Primary processing of agricultural products is an important foundation for modern agriculture to strengthen the industrial chain, optimise the supply chain and enhance the value chain, and promoting the development of primary processing of agricultural products is of great significance to the development of the ‘three rural areas’. In terms of tax policy, the state stipulates that eligible agricultural products processing can enjoy enterprise income tax exemption policy, boosting the primary processing of agricultural products enterprises bigger and stronger. However, at the same time, due to the scope of agricultural products processing tax law is not clear, vague issues, triggering disputes between the two sides of the tax enterprises, agricultural products processing enterprises on the road to development of the roadblock. Recently, a local tax authority determined that the potato fries and potato flour produced and sold by the enterprise do not belong to the scope of tax-free primary processing of agricultural products, and it is proposed to require the enterprise to pay back taxes and late payment fees. This article is intended to start from the case, for the face of such problems in the primary processing of agricultural products enterprises to provide countermeasures.

I. Introduction of the Actual Case: A Agricultural Products Processing Enterprise Producing and Selling French Fries and Potato Flour Was Required to Pay Back Enterprise Income Tax and Late Payment Fee

(i) Basic facts of the case

Enterprise A was established in 2008, and its main business was the production and sale of French fries, potato flour and other potato products. The production process of French fries mainly includes six processes: cleaning, peeling, cutting, drying, freezing and packaging. Drying includes two processes, one is to remove most of the water on the surface of French fries by air shower, and the other is to use palm oil as a heat exchange medium to gasify the water on the surface of French fries within a short period of time. The process flow of the enterprise's potato flour production mainly includes seven processes: cleaning, peeling, cutting, cooking, drying, grinding and packaging.

Recently, the competent tax authority of Enterprise A issued a notice to the enterprise that the French fries and potato flour sold by the enterprise did not fall within the scope of the Circular of the Ministry of Finance and the State Administration of Taxation on the Scope of Primary Processing of Agricultural Products to Enjoy Preferential Policies on Enterprise Income Tax (for Trial Implementation) (Cai Shui [2008] No. 149, hereinafter referred to as ‘Circular No. 149’). (hereinafter referred to as ‘Circular No. 149’), requiring the Enterprises to self-check and pay the EIT for the years 2017 to 2023 and pay the late payment fees, otherwise, the Enterprises will be characterised as having committed tax evasion.

(ii) Enterprises' views

The enterprise is puzzled by two points, one is that since the establishment of the enterprise, it has been engaged in the production and sale of French fries and potato flour potato products, and before the era of the preparation of the enterprise income tax tax preferences, the enterprise had submitted to the tax authorities for record in accordance with the law, and only after the registration and record by the tax authorities did the enterprise enjoy the enterprise income tax exemption policy, indicating that the tax authorities recognised that the French fries and potato flour produced and sold by the enterprise belonged to the scope of tax-exempted primary processing of agricultural products. The preliminary processing scope, now, why the attitude of the tax authorities to occur one hundred and eighty degrees ‘sharp turn’?

Secondly, according to No. 149, ‘4. Potato primary processing. Through the potato, sweet potato and other potatoes for cleaning, peeling, grinding, cutting, drying, freezing, grading, packaging and other simple processing, made of potato primary products. Specifically including: potato flour, crisps, French fries’, the enterprise argued that its production of French fries, potato flour process is fully in line with the above provisions, and belongs to the scope of tax-free primary processing of agricultural products.

Therefore, the enterprise insisted that its production and sale of French fries and potato flour belonged to the scope of tax-free primary processing of agricultural products, and it did not need to pay enterprise income tax and late fees, not to mention constituting tax evasion, and the tax authorities demanded this, which was not justified by the law.

(iii) Views of the tax authority

According to the tax authority, Enterprise A used palm oil as the heat exchange medium for ‘over-oil drying’ of French fries, which is not the drying stipulated in No.149, therefore, the French fries produced and sold by such process are not within the scope of preliminary processing of agricultural products exempted from tax. At the same time, ‘etc.’ is ‘etc. inside’ not ‘etc. outside’, and ‘cooking’ in the process flow of potato flour production and sales of Enterprise A is not in the scope of No. 149. ‘is not in the scope of the provisions of the 149th, so the potato flour also does not belong to the scope of tax-free primary processing of agricultural products.

(D) the focus of the dispute

From the foregoing, we can summarise the focus of the dispute between the tax enterprises:

1、Does the production and sale of French fries and potato flour belong to the scope of tax-free primary processing of agricultural products?

2、Does the enterprise constitute tax evasion?

3. Whether the enforcement behaviour of the tax authority is appropriate?

II Legal analysis of the case

(i) the enterprise production and sales of French fries, potato flour is the scope of tax-free primary processing of agricultural products?

From the perspective of legislative technology, No. 149 of the definition of the scope of tax-free primary processing of agricultural products using a ‘specific enumeration + reverse exclusion’ of the legislative means. Such as in the provisions of the ‘tea processing’ scope, No. 149 stipulates that the initial gross tea belongs to the scope of tax-free primary processing of agricultural products, refined tea, edge tea, pressed tea and tea and tea beverages mixed with a variety of drugs do not belong to the scope of tax-free primary processing of agricultural products. Specifically to the potato primary processing, No. 149 clearly stipulates that potato flour, crisps, French fries belong to the scope of tax-free primary processing of agricultural products, therefore, the enterprise production and sales of French fries, potato flour can enjoy the enterprise income tax exemption policy.

From the perspective of textual interpretation, No.149 only stipulates that ‘drying’ belongs to the process of primary processing of potatoes, and does not qualify the specific means of ‘drying’. According to the principle of interpretation in favour of taxpayers, No. 149 does not specify that ‘drying with oil’ does not belong to the scope of drying, and does not explicitly prohibit ‘drying with oil’ from applying the enterprise income tax exemption policy, and the tax authorities can not arbitrarily expand the interpretation of ‘drying with oil’. The tax authorities can not arbitrarily expand the interpretation to include ‘oil drying’ in the scope of taxation.

From the perspective of system interpretation, when the concept of tax law is not clear, the same concept of other sectoral laws should be respected. According to the Opinions of the Ministry of Agriculture and Rural Affairs on Accelerating the High-Quality Development of Mechanisation of Primary Processing of Agricultural Products (Agricultural Machinery Development [2023] No. 1), ‘around the demand for primary processing of agricultural products such as hulling (hair), slaughtering, skinning (scaling), separating, cleaning, grading, drying, pressing, crushing, packaging, storage (cold) preservation and other primary processing,’ the provisions of the Ministry of Agriculture and Rural Affairs and the provisions of the Ministry of Agriculture and Rural Affairs on accelerating the high-quality development of mechanisation of primary processing of agricultural products. Combined with the ‘potato food production licence review rules’ (2006 version) ‘Second, the basic production process and key control links 4. Basic production process of potato flour Raw material acceptance → cleaning and peeling (or not peeling) → steaming → cooling → drying → crushing → packaging’ of the provisions of the primary processing of agricultural products are not limited to the process flow of No. 149 listed process flow, cooking belongs to the basic production process flow of potato primary processing. Therefore, we believe that ‘and so on’ belongs to ‘and so on outside’, including No. 149 did not explicitly enumerate, the practice has been generally agreed upon the preliminary processing of agricultural products.

To sum up, the French fries and potato flour produced and sold by A Agricultural Products Processing Enterprise are in line with the tax exemption scope of the preliminary processing of potato agricultural products, and should enjoy the enterprise income tax exemption policy in accordance with the law.

(ii) Even if the French fries and potato flour produced and sold by the enterprise do not belong to the scope of preliminary processing of agricultural products exempted from tax, can it be concluded that the enterprise constitutes tax evasion in this case?

Take a step back, even if according to the tax authorities, ‘oil drying’ ‘steaming’ is not part of the potato primary processing process, should pay enterprise income tax, the tax authorities should not be characterised as enterprises constitute tax evasion. The tax authorities should not qualify the enterprise as constituting tax evasion. The tax authorities must satisfy the constituent elements of tax evasion, i.e., the enterprise has committed the four types of tax evasion as stipulated in Article 63(1) of the Law on Administration of Taxation Collection, has the subjective intention of tax evasion, and has caused the consequences of non-payment and underpayment of enterprise income tax. In this case, the two sides of the tax enterprises have different understandings on whether ‘oil drying’ is drying and ‘steaming’ is the process flow of potato primary processing. The reason for this, as mentioned before, is that the tax law does not have clear provisions or the provisions are not specific and vague. On the difficult question of whether this is a tax exemption, there are different understandings of tax authorities in different places, and there are also different understandings of different staff of the same tax authority, which leads to different implementation calibres in practice. Therefore, we are of the view that such tax-related disputes arising from unclear laws should be resolved by the tax authorities in accordance with the Circular of the State Administration of Taxation on Further Improving the Investigation and Handling of Cases of Tax Violations (Taxation General Fa [2017] No. 30), Article 1, Item 2, which states that ‘Taxes are not subject to any deception or concealment, and are only due to the understanding of the Inaccurate tax policies ...... lead to non-payment and underpayment of tax, the tax and late payment shall be recovered in accordance with the law, and shall not be qualified as tax evasion’, and the enterprise shall not be found to constitute tax evasion.

(iii) Is it appropriate for the tax authorities to raise objections after accepting an enterprise's tax-exempt declaration for many years?

According to the principle of protection of reliance interests, the tax authorities shall safeguard the reasonable reliance of taxpayers on their actions, avoid damaging the legitimate rights and interests of taxpayers due to the uncertainty of law enforcement actions, and, if necessary, give appropriate compensation to taxpayers. Since the establishment of the Enterprise in 2008 until 2016, the Enterprise has successively, in accordance with the provisions of the Circular of the State Administration of Taxation on the Issuance of the Administrative Measures for Tax Abatement and Exemption (for Trial Implementation) (Guoshuifa [2005] No. 129, which is now invalid) and the Announcement of the State Administration of Taxation on the Issue of the Administrative Measures for Tax Abatement and Exemption (Announcement of the State Administration of Taxation No. 43, 2015, which is now invalid), made a request to the tax authorities for filing of EIT exemption and enjoying the EIT exemption policy.After 2017, the Enterprises declared on their own to enjoy the EIT exemption policy in accordance with the provisions of the Announcement of the State Administration of Taxation on the Issuance of the Revised <Methods for Handling Matters of Preferential Policies on Enterprise Income Tax> (Announcement of the State Administration of Taxation No. 23 of 2018). For seventeen consecutive years, the tax authorities in this case have accepted the tax exemption filing and declaration of Enterprise A without raising any objection, and Enterprise A has long formed a reliance interest in the tax authorities' policy that its production and sales of French fries and potato flour can enjoy enterprise income tax exemption. Now the tax authority has changed the conclusion of seventeen years and levied tax on Enterprise A, which is a serious violation of the basic principle of trust protection.

According to the basic principle of unity of power and responsibility of administrative law, the law gives the tax authority the power to investigate and deal with the taxpayer's underpayment of tax, and the tax authority also undertakes the obligation to investigate and deal with the underpayment of tax, and for the clues and facts of underpayment of tax that have been grasped, the tax authority should carry out the inspection and auditing behaviour in a timely manner. As mentioned above, in this case, Enterprise A has adopted the production process flow of potato fries and potato flour since its establishment, and has not made any adjustment for nearly seventeen years; during the period from 2008 to 2016, it applied for tax exemption filing to the tax authorities according to the provisions of the levy and management at that time, and the tax authorities did not raise any objections; after 2017, Enterprise A made a tax exemption filing according to the provisions of the levy and management at present, and retained the relevant information for inspection. The tax authority also did not raise any objection. According to this, the tax authority is fully aware of the production process of Company A. If there is any underpayment of tax by Company A, the tax authority should raise it in time. However, the tax authorities did not make any objection during the seventeen years, but accepted the tax exemption filing and declaration of Enterprise A. Now, they are ‘repeated’ and found that the enterprise has underpaid the enterprise income tax, and even want to qualify the tax evasion, which is a serious problem of law enforcement omission.

III How should the enterprise get relief in this case?

(i) Apply for authoritative organisations to determine the process flow of French fries and potato flour.

National and authoritative institutions such as the Institute of Processing of Agricultural Products of the Chinese Academy of Agricultural Sciences, the National Research Centre for Potato Crops of the Chinese Academy of Agricultural Sciences and the China Agricultural Products Market Association have strong professionalism in determining the industrial chain of agricultural products and the process flow of production. In this case, Enterprise A can apply to the relevant authoritative organisations to make a determination on the two key issues of whether ‘over-oil drying’ is drying, and whether steaming is an indispensable process flow for the production of potato flour, and issue a Process Determination Report, and at the same time, invite the experts in the primary processing of agricultural products to issue a written opinion, explaining and proving that the production of French fries and potato flour is in line with the industry's common practice. At the same time, experts in agricultural products processing are invited to give written opinions to explain and argue that the production process of French fries and potato flour conforms to the generality of the industry and technical compliance.

(ii) Applying to the Ministry of Finance, the State Administration of Taxation and the Ministry of Agriculture and Rural Development for case approval

In our view, the root cause of the dispute between the taxpayer and the enterprise in this case is the lack of clarity in the scope of preliminary processing of agricultural products. In this case, the two sides disagreed on the word ‘drying’ and the word ‘etc.’ in the process of potato primary processing, and in the absence of clarity of the legal concepts, the two sides can apply to the enacting authority for a case-by-case review of whether ‘drying with oil’ is drying and whether ‘drying of potatoes’ is drying, and whether ‘drying of potatoes’ is drying. ‘Whether drying, potato primary processing process’, “etc.” Whether including cooking to make approval. At the same time, combined with the background of the development of the 149th, the former Ministry of Agriculture in conjunction with the Ministry of Finance, the State Administration of Taxation, the basic concepts in the 149th, of course, should respect the Ministry of Agriculture and Rural Development of the determination. Therefore, when applying to the Ministry of Finance and the State Administration of Taxation, it should also apply to the Ministry of Agriculture and Rural Development.

(iii) Late payment fees should not be added in this case, and part of the tax has already exceeded the tax recovery period.

According to Article 52 of the Law on the Administration of Tax Collection, ‘If a taxpayer or withholding agent fails to pay or pays less tax due to the responsibility of the tax authorities, the tax authorities may, within three years, require the taxpayer or withholding agent to pay the tax, but shall not impose late fees’, and Article 80 of the Rules for the Implementation of the Law on the Administration of Tax Collection Article 80 of the Implementing Rules of the Law on Tax Collection and Administration ‘The responsibility of the tax authorities referred to in Article 52 of the Law on Tax Collection and Administration refers to the improper application of tax laws and administrative regulations by the tax authorities, or the violation of law enforcement’, even if it is determined that Enterprise A should pay the EIT, the fact of underpayment of EIT is also due to improper application of law by the tax authorities. The tax authorities confirmed the filing materials that did not meet the conditions for tax exemption as meeting the conditions for tax exemption, which was an error in the application of the law. Therefore, the case should not be subject to late payment fees, and the three-year tax recovery period should be applied, and part of the tax has already exceeded the recovery period.