Editor's Note: China Coal Industry Association recently released the 2023 Annual Report on the Development of the Coal Industry, which shows that last year China's raw coal production was 4.71 billion tons, up 3.4% year-on-year, a record high. As China's basic energy source, coal occupies an important strategic position in the national economy. In the field of taxation, the tax-related risks of the coal industry present the characteristics of multiple taxes and links, and the problems of false opening and tax evasion in the operation process of coal enterprises are highlighted, hampering the healthy and sustainable development of the coal industry. Recently, the Supreme People's Court and the Supreme People's Procuratorate mentioned at the press conference on judicial interpretation of tax-related crimes and typical cases that the coal industry is a high incidence area of the crime of fraudulent tax evasion. Under the regulatory trend of eight departments across the country jointly combating tax-related crimes, the issue of tax compliance for coal enterprises cannot be delayed. Since 2021, Hwuason Law Firm has been launching tax compliance reports on coal industry, paying continuous attention to the latest regulatory situation and enterprise tax-related risks in coal industry. Recently, Liu Tianyong and Zhang Qian were interviewed by ZHONGGUO SHUIWU BAO on the common tax-related risks in the coal industry and the compliance suggestions of the enterprises, analyzing the tax-related risks of the coal enterprises in the purchasing, selling, processing, and transfer of equity, and discussing the causes of the risks and the suggestions to cope with them. In addition, based on the many tax-related risks in the coal industry, Liu Tianyong published an article titled "Coal Enterprises Should Transform, Tax Compliance", which puts forward tax-related risk prevention and control suggestions for coal enterprises in four aspects, namely, standardizing business processes, perfecting the management system, strengthening the internal control team, and regularly checking the risks. The full text is as follows.

 

A small fire can destroy ten thousand hectares of green

--Tax experts advise coal enterprises to pay attention to the prevention and control of tax risks to avoid leaving "fire" hidden danger.

Coal is China's basic energy source and important industrial raw material, shouldering the important responsibility of ensuring energy security. Hwuason Law Firm released the "Coal Industry Tax Compliance Report (2024)", which shows that in 2023, among the 145 tax-related administrative cases in the coal industry, there were 34 cases of false invoicing, accounting for more than 23%. Relevant experts said that some coal enterprises are likely to generate different degrees of tax risks in the process of improving production efficiency and accelerating green transformation, and relevant enterprises should pay attention to the prevention and control of tax risks in all aspects of production and operation.

By Kang Xiaobo Pei Shiming Correspondent Guo Kaihua

China Coal Industry Association recently released the "2023 Coal Industry Development Annual Report" shows that in 2023, the country's raw coal production of 4.71 billion tons, an increase of 3.4% year-on-year, a record high. At the same time of the growth of raw coal production, the tax-related illegal behaviors of some coal enterprises should not be ignored. The "Coal Industry Tax Compliance Report (2024)" (hereinafter referred to as the "Report") released by Hwuason Law Law Firm shows that there were 145 tax-related administrative cases of false invoicing, tax evasion and other tax-related administrative cases in China's coal industry in 2023, and the tax-related risks existed in all aspects of production and operation. "For coal enterprises, attention must be paid to preventing and controlling tax risks in all aspects of production and operation to avoid leaving 'fire' hidden dangers." Liu Tianyong, director of Hwuason Law Firm, said.

Purchase and Sales: Over-quota Sales Trigger the Risk of False Invoicing

In the coal purchase and sales chain, cases of false VAT invoicing are common. The Report shows that among 145 tax-related administrative cases in the coal industry in 2023, there were 34 cases of false invoicing, accounting for more than 23%.

Liu Tianyong said that the reason why the risk of false invoicing occurs frequently in the coal purchase and sale process is closely related to the characteristics of the industry. At present, China's coal mining quota system, some coal mining enterprises, especially small enterprises over the quota mining coal, can not be sold in its own name and provide VAT invoices. In this case, the industry has come up with modes such as modern opening and dependence, which are prone to breeding the risk of false invoicing.

Company A, a coal trading company located in Province S, mainly purchases commodity coal from coal chemical enterprises and sells it directly to local coal-using residents and small factories. as consumers and small factories seldom request Company A to issue invoices, Company A thus generates a large number of surplus input invoices. company B mainly purchases raw coal from small coal kilns and then sells it to coal chemical enterprises. Due to the over-mining of small coal kilns and the inability to issue invoices in accordance with the law, Company B has a long-term problem of insufficient input. Introduced by an intermediary, Company B and Company A reached a cooperation: Company B obtained input invoices from Company A by paying certain invoicing fees to Company A. In the invoicing process, Company B would pay the invoicing fees to Company A. In the invoicing process, Company B provided Company A with documents such as pound slips and settlement statements made by Company B for the procurement of raw coal, and Company A issued invoices based on the quantity and amount recorded in the documents.

The local tax authorities found through tax big data analysis and field investigation that there was no goods purchase and sale relationship between Company A and Company B, but Company A issued invoices to Company B, which belonged to the category of "issuing VAT invoices for others and letting others issue VAT invoices for themselves without purchasing and selling goods", constituting false VAT invoices, which should be investigated for corresponding legal responsibility and transferred to the judicial authorities for prosecution. It constituted false invoicing of VAT and should be investigated for the corresponding legal responsibility and transferred to the judicial organs for handling. The court ruled that the behavior of Company B subjectively had the intention and purpose of destroying the state order of invoice management, objectively violated the state's prohibitions on VAT invoices, and carried out the behavior of purchasing VAT invoices by paying invoicing fees, etc., from the subject who had no right to sell VAT invoices, and destroyed the state's order of management of VAT invoices, and its behavior met the composition of the crime of unlawfully purchasing VAT invoices, and its behavior met the constituent elements of the crime of illegal purchase of VAT invoices, and Company B was finally convicted for the crime of illegal purchase of VAT invoices.

Liu Deming, the person in charge of Tax Risk Management Unit of Yu County Tax Bureau of State Administration of Taxation, told the reporter that in practice, some coal trading enterprises were greedy for cheapness and had luck, mistakenly thinking that they would not be found out when they purchased over-mined coal and obtained false invoices in private "quietly", not knowing that such behaviors could not escape from the supervision of the tax big data, and they were punished accordingly in the end. The tax data will not be able to monitor such behavior, and it will be punished accordingly. Meanwhile, China's coal industry has been in a seller's market in recent years, and in the face of fierce market competition, some small coal mines seek to cooperate with large-scale regular coal mines to carry out coal sales through the mode of dependent operation, which results in the situation of "separation of invoices and goods", and at the same time, there are cases of advances and loans, which are easy to be recognized by the tax, public security departments as not having the real goods transactions. It is easy to be recognized by the tax and public security departments as not having the capital flow back of the real goods transaction. In the dependency mode, there is also a verbal agreement instead of a written contract, leading to the authenticity of the relevant departments of the dependency of suspicion, and then denied the establishment of the dependency mode, that the enterprise has a false open behavior.

Liu Tianyong suggests that the relevant enterprises in the purchase of coal, should pay special attention to the seller whether there is the phenomenon of dependence, a detailed understanding of the identity of the seller's business personnel, and timely investigation of whether there is a flow of goods, funds, invoices, the flow of the "three streams" are inconsistent with the situation. If there are instructions for delivery and other behaviors, the other party must retain the description of the documents, commissioned to pick up the goods, etc., and if necessary, should require the other party to issue a statement to prove the authenticity of their own business. Upon completion of the transaction, the coal trading enterprise shall properly keep the contract, invoice, transportation documents, weighing sheets, remittance statements and other transaction-related information.

Processing: "Packaging" Taxable Goods as Non-Taxable Goods

In coal processing, there are many cases of tax-related risks. According to the reporter's understanding, the processing link of the coal industry mainly includes two types of classification processing and deep processing, which may have different risk matters.

Zhang Qian, partner of Hwuason Law Firm, said that classification processing generally refers to the process of producing different quality coal varieties through screening, coal molding, coal pulping, etc., and applying physical and chemical methods to exclude mineral impurities and harmful elements in coal. In practice, some sorting and processing enterprises believe that the tax authorities do not understand the technical process, and attempt to achieve the purpose of concealing the real income and evading tax by confusing the coal and related by-products, which ultimately occurs a risk.

Company T is mainly engaged in coal washing and classification processing business. When the tax authorities used tax big data to conduct risk screening, they found that the proportion of medium coal produced and sold by Company T and the gangue dumped and processed was seriously unbalanced - normally, the proportion of medium coal output in raw coal is 15% to 30%, and the proportion of gangue, as solid waste output in the process of raw coal washing, is between 10% and 20%. In other words, the output of medium coal is higher than gangue. However, the weight of gangue output of Company T is two times the weight of coal, obviously inconsistent with the industry's basic situation. After in-depth investigation, the tax authorities found that Enterprise A sold the coal through off-the-books operation, and recorded the coal as gangue in the account book, and there was the act of concealing income. The tax authorities determined that Company T constituted tax evasion and recovered more than 5 million yuan according to the law.

Coal deep processing mainly includes coking and coking chemical products recovery and processing, coal gasification, coal to oil and so on. In practice, some enterprises engaged in coal deep processing did not understand and master the tax policy regulations in time, which led to risks in consumption tax treatment.

Company H is an enterprise engaged in coal mining, washing, sales and coal processing, etc. In 2019, the company plans to add the construction of a coal-to-oil project, utilizing coal and other raw materials to process and produce products such as lightweight coal tar, etc. At the end of 2020, the project was basically completed and Company H began the research, development and production of coal deep processing products. At this time, the State did not explicitly provide for the imposition of consumption tax on products such as light coal tar.In June 2023, the Ministry of Finance and the SAT issued the Announcement on the Caliber of Implementation of Consumption Tax Policy for Certain Finished Products (Ministry of Finance SAT Announcement No. 11 of 2023, hereinafter referred to as Announcement No. 11), which clarified that consumption tax was to be imposed on mixed aromatic hydrocarbons, heavy aromatic hydrocarbons, mixed carbon octane, stabilized light hydrocarbons, light oils, light coal tar in accordance with the consumption tax on naphtha. However, after the issuance of Announcement No. 11, Company H still mistakenly thought that light coal tar products were not subject to consumption tax. After the risk reminder and policy counseling by the tax department, Company H discovered the mistake and paid the consumption tax and the corresponding late payment fee.

Zhang Qian said, from the practical point of view, coal processing, especially deep processing in the technical process is more complex, but the relevant enterprises can not try to rely on complex technology, taxable products "packaging" for non-tax products, the result can only be "lifting a stone to stone their own feet! This will only result in "lifting the stone to hit their own feet". Especially after the introduction of Announcement No. 11, the relevant enterprises must carefully control the policy provisions, accurately determine whether the processed products belong to the scope of consumption tax tax, if so, they should be timely for the registration of consumption tax and improve the subsequent tax treatment. "If the enterprise cannot accurately judge whether the processed products are regarded as naphtha to pay consumption tax, it should take the initiative to communicate with the competent tax authorities and truthfully and comprehensively provide relevant materials such as product testing certificates, and accurately carry out tax processing under the counseling of the tax authorities." Zhang Qian said.

Equity transfer: taxable price is not fair value

With the accelerated transformation and upgrading, integration and optimization of the coal industry in recent years, a number of coal enterprises have engaged in equity transfers, and the tax-related risks arising from this process are also worthy of attention.

Chen Mou, a natural person, holds a 30% equity interest in A Coal Co. In October 2021, Chen Mou transferred all of his equity interest in A Co. at a price of RMB 12 million, and filed a tax return to register the change of equity interest. When the local tax authorities analyzed the tax risk of equity transfer activities within the jurisdiction, they found that according to the registration information of prospecting right and mining right of Company A and the coal resource reserves of its coal mines, Chen's equity transfer may have a low tax basis. The tax officials found that the main assets of A Coal Company were prospecting right and mining right, and the price of equity transfer by Chen was indeed obviously low without justifiable reasons, failing to reflect the fair value of the corresponding equity of A Company. The tax authorities approved Chen's income from equity transfer and required him to pay back taxes and impose late fees in accordance with the provisions of the Announcement of the State Administration of Taxation on the Issuance of the Measures for the Administration of Individual Income Taxes on Income from Equity Transfers (for Trial Implementation) (Announcement of the State Administration of Taxation No. 67 of 2014).

Yang Yanming, Deputy Chief of Income Tax Section of Yangquan Municipal Tax Bureau, said that from the taxation point of view, the equity transfer of coal enterprises belongs to major tax-related matters, and it is necessary to ask the competent tax authorities to provide counseling in advance, which is because the equity transfer not only involves "visible" tangible assets but also intangible assets such as prospecting right and mining right, and not only to consider the corresponding taxable value of the equity at the time of transfer. This is because equity transfer not only involves "visible" tangible assets, but also may involve intangible assets such as prospecting rights and mining rights, which not only need to consider the share of net assets corresponding to the equity at the time of transfer, but also need to consider the possible income from future profitability. If taxpayers ignore the actual situation and blindly transfer the equities according to the cost value at the same price in the equity transfer, it may generate the risk of being adjusted by the tax, and need to be paid attention to.

Yang Yanming suggested that the financial team and shareholders of coal enterprises should familiarize themselves with and master the Circular of the Ministry of Finance and the State Administration of Taxation on Several Issues Concerning the Enterprise Income Tax Treatment of Enterprise Reorganization Businesses (Cai Shui [2009] No. 59), the Announcement of the State Administration of Taxation on the Relevant Issues concerning the Application of Special Tax Treatment to Equity Transfer of Non-Resident Enterprises (Announcement of the State Administration of Taxation No. 72 in 2013), the Announcement of the State Administration of Taxation on the Issuance of Administrative Measures for Individual Income Tax on Income from Equity Transfer (for Trial Implementation) (Announcement of the State Administration of Taxation No. 67 of 2014) and other policies, accurately determine the original cost value of the transferred equity, reasonably select the cost method, the market method and the income method for determining the income from the transfer of equity, and maintain close communication with the competent tax authorities in order to avoid blind pricing that may result in tax-related risks. Risks.

Mr. Liu Tianyong, Director of Hwuason Law Firm, reminded that in the process of transferring equity interests in coal enterprises, the transferor should also pay attention to the issue of the time point of tax declaration to avoid the risk arising from late declaration. According to the relevant policy provisions, legal person shareholders transferring equity interests in coal mining enterprises should recognize the realization of income when the transfer agreement comes into effect and completes the procedures for changing equity interests; for individual shareholders, there are circumstances such as the share transfer agreement coming into effect, payment or partial payment of the price, and the transferee shareholders actually fulfilling the duties of the shareholders, and so on, the withholding agent and the taxpayers should declare the tax payment to the competent tax authorities within 15 days of the following month according to the law. "In addition, in order to prevent the share transfer agreement comes into effect, the tax obligation arises after the transaction default situation, the transferor can also be in advance in the share transfer agreement to make a clear agreement, if the transferee there is a breach of contract, resulting in the termination of the equity transfer transaction, should bear the transferor due to the inability to return the tax paid and the loss caused." Liu Tianyong said.

 

Coal companies should be tax compliant to transform

Liu Tianyong

With the steady progress of the carbon peak carbon neutral goal, as one of China's important main energy sources of the coal industry, is constantly accelerating the pace of green low-carbon transformation. China Coal Industry Association recently released the "2023 Annual Report on Coal Industry Development" (hereinafter referred to as the "Report") shows that China's coal industry has achieved new results in green and low-carbon transformation, the national coal power installed ultra-low emission transformation of more than 1.03 billion kilowatts, per kilowatt hour of thermal power generation standard coal consumption decreased by 0.2%, the ecological environmental quality of the mining area continues to improve, the raw coal production of the integrated energy consumption of 9 kg of standard coal / tons, a year-on-year decline of 7.2 percentage points. However, in the face of the complex international energy situation and new development requirements, the coal industry's green low-carbon transformation road is still "a long way to go". In this regard, the Report proposes that in 2024, efforts should be made to improve the level of clean and efficient utilization of coal, and to fight the battle of clean and efficient utilization of coal.

For coal enterprises, green and low-carbon transformation is a challenging systematic project, enterprises should not only change the traditional rough business philosophy, but also innovate clean and efficient use of technology, the introduction of energy-saving and environmentally friendly equipment and professionals, but also to "break the wrist" determination to eliminate backward production capacity, optimization and restructuring of business segments. ...... This process is not only inseparable from the capital investment, but also need to have a healthy and good industry ecology as a guarantee. However, in recent years, there are many cases of tax-related violations in the coal industry, and the main aspects of production and operation of coal enterprises may involve tax risks. Poor prevention and control will adversely affect the transformation and upgrading of coal enterprises. In this case, coal enterprises must attach great importance to tax compliance, and effectively take measures to enhance tax risk prevention and control capabilities in order to lay a solid foundation for successful transformation.

Regulate business processes. Unstandardized business practices are the source of tax risks. From the practical point of view, the current coal industry, whether in the purchase and sale, processing and other links, or in the transfer of equity, there may be hidden risks. In this regard, coal enterprises should seriously review their own business processes, with sound systems and strict management, and effectively standardize the business process. For example, the relevant enterprises can establish a perfect written contract review and retention system, before the transaction with the partner, relying on the system to properly design the terms of the transaction contract, in which the type of invoicing, the project, the tax rate, the invoicing time, the main body of the tax, the out-of-the-money costs, the liability for breach of contract, and other tax-related provisions for a clear and explicit agreement; in the completion of the transaction, the proper preservation of the contract, the invoice, the transportation documents, After the transaction is completed, contracts, invoices, transportation documents, remittance statements and other transaction-related information and evidence should be properly preserved.

Improve the management system. The coal industry has a long industrial chain, from upstream coal mining, to coal transportation, to downstream coal processing, the whole process involves more taxes, in addition to value-added tax, enterprise income tax, stamp duty and other common taxes, but also involves resource tax, water resources tax, consumption tax and other taxes. It is necessary for coal enterprises to sort out in detail which taxes are involved in their own business and what are the policies and regulations of these taxes, and establish a perfect management system on this basis to clarify the duties of the personnel in finance and tax positions and the practical specifications of each tax, so as to ensure that each tax matter can be handled in a compliant and accurate manner.

Strengthen the internal control team. With the in-depth development of smart tax, tax authorities continue to improve the level of accurate supervision through tax big data. For coal enterprises that have the conditions, they can strengthen the digital construction and promote the deep integration of industry finance and tax. For example, the relevant enterprises can develop appropriate ERP management systems according to their own basic situation, strategic development goals, basic processes of procurement, supply and marketing, covering procurement, weighing, production, sales, settlement, finance, taxation and other processes, to further standardize the production, transportation, supply and marketing and financial and tax processing behavior, to achieve real-time data transmission, synchronization constraints, and tampering, to better protect the authenticity of the business, and to achieve the effective control of the whole process of the business. control of the whole process of business. At the same time, coal enterprises can also set up internal control teams or departments in accordance with their own actual situation, so that major transactions are reviewed by professionals, and regular training on tax-related risk prevention is provided to the management of business, finance, administration and other departments of the enterprise, so as to further enhance the compliance awareness of all members of the enterprise.

Regular risk screening. Coal enterprises should attach great importance to regular "medical checkups" to comprehensively check whether there are risks and hidden dangers in terms of business authenticity, goods authenticity, funds receipt and payment, consistency of invoices and goods, and tax payment; for historical legacy problems found in the checkups, rectification should be made immediately, and those resulting in underpayment of tax should be declared in a timely manner to make up for the underpayment. In addition, if the coal enterprises have already occurred tax risks or even tax crisis, they should not take any chances, let alone trying to hide the truth, and should actively cooperate with the tax department to provide relevant materials truthfully, comprehensively and accurately according to the requirements of the tax department. When the conclusion of the tax audit comes out, the enterprise should actively respond to it, rectify the non-compliant business operations and defuse the risk as much as possible.

(Author: Hwuason Law Firm)