Editor's Note: Non-ferrous metals are important basic raw materials for electronics, aviation, automobiles, construction and other fields, and play an important role in economic construction, national defense construction and social development. In the field of taxation, in recent years, the non-ferrous metal industry tax-related cases occur frequently, non-ferrous metal purchase and sale, transportation and other aspects of the tax risk is more and more prominent. In March this year, the Supreme People's Court and the Supreme People's Procuratorate also mentioned at the press conference on judicial interpretation and typical cases of tax-related crimes that the precious metal industry is a high incidence area of fraudulent tax crimes. Under the supervisory situation of eight departments of the country jointly combating tax-related crimes, the tax compliance management of non-ferrous metal enterprises should not be delayed. Recently, Hwuason Law Firm Liu Tianyong and Zhang Qian were interviewed by China Taxation News on the common tax-related risks and compliance management of non-ferrous metal industry, and analyzed the "false VAT invoices", "supplier sales without invoices" and "invoiced sales" in the non-ferrous metal industry. It analyzes the causes of three common tax-related risks in the non-ferrous metal industry, namely, "false VAT invoicing", "sales by suppliers without invoices" and "invoicing party escaping and losing contact", and puts forward suggestions for prevention and response. The full text is as follows:

In the chain of purchase and sale transactions in the non-ferrous metal industry: one enterprise is falsely opened, and the risk may be transmitted to the whole chain

Luo Shunai, Li Wei, Chen Yuyun

Data from the National Bureau of Statistics showed that the industrial added value of the national non-ferrous metal industry in 2023 increased by 7.5% year-on-year, an increase of 2.9 percentage points higher than the industrial average. The output of ten non-ferrous metals was 74.7 million tons, up 7.1% year-on-year, exceeding 70 million tons for the first time. While the non-ferrous metal industry is developing rapidly, there are also some tax-related problems that deserve attention.

The Tax Compliance Report (2024) for the Non-ferrous Metals Industry released by Hwuason Law Firm shows that 527 tax-related administrative cases in the non-ferrous metals industry were included in the information on tax treatments, tax administrative penalties and major tax law violations and breach of trust disclosed by the State Administration of Taxation (SAT) and tax departments around the world during the period from 2018 to 2023.

It is understood that the procurement source of non-ferrous metal industry, there are a large number of recycled non-ferrous metals from industrial waste, as the source of waste production enterprises for off-the-books sales, tax avoidance and other purposes, the sale of waste materials without a ticket occurs from time to time. As the VAT chain is interlocked, the existence of irregular tax-related behavior in the upstream enterprises will cascade the risk to the downstream enterprises. "In the chain of purchase and sale transactions in the non-ferrous metal industry, the phenomenon of false opening by one enterprise and risk transmission to the whole chain is especially prominent." Liu Tianyong, director of Hwuason Law Firm, said.

Common Risk Point 1: False VAT invoicing

As jointly investigated by the tax police, a group used "golden tickets" as input items and falsely issued VAT special invoices to downstream enterprises by means of ticket and goods separation and changing tickets, involving 994 invoices amounting to 955 million yuan and 124 million yuan in tax. From the public information, there are many other similar cases disclosed in recent years.

The analysis of "Tax Compliance Report of Non-ferrous Metals Industry (2024)" pointed out that one of the distinctive features of the cases of false VAT invoices in the non-ferrous metals industry is that the completion of the transfer of the right of goods through a third-party warehouse is not recognized. The non-ferrous metal industry mostly adopts the third-party warehouse transfer for the transfer of cargo right, and this kind of delivery of cargo right can significantly reduce the logistics cost. In the transaction process, the intermediate trade links do not involve the actual change of the geographical location of the goods, i.e., the goods are always in the warehouse, and no actual transportation occurs. At the same time, in the case of insufficient inputs, some non-ferrous metal enterprises take the form of paying invoicing fees to a third party to obtain invoices, which is commonly referred to as "truthful invoicing". Although the invoice issued by the third party contained the number of goods, the amount of the actual transaction with the situation, but the tax authorities believe that the invoicing party and the seller of goods is inconsistent, but still tend to false invoicing characterization, and even transferred to the public security organs to enter the criminal process.

The tax risk is particularly high when enterprises are involved in the false invoicing of golden tickets and variable tickets. According to the "Ministry of Finance State Administration of Taxation on the precious metals and gemstones as the main raw materials of goods export tax rebate policy notice" (Cai Shui [2014] No. 98), after deep processing of gold products, as long as the cost of raw materials in the scope of the provisions will be able to enjoy the export tax rebate policy. However, from the outbreak of the gold ticket in recent years in the case of false invoicing found that most of the cases are the use of gold and other non-ferrous metals are easy to combine the characteristics of the way through the change of the ticket to the external false invoicing of gold. The specific modus operandi is that the gold distribution enterprise will invoice to the variable invoice company, and the variable invoice company will change the product name to alloy after forging the processing link, and invoice to the downstream enterprises.

State Administration of Taxation, Hunan Provincial Tax Bureau, deputy director of goods and services tax Wang Sihui that the gold itself is of high value, strong value retention, the transaction process, the lawless elements are often in the tax link "make a big fuss. In this regard, enterprises in the non-ferrous metal industry should take the initiative to carry out self-examination, and carry out inspections in terms of the authenticity of business, authenticity of goods, receipt and payment of funds, consistency of tickets and goods, tax payment, and review of upstream and downstream business units. If the inspection finds that there are historical problems, they should carry out the divestment of the historical problem business in a timely manner, and if the risky historical business results in underpayment of tax, they should make up the tax in a timely manner.

Common Risk Point 2: Vendors selling without invoices

Company M is a non-ferrous metal trading company, and Bai is the actual controller of the company. between 2015 and 2016, Company M repeatedly purchased electrolytic copper, electrolytic nickel, zinc ingots and other goods from retailers and non-ferrous metal trading companies, amounting to approximately RMB 30 million and incurring transportation costs of more than RMB 4 million. As the relevant enterprises did not issue invoices at the time of purchase and transportation, but the Company had to issue invoices at the time of sale, which led to a surge in the Company's tax burden. Through the introduction of Li Mou, the company obtained false VAT invoices from nine companies, including Fang Mou Company, at a fee of 8%-9% of the face amount of the VAT invoices, with a tax amount of RMB 3.2 million. The court held that the behavior of Bai Mou and Li Mou, violating the national tax management system, had constituted the crime of illegally purchasing VAT invoices, and sentenced Bai Mou to 3 years of fixed-term imprisonment and 4 years of probation; Li Mou, playing a secondary and auxiliary role, was an accessory, and should be given a lighter and mitigated punishment according to the law, and sentenced Li Mou to 2 years and 10 months of fixed-term imprisonment, with a probationary sentence of 3 years.

Non-ferrous metal industry procurement source has a large number of recycled non-ferrous metals, and recycled non-ferrous metals from industrial waste, China's renewable resources market has long been in a seller's market, waste enterprises for off-the-books sales, tax evasion, etc., do not bring the ticket sales of waste materials, and by the many scattered individual operators to undertake the acquisition and resale. Due to the source sales of waste enterprises do not invoice, recycled non-ferrous metals scattered to the hands of a large number of retailers, retailers also do not issue invoices for external sales.

Zhang Qian, partner of Hwuason Law Firm, analyzes that the reason for this situation is, on the one hand, the retailer's own tax awareness is insufficient, and on the other hand, in the case of a possible increase in the tax burden, the retailer chooses to "turn a blind eye". In the new mining or imported non-ferrous metal purchase and sale of the main business, there are also a large number of individuals, self-employed, may be out of the consideration of reducing their own tax burden, usually unwilling to issue VAT invoices to the buyer. In this way, non-ferrous metal trading enterprises may face the problem of insufficient input invoices.

The analysis of Tax Compliance Report on Non-Ferrous Metals Industry (2024) points out that for enterprises engaged in recycled non-ferrous metals trading, as it is difficult to obtain input invoices, they usually sell without invoices when they sell to downstream small-scale producers, and they do not include the sales revenue in the books of accounts, nor do they make corresponding tax declarations of value-added tax (VAT), enterprise income tax (EIT) and other taxes. With the continuous enhancement of the tax administration capacity of the tax department, it is easy for the tax authorities to find out the behavior of enterprises selling without invoices and collecting money from private households through big data analysis and comparison.

As a tax cadre who has long been engaged in tax management of the non-ferrous metal industry, Teng Yu, deputy director of the Second Taxation Institute of Changning Taxation Bureau, suggests that renewable non-ferrous metal enterprises, when acquiring scrap metal, should do a good job of risk control at the source, and keep the contractual agreement, basis of expenditure, payment vouchers and other information for inspection according to the regulations, in order to confirm the authenticity of the purchasing business and costs. Conditional non-ferrous metal enterprises should establish a sound corporate compliance department to resolve tax risks at the front end, so that major transactions are reviewed by professionals, and the compliance department carries out regular tax-related criminal risk prevention training to business, financial and administrative management to strengthen the awareness of operational compliance. If it is difficult for enterprises to set up an independent compliance team, it is recommended to cooperate with an external team. At the same time, professional tax lawyers and tax accountants can be hired to help non-ferrous metal enterprises carry out regular tax health checks to investigate tax issues in the business process from multiple perspectives, such as accounting, tax and law.

Common Risk Point 3: The invoicing party escapes and loses connection

The analysis of "Tax Compliance Report of Non-ferrous Metals Industry (2024)" points out that the VAT chain is interlocked, and whether the upstream enterprises issue VAT invoices legally and in accordance with the law and whether they pay VAT on time and in full directly affects whether the downstream enterprises can declare and deduct the VAT input tax amount normally, and whether the deduction behavior will lead to the loss of the state's VAT. In the case of false invoicing in the non-ferrous metal industry, a considerable part of the cases is due to the upstream enterprises appearing the problem of false invoicing and then implicated in the downstream enterprises, the downstream enterprises receiving the invoices may accept the tax inspection, carry out the transfer of VAT input tax and affect the continuous operation of the enterprises in the light case, and in the heavy case, may be sent to the public security organs for investigation in the form of a criminal case of false invoicing.

According to the relevant provisions of tax registration management, if the tax authorities still have no whereabouts of the enterprise and the relevant personnel of the enterprise through on-site investigations, telephone inquiries, verification of tax-related matters and other means of collection and management, or if the relevant personnel, such as bookkeepers and tax preparers of the enterprise can be contacted, but they do not have any knowledge of the situation and are unable to contact the actual controllers of the enterprise, it can be determined that the enterprise is a fugitive (lost) enterprise. Among the tax-related administrative cases in the non-ferrous metal industry counted in the Non-Ferrous Metal Industry Tax Compliance Report (2024), there are quite a number of cases involving upstream enterprises that have fled and lost contact.

In practice, if the invoicing party escapes, the competent tax authority of the invoicing party will generally recognize the invoices issued by the invoicing party as "uncontrollable invoices" and inform the tax authority of the invoiced party. In this case, if the competent tax authority of the invoiced party discovers the "uncontrolled invoice" during the audit and comparison, it may require the enterprise to make VAT input tax transfer or not to deduct the input tax of the uncontrolled invoice. Meanwhile, in terms of enterprise income tax, the tax authorities will order the enterprise to reissue or exchange invoices within a certain period of time. If it is not possible to reissue or exchange invoices, enterprises are required to provide other legal and valid supporting materials. If these supporting materials comply with the regulations, pre-tax deduction is allowed; if not, the enterprise faces the risk of paying back the enterprise income tax and late payment fees.

"The cases of upstream enterprises are likely to bring the tax-related risks of downstream enterprises to the surface." Liu Tianyong analyzed, from the origin of the false opening type of cases, some enterprises of the upstream enterprises (or the upstream enterprises of the upstream enterprises), suspected of false opening of the criminal case has been the judiciary to make a guilty verdict, the downstream enterprises of the tax-related risk, it is easy to implicate through the case of the concurrence of the investigation. As far as the non-ferrous metal industry is concerned, once an enterprise in the chain of purchase and sale transactions is characterized as a false issuance, the risk may be transmitted to the whole chain, which in turn will have an impact on the operation of the upstream and downstream non-ferrous metal enterprises.

Duan Wentao, second-level organizer of the Changsha Taxation Bureau's Inspection Bureau, suggests that non-ferrous metal enterprises' production, sales and export business involves multiple links and complex processes, and that enterprises, when choosing suppliers, should fully examine the basic situation of the suppliers, and carry out key verification of whether the suppliers have entity operations and whether there are any major tax violations. In the transaction process, 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, loss of connection or abnormal write-off of the upstream, and at the same time, they should prevent upstream and downstream enterprises from colluding with each other, which will lead to tax risks.