Since the refined oil invoice module went online, the petrochemical industry has quietly transformed its tax-related cases and tax risks, and the risks associated with the new variable invoice model will affect the entire industry chain. Recently, a case of false invoicing by means of hacking technology was sentenced, and the main culprit was sentenced to 12 years' imprisonment. This paper is intended to analyze the current risks in the petrochemical industry in the light of the case, and put forward a few suggestions for prevention and response, so that enterprises can control the tax-related risks at an acceptable level.

I. Case introduction: the nation's first case of false invoicing by means of hacking technology pronounced judgment

(I) Source of the case

In May 2020, the Liaoning Anshan Public Security Economic Investigation Detachment received a tip from the tax department that a limited company in Haicheng City, Anshan was suspected of violently and falsely issuing VAT invoices, involving a huge amount of money. Anshan tax police quickly formed a joint task force to investigate.

On July 28, 2021, the case was identified as a supervised case by the Ministry of Public Security.

(II) Facts of the case

Since February 2020, the operator of a limited company in Haicheng City contacted He Mouhua, a "hacker" technician, through Ma Mou, who was engaged in the sale of false VAT invoices, and He Mouhua used hacking technology to swipe 100,000 tons of refined oil products to the company, falsely increase the item inventory, and, together with other members of the gang, made profits of 200 or 300 yuan per ton of refined oil products. He, together with other members of the gang, falsely issued VAT invoices to many petrochemical companies in Shandong, Heilongjiang and other provinces at a profit of 200 or 300 yuan per ton of refined oil, from which they made large profits illegally.

After examination, it was found that the criminal gang also existed through more than 200 shell companies, changed the name of imported goods to offset inputs, falsely issued sales invoices for fuel oil, as well as the use of "horsemen", such as beaters, and other illegal detention to the purchase of tickets to the enterprise personnel to ask for the stolen money, and then by specialists turnover of money laundering and other behaviors, tax-related crimes means diverse, complex and complicated. Tax-related crimes are diversified, complex and hidden, and the criminal group has a high degree of professionalization, diversified modus operandi, and great harm, which makes it extremely difficult to discover and investigate.

(III) Results of the case

After the Anshan police successfully captured He Mouhua, the first stop, the task force launched a nationwide net, has arrested 22 suspects, including technical hackers, buying tickets and tax evasion business operators, and seized 12 copies of hacking files used in the crime, more than 500 bank cards, more than 30 computers, more than 60 cell phones, and more than 15 million yuan in cash.

In late February 2023, the criminal gang led by He Mouhua who used hacking technology to falsely issue VAT invoices has been sentenced according to the law, in which He Mouhua was sentenced to 12 years of imprisonment, 13 main members of the gang have been sentenced to penalties ranging from three to ten years, and the other members have entered the judicial proceedings.

At present, under the command and coordination of the Ministry of Public Security, the public security organs of 25 cities in 11 provinces across the country have taken joint action to close the net and crack down, and the relevant investigative work is in progress.

II. Risks of false invoicing in traditional invoicing transactions in the petrochemical industry

Prior to 2016, tax authorities practiced the design concept of "controlling tax by invoices" for VAT, relying on the anti-counterfeit tax control system to monitor the authenticity of invoices on the one hand, and comparing the amount of inputs and outputs of enterprises through the cross auditing system on the other. As the management of invoices was still relatively simple and elementary at that time, the activities of issuing invoices on behalf of others and fraudulent invoicing were very rampant in various industries. With the tax big data becoming more and more perfect and being popularized and applied nationwide, the invoice auditing capacity of tax authorities has been greatly improved. By screening the information of enterprises that issue and receive invoices, the tax authorities are able to grasp the information on whether the names of the enterprises' inputs and outputs are related, whether the invoice name and the scope of business are in line with each other, whether the number of invoices issued is matched to the production and operation capacity, and whether the growth of the amount of invoices issued and received is abnormal, so as to strengthen the supervision of invoices. On September 6, 2016, the State Administration of Taxation ("SAT") issued the Notice on Carrying Out Special Inspection on the Use and Management of VAT Invoices (Taxation General Letter [2016] No. 455), organizing and carrying out special inspection on the use and management of VAT invoices nationwide, and the problem of traditional petrochemicals' "variable invoices" surfaced. The problem of traditional petrochemical "variable invoice" has surfaced.

(I) Analysis of the transaction mode of traditional variable invoices

1. Variable invoices used for false consumption tax credit in the field of production

The refining enterprise as an invoicing enterprise purchases crude oil from the crude oil supplier unit for refining finished oil products. The crude oil supplier issues the crude oil invoice to the over-invoicing enterprise and the variable invoicing enterprise, and changes the name of the crude oil invoice to the finished oil invoice and then issues the invoice to the refining enterprise, which enables the refining enterprise to falsely deduct consumption tax when it produces and processes the finished oil products.

2. Changing invoices for circulation

In this kind of transaction, the act of altering invoices can occur in the purchasing process or in the sales process. 

In the procurement process, the invoicing enterprise purchases crude oil and obtains gasoline invoices through the over-invoicing enterprise and the invoice-changing enterprise, so as to use the sales behavior of "purchasing gasoline and selling gasoline" to cover up the production behavior of "purchasing crude oil and producing and selling gasoline", and to circumvent the tax obligation of consumption tax. 

In the sales link, the invoicing enterprise purchased chemical raw materials to produce and process gasoline, issued invoices for chemical raw materials to the over-invoicing enterprise and the invoicing enterprise, and then issued the invoices to the affiliated company under its control after the name was changed to gasoline, and then issued invoices for gasoline goods to the public for sales. The purchase and sale behavior of "purchasing chemical raw materials and selling chemical raw materials" covers up the production behavior of "purchasing chemical raw materials and producing and selling gasoline", thus evading consumption tax.

3. Oil mixers change their invoices 

Similar to the variable ticket mode used in the circulation field, under this mode, the enterprise with the ticket often purchases the components of refined oil products through the oil blenders who do not have the qualification of production refining and implements the physical blending by renting tanks to blend the component oils into refined oil products and sells to the outside world through the invoices of refined oil products provided by the variable ticket enterprise with the variable ticket.

4. Variable invoices detached from the actual goods 

Under this model, the invoice is detached from the actual flow of goods, and the seller does not need to obtain VAT input invoices from the enterprises using the invoices to change the invoices, but only buys VAT input invoices of various names from some entities or shell companies, fictionalizes the input tax amount, and then changes the name of these invoices into invoices of refined products and sells them to the outside world to make profit by fraudulent invoicing.

(II) Specialized Tax Audit Accelerates the Outbreak of the Risk of False Invoicing

In April 2017, the State Administration of Taxation ("SAT") issued the Notice on Tax Inspection of Some Local Refining Enterprises, deploying and arranging for the State Tax Inspection Bureaus of 25 provinces (autonomous regions and municipalities) to carry out a special inspection on consumption tax for the petrochemical industry problems found in the special inspection of VAT invoices, with an emphasis on cracking down on the oil refining enterprises' evasion of consumption tax through the transformation of commodity names by the commercial and trade distribution enterprises and other tax-related illegal behaviors. As a result, a large number of cases of change of invoices in the petrochemical industry were referred to the judiciary.

At the initial stage of the outbreak of such cases, due to the limitations in understanding the nature of the act of changing invoices and the boundary between tax evasion and false invoicing, the judiciary generally categorized the act of changing invoices whose names did not match the actual goods as a false invoicing crime. As the vast majority of illegal consumption tax benefits under the transaction mode of invoicing are obtained by the enterprises using invoices, the criminal liability of the enterprises only pursuing the invoicing enterprises and the enterprises changing invoices is a drop in the bucket for recovering the loss of the national consumption tax, and the state gradually strengthens the function of the organization of the fiscal tax revenue in the investigation and handling of the cases, and the criminal risk of tax-related crimes extends from the shell enterprises and the enterprises changing invoices to the entity enterprises and the enterprises using invoices. In addition to bearing the heavy burden of tax reimbursement and fines, the invoicing enterprises also face the criminal risk of being held liable for false invoicing.

(III) The nature of the infringement of legal interests by the petrochemical industry's vote-changing behavior

On November 6, 2012, the State Administration of Taxation ("SAT") issued the Announcement on Relevant Policy Issues of Consumption Tax (SAT Announcement No. 47 of 2012), which clarifies that petrochemical trading enterprises selling consumption tax non-taxable goods to the public as consumption tax tax taxable goods are regarded as the production of taxable consumer goods, and consumption tax shall be levied in accordance with the provisions, thus transforming the regulatory issue of taxable production behavior into the regulatory issue of the input and output invoices. According to the Announcement of the State Administration of Taxation on Supplementary Provisions on Relevant Policy Issues of Consumption Tax (Announcement of the State Administration of Taxation No. 50 of 2013), the production of taxable consumer goods in conformity with the regulations by means of taxed consumer goods can be credited against the consumption tax that has already been paid on raw materials.

From the perspective of harmful consequences, since the transaction of change of invoice only changes the product name, the quantity, amount and other information are consistent with the actual transaction, and the corresponding VAT is paid in accordance with the regulations, it will not cause the harmful consequences of the loss of the national VAT tax.

From the essence of the behavior, the core of the act of changing bills lies in "escaping", i.e., reducing the amount of tax to be declared and paid in an illegal way, which damages the incremental claim of the state on consumption tax. The core of false invoicing behavior lies in "cheating", that is, reducing the amount of tax to be declared by illegal means, which damages the country's stock of claims on VAT.

Therefore, the essence of the act of changing bills in the petrochemical industry is to evade the payment of consumption tax by covering up the taxable production behavior of consumption tax, which violates the incremental right of the state tax. The objective harmfulness and subjective viciousness of the act of changing tickets are significantly different from that of false invoicing, and should be evaluated as a tax evasion crime.

III. Five new types of tax-related risks to pay attention to after the refined oil invoice module goes online

After the refined oil invoice module went live in March 2018, enterprises are required to obtain the refined oil enterprise identification in order to issue VAT invoices for refined oil product names externally through the refined oil management module. Coupled with the fact that the module indirectly realizes the monitoring of the inventory number of refined oil products by linking the input quantity of refined oil products in stock with the number of invoices that can be issued. As the traditional invoicing activities are unsustainable, some refining and chemical enterprises start to seek for new consumption tax deduction modes, and even start the idea of VAT fraud, which gives rise to various tax-related criminal modes in the petrochemical industry as the "new business".

(I) Surplus invoices from gas stations flow back to refining enterprises

As the terminal of petrochemical chain, gas stations often do not ask for invoices from individual consumers and drivers when they buy refined oil, which makes the input invoices of gas stations generally surplus. Some refining enterprises then obtained special VAT invoices issued by gas stations by paying invoicing fees.

According to the Interpretation of the Supreme People's Court on Several Issues Concerning the Application of the Decision of the Standing Committee of the National People's Congress on Punishing the Crimes of False Opening, Counterfeiting and Illegal Sale of VAT Invoices (Fa Fa [1996] No. 30), the person who carries out the actual business activities but lets other people open the VAT invoices for him/her also constitutes a false opening. In order to cover up the "separation of invoices and goods", the refining and chemical enterprises will also enter into false purchase and sale contracts with the enterprises supplying invoices and falsify the flow of funds matching the contracts, so as to create the illusion of normal flow of funds of the whole chain by joining the over-invoiced enterprises in the transaction chain. In practice, through the "separation of votes and goods", "funds back" and other clues, the audit is very easy to find the transaction abnormalities, so as to detect the entire chain of invoices.

(II) Borrowing qualifications of production enterprises for invoicing tax arrears

After the refined oil module goes online, only refined oil producers can issue sales invoices for refined oil products under the condition of obtaining crude oil input invoices. Therefore, only by establishing, controlling or contacting the refined oil production enterprises can the refining enterprises continue to engage in invoicing activities. Since the "refined oil production enterprise" acting as a bill changer is not a long-term solution under the current policy conditions by copying the traditional bill changer mode of billing, most of the bill changer enterprises tend to "change one place for another" by concentrating on billing a large number of invoices after their establishment and then fleeing and disappearing under the circumstance of defaulting on the payment of excise tax. In the case of non-payment of excise tax, they will flee and lose contact with each other. After the identity of the person who changes the invoice is changed, a new round of invoice-changing activities is started, and the risk of hindsight is extremely high.

(III) Alteration of import payment certificates

According to the current tax laws and regulations, except for the taxable consumer goods such as gold and silver jewelry which are taxed at the retail level, all other imported taxable consumer goods are taxed at the import level by the Customs on behalf of the consumption tax. According to the Circular of the State Administration of Taxation on the Issuance of the Provisions on Adjustment and Improvement of Consumption Tax Policies and Collection Management (Guo Shui Fa [2006] No. 49), imported dutiable consumer goods are used in the continuous production of dutiable consumer goods, and the Customs Imported Consumption Tax Special Payment Certificate should be obtained for the offset of consumption tax. Due to the increasingly strict regulation of domestic invoices, some refining and chemical enterprises try to take advantage of the imperfect exchange of information between the customs and tax authorities, and alter the amount of money and tax recorded in the Special Payment Book for Imports by means of alteration and filling in, so as to offset consumption tax in accordance with Guo Shui Fa [2006] No. 49. However, the Customs and Excise Department has established an information exchange mechanism, such behavior is very easy to be found.

(IV) Concealing taxable production behavior with the help of entrusted processing

After the promotion of the refined oil invoice module, some refining and chemical enterprises want to avoid paying consumption tax, but also want to avoid tax-related risks and improve the efficiency of the transaction as much as possible, so they turn to look for loopholes in the collection and management of consumption tax. According to the Provisional Regulations on Consumption Tax, taxable consumer goods entrusted to be processed shall be collected and paid by the entrusted party upon delivery. The refining enterprise signed a false entrusted processing contract with the foreign enterprise and forged a false capital flow to support the fact that the foreign enterprise had carried out crude oil processing, but in fact, the refining enterprise purchased crude oil by itself, obtained the invoice for crude oil, produced and processed the finished products, and claimed that the entrusted party had already collected and paid the tax on behalf of the customer when it sold the finished products to the outside world and issued invoices for the finished products, which was actually neither entrusted processing, nor collection and payment. In addition, the entrusted party and the refining enterprise's respective tax authorities in charge of the information communication is not smooth, the real transaction situation is not easy to examine, refining enterprises can use the false entrusted processing relationship to conceal the production behavior and avoid paying consumption tax. However, this kind of transaction behavior is very easy to trigger the tax system consumption tax payment risk warning, thus implicating the tax police joint investigation outbreak of false opening risk.

(V) Private bookkeeping

Some refining and chemical enterprises have adopted the most primitive mode of private accounts, attempting to completely escape from the supervision of invoices by means of two sets of account books. As a matter of fact, private accounts do have a hidden nature, with more and more enterprises joining the camp of private accounts, legitimate business enterprises, on the contrary, in the market competition, and even have no choice but to embark on the road of illegal and criminal. However, since the launch of the special inspection, the private accounts are not free from worry, the tax authorities through the access to the bank accounts of the related parties of the enterprise, it is easy to find out the tax problems. In accordance with the Tax Collection and Management Law, the characterization of private accounts and expenditures as tax evasion is almost a nail in the coffin, and there is basically no room for defense.

In addition, some refining and chemical enterprises make use of the historical legacy of false inventory, refined oil invoice red flush time difference, hacking technology to tamper with the system and other methods of external invoicing, the tax-related risk is extremely high. Driven by VAT interests, some refining and chemical enterprises also have the phenomenon of illegally selling surplus invoices, which flow into manufacturing, logistics and transportation and other industry sectors, and are used by downstream enterprises to fraudulently deduct VAT taxes, with administrative and criminal liabilities that need to be guarded against.

IV. How to Prevent and Respond to New Tax Risks in Petrochemical Industry

After the refined oil invoice module goes online, the petrochemical industry enters the post-variable invoice era, and the tax administration reform continues to deepen, which puts forward new requirements for tax compliance in the petrochemical industry, and the petrochemical industry should pay close attention to and prudently guard against new types of tax risks.

(I) Improve the supply chain to ensure compliance in daily operation

Normally, petrochemical products need to go through a long industrial chain to reach the final consumers, in which individual links are mixed with speculators through illegal means to evade consumption tax, fraudulent VAT, which is easy to cause tax risks. Once the risk breaks out, the whole industry chain will be affected, and the whole industry chain may not be able to survive. As a refining and chemical enterprise, it is especially important to check the qualification of upstream suppliers, cautiously identify whether they are actually operating and whether there are major tax violations, assess the legitimacy and validity of the invoices obtained by the enterprise, and improve the supply chain, so as to avoid the risk of fraudulent invoicing by the upstream from spreading to the enterprise.

(II) Improve invoice management and focus on invoice compliance

In addition to verifying the consistency of the invoices obtained and the goods actually purchased in terms of name, quantity and price in the procurement process, the consistency between the invoicing party and the supplier should be emphasized for the goods purchased from individuals and small-scale taxpayers. If the other party does not cooperate with the issuance of VAT invoices, it should communicate with the local tax authorities in advance and request the other party to sign a dependency agreement with the invoicing party, so as to obtain special invoices issued in the name of the dependency party and use them for complying with the offsetting of inputs. Enterprises issuing foreign invoices for refined oil products should also strictly follow the relevant provisions of invoice management to standardize and improve the management of enterprise invoices for refined oil products.

(III) Strictly manage business processes and regularly check tax risks

On the one hand, the enterprise should be around the procurement, warehousing, sales and other stages, do a good job of dynamic management of import and export inventory. The contracts, transfer of goods right certificates, transportation documents, and inventory lists obtained in the whole business process should be kept for inspection, which is conducive to proving the authenticity of the transactions.

On the other hand, enterprises should strengthen the awareness of compliance, establish a special internal risk control mechanism, led by the legal and financial departments, based on the books and accounting documents, based on the list of tax-related risks, compared with the authenticity of the business and compliance, and regular self-correction, to resolve the tax risks at the front end.

(IV) Employing tax consultants to cope with audits

Compared with enterprises and judicial authorities, tax consultants show professionalism in handling tax issues, which can help answer enterprises' tax-related problems and help them communicate effectively with tax authorities and judicial authorities on issues such as transactions, tax treatment and application of laws, so as to avoid the materialization of tax risks.