system that is in line with their actual development and mode; on the other hand, pharmaceutical enterprises can hire tax lawyers to actively respond to tax-related risks, for example, when they receive tax treatment and penalty notices, the tax lawyers can guide the enterprises to collect evidence of authenticity of the relevant transactions, and actively exercise the right to file administrative reconsideration and administrative litigation.