Editor's Note: In recent years, China's foreign trade industry has continued to run smoothly, and in the first two months of this year, China's foreign trade grew by 8.7% year-on-year, realizing a good start. However, with the steady development of foreign trade exports accompanied by fraudulent export tax rebates and other illegal and criminal behavior is common. In order to protect the orderly development of the foreign trade industry and standardize the order of export tax rebates, tax, public security and other departments have continued to crack down on illegal and criminal acts of cheating export tax rebates in a high-pressure situation. Since 2021, Hwuason Law Firm has been launching tax compliance reports on foreign trade industry, paying continuous attention to the latest tax regulatory situation and enterprise tax-related risks in foreign trade industry. Recently, Hwuason Law Firm Liu Tianyong and Jiang Zhenghe were interviewed by ZHONGGUO SHUIWU BAO on the common tax cheating behaviors in the foreign trade industry and the compliance suggestions of enterprises, analyzing the operation methods of using silver and other precious metal products to cheat tax, falsely opening VAT invoices for agricultural products to cheat tax, and using high-tech products to cheat tax. Based on the many tax-related risks in the foreign trade industry, Liu Tianyong published an article entitled "Building a "Firewall" for Risk Control", which puts forward tax-related risk prevention and control suggestions for foreign trade enterprises in three aspects: prevention beforehand, assessment during the process, and response afterward.

Foreign trade enterprises: these tax fraud "red line" can not be stepped on

By Sun Lina, Tian Jiangtao, He Shuang, Correspondent: Zhang Tingjuan

According to the latest data released by the General Administration of Customs, China's trade in goods import and export value of 41.76 trillion yuan in 2023, an increase of 0.2% year-on-year, better than expected, to achieve the goal of promoting stability and quality. In the first two months of this year, China's foreign trade grew 8.7% year-on-year, realizing a good start. Insiders pointed out that continue to maintain China's favorable foreign trade situation, need all foreign trade enterprises to make joint efforts. One of the important points is to timely prevent potential tax risks, especially high risks.

According to the "Foreign Trade Industry Tax Compliance Report (2024)" issued by Hwuason Law Firm, from the tax fraud cases exposed by the State Administration of Taxation (SAT) and tax departments around the country since 2023, the four major areas of foreign trade, including silver and other precious metal products, agricultural products, textile and garment products, and high-tech, are the "hardest-hit areas" of false opening of VAT invoices and fraudulent export tax refunds. The four major areas of foreign trade, such as silver and other precious metal products, agricultural products, textile and garment products, and high-tech, are the "hardest hit areas" of VAT invoice fraud and export tax refund. Liu Tianyong, director of Hwuason Law Firm, suggests that foreign trade enterprises should firmly establish the awareness of tax risk prevention and control, strengthen the risk investigation and prevention and control of all links and processes of business, and contribute to the high-quality development of China's foreign trade exports and national economy under the premise of tax compliance.

Strictly Preventing Tax Fraud Using Silver and Other Precious Metal Products

On January 31, 2023, the State Administration of Taxation (SAT) released a tax case notification on its website, which showed that the Beijing Municipal Taxation, Public Security, Customs, People's Bank of China and other departments jointly investigated and dealt with the case of a Beijing Municipal trading company and other 2 export enterprises fraudulently obtaining export tax refunds in accordance with the law. After investigation, these two export enterprises will not be refundable gold, silver and other precious metals for simple processing, through the disguise of high-performance wires, hollow inductors and other refundable products exported by means of fraudulent export tax rebates.

According to the "Ministry of Finance, State Administration of Taxation on the adjustment of textiles and clothing and other parts of the commodity export tax rebate rate notice" (Cai Shui [2008] No. 111), since August 1, 2008, China canceled the export tax rebate on silver. However, based on the consideration of encouraging the development of domestic high-end manufacturing industry, for the silver as raw material, processed into cigarette butts, circuit parts, plates, silver wires, high-performance wires and other silver products exported, then you can apply for export tax rebate. In the context of this policy, in the following years, some unscrupulous enterprises to silver as the main raw material, after simple processing and export, and commodities exported outside the country more back to the furnace into pure silver listed for sale. This illegal operation, in essence, is the use of policy differences to cheat the state export tax rebates.

In order to plug this policy loophole, the Ministry of Finance, the State Administration of Taxation issued the "notice on the export of goods and services VAT and consumption tax policy" (Cai Shui [2012] No. 39) clearly, if more than 80% of the cost of raw materials for the raw materials listed in Annex 9, the raw materials should be the implementation of the VAT and consumption tax policy (silver for the raw materials listed in the Annex, the tax rebate rate is 0). However, criminals turn to use raw materials such as "palladium", which has a relatively high unit value, as raw materials for commodities together with silver, so as to control the cost of silver within 80% to avoid tax supervision. In response, the Ministry of Finance and the State Administration of Taxation issued the Circular on Export Tax Refund Policies for Goods with Precious Metals and Gemstones as the Main Raw Materials (Cai Shui [2014] No. 98), which includes raw materials such as palladium in the aforementioned range of raw materials.

"However, the phenomenon of tax fraud in the field of precious metals has not disappeared." Liu Tianyong analyzed that the cases of unscrupulous enterprises fraudulently obtaining export tax refunds by adding precious metals, controlling the cost of the accounted raw materials within the red line of 80%, and disguising them as scientific and technological products have gradually increased. Some unscrupulous enterprises in the export of products, outside the gold and other precious metals dismantled, the rest of the accessories and then shipped back to the country loaded with gold and other precious metals to continue to export. In this process, gold and other precious metals are sold outside the country, and props such as smart devices inlaid with gold are recycled repeatedly. "The above tax fraud has a strong concealment, easy to evade the crackdown, and the amount of tax involved is often larger." Liu Tianyong said.

Huo Shuyi, a cadre from the Changchun Taxation Bureau of the State Administration of Taxation, has long been engaged in export tax rebates. She suggested that export enterprises in the export business, should be from the business, financial, tax, legal level and other multi-dimensional, accurate understanding and application of the export tax rebate policy, to understand the production process of export products, pay special attention to silver, gold, etc. accounted for the red line problem, to strictly prevent the risk of export tax rebates. At the same time, we strictly keep relevant supporting materials for inspection according to the actual transaction situation.

Strictly Preventing Fraudulent VAT Invoices for Agricultural Products to Cheat Taxes

In November 2023, the First Inspection Bureau of Hainan Provincial Taxation Bureau accurately analyzed the clues, and investigated and dealt with the case of 9 households in Hainan using falsely opened invoices for the acquisition of agricultural products to cheat export tax rebates in accordance with the law. By means of fictitious rubber acquisition business, six natural rubber trading companies in Hainan falsely issued 65,000 agricultural product acquisition invoices for themselves, with a false opening amount of 568 million yuan, and 5,213 VAT special invoices for downstream shell enterprises outside the province, with a false opening amount of 492 million yuan. After accepting the false VAT invoices, the downstream shell enterprises issued false VAT invoices to a number of domestic export enterprises. Among them, the three Hainan export enterprises that accepted the false VAT invoices fraudulently obtained export tax rebates by means of buying and matching the invoices and providing false filing documents. The tax department of Hainan Province recovered 2.6779 million yuan of fraudulent export tax refunds.

Among the many cases of fraudulent export tax refund, the case of using agricultural products as props to cheat tax has occupied a considerable proportion.

The analysis of "Tax Compliance Report of Foreign Trade Industry (2024)" points out that there are two main ways to use fictitious agricultural products acquisition transactions to cheat export tax refund: one is that the export enterprise registers and files as a production enterprise, fictitious agricultural products acquisition transactions on its own, and fictitious invoices of agricultural products acquisition on its own to carry out fake export and tax cheating; the other is that the foreign trade enterprise itself doesn't directly fictitious agricultural products acquisition transactions, but through other people for its own The other is that the foreign trade enterprise itself does not directly fictionalize the agricultural products acquisition transaction, but through others for their own fictional VAT invoices, fictional export transactions, fraudulent export tax refunds. Under this transaction mode, the enterprises that falsely issue VAT special invoices for the export enterprises need a large number of input invoices to offset the tax they should pay, so they make use of the tax exemption policy on the acquisition of agricultural products to create false agricultural product acquisition transactions and falsely issue invoices for the acquisition of agricultural products.

Huo Shuyi suggests that agricultural products export enterprises should establish strict internal risk prevention and control system, strengthen the supervision and internal audit of the export process, and strictly audit the documents related to the exported products from the source to ensure their truthfulness, completeness, and accuracy, so as to avoid false invoices, false declarations, and tax cheating, etc.; Enterprises should pay attention to the risk management of the export tax rebate (exemption) to ensure the legitimacy and compliance of the declaration, and avoid tax cheating behavior due to the misunderstanding of the policy. avoid tax fraud caused by misunderstanding the policy. In addition, enterprises in the whole chain of production, purchase, sale and processing of agricultural products should promptly investigate potential risks of false invoicing and establish an early warning mechanism for enterprise tax risks as soon as possible.

Preventing tax fraud by taking advantage of high tax rebate rates for textiles and garments

In January 2023, a multi-departmental joint investigation in Guangdong investigated and dealt with a garment company's fraudulent export tax rebate case. He Moumou's gang took advantage of eight production-oriented export enterprises, including a garment company in Guangzhou City, to falsely declare exports by means of forged sales contracts, false collection of foreign exchange, fictitious export business, and obtaining false export documents. Ltd. provided assistance to the group in setting up shell enterprises with import and export qualifications and fraudulently issuing VAT invoices to obtain export tax refunds. Guangzhou tax authorities recovered 38,711,400 yuan of fraudulent export tax rebates, and 3,266,200 yuan of non-refundable taxes were not refunded. The relevant responsible persons have been held criminally liable, and the main culprit was sentenced to 11 years' imprisonment.

China is the largest country in the global textile industry, with the production and manufacturing capacity and trade scale ranking first in the world for a long time. This is partly due to China's high export tax rebate rate in the textile and garment industry to give policy support. Because of this, textiles and clothing export tax fraud cases, showing a large scale, high amount, long chain and other prominent features.

As early as 2008, the state will be part of the textiles, clothing, toys, the export tax rebate rate increased to 13%, with the market and economic changes, some of the textiles and clothing export tax rebate rate was once as high as 17%. Although the export tax rebate rate for textiles and garments is currently maintained at 13%, which is equal to the VAT rate, it is also at a very high level of export tax rebate rate. As a result, unscrupulous elements are operating illegally around the 13% export tax rebate rate.

The "Foreign Trade Industry Tax Compliance Report (2024)" analyzes that there are two main modes of using textiles and garments to cheat export tax refunds: the first one is "substituting good for bad" and "under-valuing and over-reporting". Unlawful elements through camouflage and packaging, will not be able to tax rebates disguised as goods can be refunded, the low value of the defective goods disguised as high-value goods, raise the price of goods, access to false export value. Due to the production process, the source of procurement in the customs link is difficult to verify, has a strong deceptive. The second is the "buy a single ticket" mode. Unlawful elements through the purchase of other people's export goods information, the manufacture of false customs declarations, false VAT invoices, false foreign exchange settlement and other means of false export declaration, fraudulent export tax rebates.

Zhou Yong, Chief of Goods and Services Tax Section of Tongren Municipal Taxation Bureau, suggests that the production, sales and export business of textiles and garments involves many links, and the process is complicated, and some goods and invoices may even be circulated among many provinces and cities, and the enterprises in each link should pay attention to the risk problems therein. Therefore, enterprises exporting textiles and garments should enhance the awareness of risk prevention and control, strictly abide by the legal red line of real transactions, and establish a sound financial system and internal risk prevention and control system for export tax refund (exemption) enterprises. In the process of transaction, they should strengthen the inspection and evaluation of upstream and downstream enterprises to prevent their losses caused by accepting false VAT invoices due to false invoicing or fleeing, loss of connection, or abnormal write-off of the upstream, and at the same time, they should prevent the upstream and downstream enterprises from colluding with each other, which will lead to the risk of not being able to refund the tax and thus being utilized to implement the tax cheating.

Strictly Prevent Smuggling and Tax Fraud in High-Tech Sector

In October 2023, the Nanjing Yuhuatai District People's Procuratorate announced a large fraudulent export tax rebate case. It was found that the group took advantage of the national export tax rebate policy, exported Apple cell phones outside the country to obtain tax rebates, and then smuggled them back into the country for domestic sales by means of dismantling and other means, and exported more than 1.08 million Apple cell phones over a period of three years, with the total amount of price and tax exceeding 8.27 billion yuan, and cheated tax by 819 million yuan. The court sentenced the defendants to sentences ranging from 5 to 6 years, and fines ranging from 500,000 to 80 million yuan, and recovered the relevant illegal income in accordance with the law.

Jiang Zhenghe, a lawyer of Hwuason Law Firm, analyzed that some unscrupulous enterprises took advantage of the features of small size, high added value and tax concessions of high-tech products to cheat export tax rebates, which not only seriously eroded the tax of the country, but also weakened the role of tax incentives in the promotion of scientific and technological innovation.

From the public cases, some criminals firstly purchase Apple cell phones in China, and then sell them to Hong Kong, apply for tax rebate by way of false customs declaration and false export transactions, split the cell phone into bare phone and packing box by Hong Kong touting personnel, and then arrange smuggling personnel or other ways to smuggle the cell phone into the country, and the packing box enters into the country by way of normal customs declaration and importation. Finally, by the relevant personnel group goods in the domestic sales. Unlawful elements in Hong Kong to register affiliated companies for domestic enterprises to provide foreign exchange and other facilities, is one of the new features of this type of tax fraud cases.

There are also criminals who adopt the tactic of "buying a single ticket", first illegally purchasing the export information of non-tax-refundable goods through intermediaries, such as branded cell phones, routers, etc., tampering with the owner's information to declare and obtain customs declarations, and then illegally obtaining false invoices from fraudulent invoicing groups by purchasing or "separating the ticket from the goods". Then, by purchasing or "separating votes and goods", they illegally obtained false VAT invoices from the false opening gangs, and then the foreign trade enterprises controlled by the tax fraud gangs declared export tax rebates, and cheated the export tax rebates.

Jiang Zhenghe said that relevant enterprises should strengthen the construction of rules and regulations, implement effective supervision for various taxes and policies, and carry out regular tax health checks; in the integration of "business, finance, law and tax", enterprises should re-examine the business model at four levels of business, finance, law and tax, and ensure the authenticity and relevance of the transactions in business, and establish the financial system in finance, and establish the financial system in finance. In the integration of "business, finance, law and tax", enterprises should review their business model from four levels: business, finance, law and tax, ensure the authenticity and relevance of transactions from the business level, set up a financial filing system and book checking system from the financial level, and carry out compliance check on the contract flow, bill flow, capital flow and business flow from the legal and tax levels, so as to prevent the tax risks involved in the enterprise. If necessary, professional organizations can also be hired to follow up the whole process of the business in order to detect problems and prevent risks in time.

 

Building a "firewall" for wind control

Liu Tianyong

[News playback] on March 11, the second session of the 14th National People's Congress held in the third "ministerial channel", the General Administration of Customs Yu Jianhua said that this year, China's imports and exports continue to improve trend, the scale of the same period in history hit a new high at the same time, the quality of foreign trade in the gold is also constantly improving. Customs monitoring shows that in the first two months of this year, the volume of customs declarations increased by more than 10%, inbound and outbound means of transportation increased even more, import and export enterprises continue to enhance business confidence.

The total value of imports and exports 6.61 trillion yuan, an increase of 8.7% year-on-year, the scale of a record high for the same period in history, for five consecutive months of year-on-year growth ...... the first two months of this year, China's foreign trade handed over an eye-catching "report card" to achieve "open the floodgates! ". In March 11 held the second session of the 14th National People's Congress, the third "ministerial channel" on the General Administration of Customs Yu Jianhua said that, overall, China's foreign trade this year, a good start, the preliminary judgment of the first half of the year can be maintained in the growth of the channel. However, in the face of the current complex and severe situation, China's foreign trade to achieve the annual "quality and quantity stability" goal, still need to pay hard efforts.

The high-quality development of any industry cannot be separated from a fair environment under the rule of law. For the foreign trade industry, some tax-related crimes have emerged in recent years, which is not conducive to the healthy and orderly development of the industry. In response, tax, public security and other departments have strengthened cooperation and jointly cracked down on tax-related criminal behavior, achieving good results. Data show that a total of about 16.6 billion yuan of export tax refund losses were recovered in 2023. Foreign trade enterprises must attach great importance to tax compliance, and effectively take initiatives to enhance tax-related risk prevention and control capabilities, with a view to better realizing sustainable development.

Through the study of tax-related risk cases in the foreign trade industry in recent years, the author found that the tax-related criminal behavior of many foreign trade enterprises is not sudden, and there have been many signs before they were investigated and dealt with. For example, some business personnel of foreign trade enterprises lack understanding of export tax rebate policies and regulations, and even the basic export methods such as "self-operated" and "agent" are not clear, which has laid hidden risks from the beginning; some foreign trade enterprises, in the process of carrying out their business, have no understanding of the acceptance of VAT invoices and have no knowledge of the tax-related risks. Some foreign trade enterprises, in the process of conducting business, are not strict in accepting VAT invoices, and there is a risk; there are also foreign trade enterprises in the occurrence of minor tax-related risks, the relevant person in charge of the tax department for the risk of prompting, interviews, warnings, etc. do not pay attention to, and do not rectify, resulting in higher and higher risks, and ultimately assume criminal responsibility, be severely punished by the law. These lessons show that foreign trade enterprises want to more effectively prevent and control tax-related risks, can not only focus on a certain aspect or a link to passively respond to risks, and should take the initiative to build a full-process risk prevention and control system covering the prior, during and after the event, and effectively build a strong wind control "firewall".

Strengthen the prevention beforehand, through the system of the "fence" to block the risk. Export tax rebate for the development of the foreign trade industry is a crucial policy. In practice, the foreign trade industry involves a large number of subjects, production enterprises, foreign trade enterprises, foreign trade comprehensive service enterprises, etc., different types of subjects in the application of export tax rebate policy there are certain differences. Based on this, different types of foreign trade enterprises should be based on the actual business model to establish their own tax compliance system, clear guidelines for tax-related behavior that all employees must comply with, the formation of close collaboration between various departments within the enterprise process mechanism. For example, the business department of the enterprise should be familiar with the relevant tax policies and regulations, and give full consideration to the tax-related compliance issues when signing contracts with business partners in procurement, production and sales; when the business department passes the contract to the legal department for review, the legal department should guide the business department to improve the tax-related terms of the contract in accordance with the provisions of the relevant tax policies; and the financial department should carry out the accounting and tax processing according to the business activities, contracts and invoices, forming the accounting, tax information and tax compliance system. The finance department shall carry out accounting and tax processing based on business activities, contracts and invoices, and form accounting and tax information to be submitted to the management of the enterprise for decision-making reference.

Reinforce the assessment in the process, and investigate the hidden risks through timely "scanning". The author suggests that foreign trade enterprises, on the basis of learning and mastering the tax policies and regulations of the foreign trade industry, sort out a practical guide containing common tax-related risk points, and regularly review the guide to see if there are any hidden risks. For example, export business often involves multiple links and the business process is relatively complicated. Relevant enterprises should arrange specialized personnel to carry out risk investigation on each link of export business when conditions permit, especially to strengthen the control of goods and the management of VAT invoices, export declaration and other tax rebate documents, so as to ensure that the export tax rebate business is real and legitimate; at the same time, they should strengthen the investigation and evaluation of suppliers to prevent the risk of suppliers escaping, losing contact, or irregularly injecting tax into their business. At the same time, the inspection and evaluation of suppliers should be strengthened to prevent the risk of not being able to make tax refund or even being utilized to implement tax fraud due to suppliers' escape, loss of connection, abnormal cancellation or acceptance of false VAT invoices.

Adept at responding after the event and avoiding the expansion of risks through active actions. As the tax authorities have continuously strengthened precise supervision and flexible enforcement in recent years, when foreign trade enterprises have certain tax-related violations, the tax authorities often send prompt reminders to the enterprises in a timely manner after discovery. In this regard, foreign trade enterprises should attach great importance to the situation and immediately carry out rectification in accordance with the requirements of the tax authorities. It is worth noting that if a foreign trade enterprise is subject to a tax audit due to invoice problems, the conclusion of the audit often determines the direction of the case. If the tax audit finds that the case is suspected of tax fraud, it should be transferred to the judicial authorities, and the relevant enterprises and personnel may also face criminal risk. Based on this, the relevant foreign trade enterprises, once the risk matters, must not ignore, not to mention trying to cover up the risk, must take the initiative, frank communication with the tax department, the risk resolution port "forward", through active cooperation with the investigation, truthful provision of materials, and immediately begin to rectify the actual action, as far as possible to avoid the risk of criminal liability! (Author: Beijing Huatax Lawyer)

(Author's organization: Hwuason Law Firm)