Editor's Note: The coal industry has long been a key and challenging area for tax administration due to its production capacity quota management system, complex industrial chain, and extensive cash transaction scenarios. When coal extracted in excess of quotas enters the stream of commerce, downstream enterprises are unable to obtain input tax invoices. Such downstream enterprises often resort to concealing sales revenue, obtaining third-party invoices issued on their behalf, or fabricating transportation expenses to reduce their tax burden. However, against the backdrop of the full implementation of the Golden Tax Phase IV system and the interconnection of data across multiple government agencies, cases of tax evasion and fraudulent invoicing by coal enterprises have erupted with increasing frequency. The investigation and handling of major tax-related cases involving coal enterprises sends a clear signal of intensified regulatory oversight to the industry. This article, drawing on relevant tax laws, regulations, and practical case studies, systematically analyzes the various tax risks facing coal enterprises and provides guidance for strengthening tax compliance.

I. Typical Tax-Related Cases in the Coal Industry

A. The "Oil"-to-"Coal" Invoice Fraud Scheme

In October 2025, the First Audit Bureau of the Chongqing Municipal Tax Service, State Taxation Administration, published the cases of Genze (Chongqing) International Trade Co., Ltd. and Chongqing Xinhantong Trading Co., Ltd. for fraudulently issuing special VAT invoices. The two companies were under the control of the same ultimate controlling person and, through a scheme of falsifying input invoices for "oil" and output invoices for "coal," cumulatively issued 1,036 fraudulent special VAT invoices with a total value (tax inclusive) of RMB 1.122 billion. Investigation revealed that both companies ostensibly entered into affiliation agreements with a certain Yang from Hebei Province, under which Yang would conduct coal trading in the name of the companies, and the companies would collect management fees based on sales volume. However, the investigation further uncovered that approximately 90% of Genze's input invoices were for oil-based chemical raw materials, and approximately 70% of Xinhantong's input invoices were likewise for oil-based chemical raw materials, whereas the output invoices of both companies were exclusively for coal — a serious discrepancy between the description of goods on input and output invoices, characteristic of a classic invoice fraud scheme. The purported "production site," upon on-site verification, did not match the actual conditions of the coal yard, and the majority of the 14 upstream and downstream enterprises had absconded or become non-compliant taxpayers. The tax authorities determined that both companies had engaged in fraudulent invoice issuance, imposed a fine of RMB 500,000 on each, and referred the cases to the public security authorities for criminal prosecution.

B. Concealment of Income Through Private Account Collections and Sale of High-Quality Coal at Low Prices

Recently, the Second Audit Bureau of the Ordos Municipal Tax Service, State Taxation Administration, lawfully investigated and dealt with a tax evasion case involving private account collections by Inner Mongolia Yidong Group Xiwusu Coal Co., Ltd. The case originated from tax big data analysis. During risk screening, the tax authorities discovered that from 2021 to 2023, the company's average coal sales price was significantly lower than the prevailing market transaction prices for comparable products in the same locality and period, with a price differential of approximately 35%; annual sales revenue fluctuated abnormally and dramatically, with the difference between the highest and lowest annual revenues exceeding RMB 1 billion and a fluctuation range exceeding 80%; and the actual transportation volume far exceeded the declared sales volume, with a serious mismatch between transportation volume and reported data. Based on the above suspicious indicators, the tax authorities initiated an investigation in accordance with the law. The investigation found that the company committed tax evasion primarily through three methods. First, it concealed income through private account collections by using an engineering company to act as a proxy seller of coal in the coal enterprise's name, collecting coal payments through the private accounts of nine employees and their relatives, keeping such sales revenue off the books, thereby underreporting revenue by RMB 220 million. Second, it intercepted price differentials by selling good-quality coal at low prices, disguising higher-quality and higher-value raw coal as low-priced engineering coal for external sale, diverting the price differential into private accounts, thereby underreporting revenue by RMB 26.741 million. Third, it failed to declare deemed sales, providing 2,930 tons of coal to others free of charge and extending interest-free loans of RMB 241 million to non-affiliated enterprises, none of which was declared for tax purposes in accordance with the deemed sales rules, thereby underreporting revenue by RMB 3.6642 million. The company ultimately underpaid various taxes and levies totaling RMB 217 million. The tax authorities lawfully issued an administrative decision requiring the recovery of underpaid taxes and levies, the imposition of late payment surcharges, and the assessment of fines totaling RMB 369 million, of which RMB 254 million has been recovered and remitted to the treasury.

C. Zero-Yuan Equity Transfer by Natural Person Shareholder in a Related-Party Transaction

According to China Tax News, during a special campaign targeting equity transfers by natural persons in the coal mining industry, the tax authorities discovered that a natural person shareholder surnamed Liu of a coal mining company in Zichang City had transferred his 46% equity interest to an affiliated real estate company in Yulin City for zero consideration. A search of the Natural Person E-Tax Bureau revealed that Liu had neither filed an equity transfer declaration nor had any record of individual income tax payments. Liu claimed that the equity transfer was an internal restructuring among enterprises under his personal control and should not give rise to any tax liability. The tax authorities determined that the equity interest held by Liu corresponded to a coal mining enterprise holding mining rights, the fair value of the net assets of which far exceeded the zero consideration. Pursuant to the Administrative Measures for the Collection of Individual Income Tax on Income from Equity Transfers (for Trial Implementation) (State Taxation Administration Announcement No. 67 of 2014), the tax authorities have the authority to determine the equity transfer income by applying the net asset valuation method or the comparable transaction method. After repeated guidance and consultation, Liu ultimately paid the outstanding individual income tax in accordance with the law.

D. Zero Filing of Water Resource Tax on Mine Dewatering

According to China Tax News, the large enterprise tax administration division of a provincial tax bureau uncovered a typical case during tax source monitoring. The case originated from a "data pool" established by the tax authorities for tax source monitoring purposes. Through analysis of the indicator comparing "growth in operating revenue against growth trends in water resource tax on mine dewatering," tax officers discovered that the month-on-month growth rate of a coal mining enterprise's operating revenue was steadily climbing, yet the water resource tax on mine dewatering — closely related to its mining operations — had been filed as zero over an extended period, creating a serious divergence between the two. After reviewing water intake and drainage data and conducting desk-based comparisons, the tax authorities confirmed the enterprise's illegal failure to declare and pay water resource tax as required. The enterprise was ultimately compelled to pay outstanding water resource tax and late payment surcharges totaling more than RMB 22 million.

II. Analysis of Various Tax Risks Facing Coal Enterprises

Tax risks for coal enterprises span multiple operational stages, including production and extraction, purchase and sale circulation, goods transportation, and equity transfer transactions. Based on their legal nature, the risk points at each stage can primarily be categorized into the following types — fraudulent invoice issuance, tax evasion, and non-compliant tax filing — as analyzed below by category.

A. Fraudulent Invoice Issuance

Fraudulent invoice issuance is a high-frequency tax risk scenario for coal enterprises, with the root cause of such risk lying in the structural shortfall of input tax invoices in the industry. Currently, coal extraction is subject to a strict production capacity quota management regime. Coal extracted in excess of quotas cannot be sold with compliant invoicing, and a portion of such coal enters the stream of commerce as undocumented spot goods. When downstream trading enterprises purchase such coal, they are unable to obtain compliant invoices, making it difficult to claim input VAT credits or pre-tax deductions for corporate income tax purposes. Under these circumstances, some enterprises resort to obtaining invoices from third parties in violation of regulations to fill the input invoice gap, which readily triggers the risk of goods-invoice separation fraud.

In addition to coal goods invoices, fraudulent invoicing in the coal transportation segment is equally prominent. Coal transportation is characterized by large cargo volumes, high freight costs, and significant participation by individual operators. Transportation expenses have become a high-frequency area for enterprises to fabricate costs, and are also a key area of expense anomalies subject to intensive screening through tax big data. A substantial volume of fragmented transportation services for coal enterprises is undertaken by individual truck drivers or individual fleets; such carriers typically do not issue invoices, leaving enterprises unable to obtain compliant transportation invoices for accounting and credit purposes. To resolve the invoice problem, a small number of enterprises obtain transportation invoices in violation of regulations through third-party logistics companies, thereby constituting fraudulent invoicing.

B. Concealment of Income and Fabrication of Costs for Tax Evasion

Concealing income and fabricating costs are commonly employed tax evasion methods by coal enterprises. With respect to income concealment, in addition to the private account collection and good-quality-coal-sold-at-low-price scenarios revealed in the foregoing cases, the following practices are also common: first, for sales to end retail customers, small coal-consuming enterprises, and other buyers that do not require invoices for coal purchases, some coal trading enterprises maintain off-book accounts and fail to record or declare sales revenue; second, where an enterprise has conducted genuine goods transactions and received payment, it only declares tax on the invoiced portion, while the uninvoiced portion is neither recorded nor declared; third, in affiliated operations, where the affiliated party conducts business externally in the name of the affiliating entity, but the affiliating entity fails to conduct accounting and tax filings for the sales revenue, this may also be deemed as income concealment.

With respect to cost fabrication, transportation expenses are a high-frequency area for inflating costs. Some enterprises, even where genuine transportation services exist, artificially inflate transportation expenses by raising unit freight rates, fabricating transportation trips, and duplicating freight charges for the same route segments, thereby reducing taxable income; they also record expenses that should be attributed to other cost categories under the label of transportation expenses to reduce the likelihood of abnormal expenses being flagged. When conducting audits, tax authorities typically undertake comprehensive comparisons, including the deviation of per-ton coal transportation costs from the industry average, the degree of alignment between the growth rates of transportation expenses and sales revenue, and the business qualifications and transportation capacity of the transportation invoice issuers. Abnormal fluctuations may trigger risk alerts.

C. Transfer of Mining Rights and Other Intangible Assets Through Equity Transfers

In recent years, tax risks arising from equity transfers by coal enterprises due to valuation issues of intangible assets such as exploration rights and mining rights have become particularly prominent. In practice, some enterprises use equity transfers as a facade for mining right transfers, achieving the transfer of mining rights through the transfer of equity in the company holding such mining rights, with the intent of lowering the transfer price and reducing the taxable gain. When reviewing such transactions, the tax authorities comprehensively consider factors such as the commercial substance of the transaction, asset composition, personnel arrangements, and business continuity, and will recharacterize transactions that substantively constitute mining right transfers in accordance with the substance-over-form principle of taxation.

In related-party transactions, internal transfers of raw coal, related-party purchase and sale transactions, and cost and expense allocation arrangements are prevalent among large and medium-sized coal group enterprises. Some enterprises fail to strictly adhere to the arm's length principle in intra-group transactions, using internal cost transfer prices rather than market-based fair prices as the pricing benchmark. Such circumstances may trigger special tax adjustments, and the tax authorities have the authority to review related-party transaction prices and implement tax adjustments in accordance with the arm's length principle.

D. Non-Compliant Filing of Minor Tax Categories

Coal resource tax is levied on an ad valorem basis, with the sales revenue of taxable products serving as the tax base. In practice, some enterprises exhibit filing non-compliance issues. First, they inflate washing and sorting losses by artificially raising the washing and sorting loss rate, thereby reducing the tax base corresponding to the volume of raw coal processed and reducing the tax payable. Second, the boundary between raw ore and processed ore is blurred: some enterprises blur the product classification between raw coal sales and washing and sorting operations, declaring the sales volume of products subject to higher tax rates under the guise of products subject to lower tax rates, thereby reducing their tax burden. Acts such as artificially inflating washing and sorting losses or applying non-compliant conversion standards may be deemed as misrepresentation of the tax base, exposing the enterprise to risks including deemed assessment of tax, payment of underpaid taxes, and the imposition of late payment surcharges.

Following the nationwide implementation of the shift from water resource fees to water resource tax in December 2024, mine dewatering has been lawfully brought within the scope of water resource tax. Prominent non-compliance issues in practice include: failure to properly install water intake and usage metering equipment or failure to calibrate such equipment on a regular basis, resulting in distorted water intake and drainage data; failure to truthfully declare water intake and drainage data, with unlawful under-reporting or zero reporting of water intake volumes; and continued reliance on outdated approval standards for tax filing, without updating water intake permits and approved water volumes in accordance with current regulations. Tax authorities and water resources authorities have now achieved data interoperability, and the tax authorities can use indicators such as coal output, the per-ton coal dewatering coefficient, and records of water and soil conservation compensation fee payments to reverse-verify the reasonableness of enterprise filing data. Abnormally low data will trigger risk alerts and subsequent investigations.

III. Tax Compliance Recommendations for Coal Enterprises

A. Accurately Understand Tax Policies and Conduct Regular Compliance Health Checks

Coal enterprises should establish a regularized tax policy tracking and training mechanism, focusing on understanding the regulatory boundaries in the following areas: matters relating to the definition and characterization of tax-related crimes; the arm's length principle and the statutory scope of legitimate grounds for related-party transaction pricing; the application of deemed sales rules in scenarios such as coal for self-use and gratuitous transfers; and the scope of taxation and tax base for minor tax categories such as resource tax and water resource tax. Where an enterprise's internal capacity is insufficient, it may engage external institutions to conduct specialized tax training and tax compliance health checks. Only on the foundation of a precise understanding of tax policies can an enterprise's internal management and tax treatment rest on a reliable compliance baseline.

B. Maintain Complete Documentation to Substantiate the Authenticity of Business Transactions

The foundation of tax compliance is the existence of genuine business transactions. Whether responding to allegations of fraudulent invoicing or demonstrating the compliance of cost and expense deductions, an enterprise must first be able to prove that "the business transaction genuinely occurred." At the invoice management level, enterprises should ensure consistency across the four streams of contract flow, goods flow, fund flow, and invoice flow. With respect to costs and expenses, substantial expenditures such as intermediary service fees, information consulting fees, and transportation fees should be supported by complete business contracts, service deliverables, and payment vouchers, so as to be fully prepared for cross-verification in the event that tax risks arise.

C. Establish a Professional Tax Risk Management Mechanism

Upon receiving a tax audit notice or risk alert letter, an enterprise should immediately activate a risk management mechanism led by the person in charge of the enterprise and involving the joint participation of the finance, tax, and legal departments (or external tax counsel), to retrace the business circumstances, collate supporting materials, and promptly conduct self-inspection and rectification of any tax issues identified. In addition, enterprises should properly exercise their statutory remedial rights. For tax matters that are subject to dispute, enterprises should lawfully and rationally exercise their rights to make representations and defenses and to request a hearing, and, where necessary, safeguard their lawful rights through statutory remedial procedures.