Editor's note: Recently, tax authorities and courts have announced multiple cases of tax violations by pharmaceutical companies, involving tax risks related to false invoicing and improper enjoyment of tax preferential policies. Based on this, this paper analyzes the tax risks faced by pharmaceutical companies through specific cases, and proposes corresponding strategies for the administrative responsibility or criminal responsibility faced by pharmaceutical companies.

ⅠThe Case observation: three cases reveal the tax risks of pharmaceutical companies

Case one: Pharmaceutical companies use tax incentives for small and micro-profit enterprises to evade taxes

Based on the tax-related clues transferred by relevant departments, the Deyang Municipal Taxation Bureau of the State Administration of Taxation has lawfully investigated and dealt with the case of Sichuan Renyuan Medical Technology Co., Ltd. deceiving small and micro enterprise income tax preferential treatment. According to the investigation, the company involved in the case used other people's ID cards to establish 4 individual industrial and commercial households, and falsely declared taxes through means such as issuing value-added tax general invoices and falsely listing wage and salary expenses, and illegally enjoyed preferential income tax for small and micro-profit enterprises, resulting in a less payment of 1.2335 million yuan in corporate income tax. In accordance with relevant laws and regulations such as the "Enterprise Income Tax Law," "Tax Collection and Administration Law," and "Administrative Penalty Law," the Inspection Bureau of the Deyang Municipal Taxation Bureau of the State Administration of Taxation has made a decision to recover taxes, impose late payment penalties, and impose a total of 2.213 million yuan on the company. Currently, the taxes, late fees, and fines involved in the case have been recovered and stored. At the same time, the tax department has transferred the relevant clues related to the company's suspected false invoicing to the public security organs for further investigation.

Case two: Medical representative issued false invoices through Control individual industrial and commercial households

2018 From July to October 2022, Wang registered and established 17 individual businesses in Daishan County, including the information consulting service department of Daishan County, and actually Control. From July 2018 to January 2024, Wang, without any real transactions, had the aforementioned individual industrial and commercial households issue a total of 931 invoices for other companies, with a total tax of 81,557,810.27 yuan, for himself or by collecting invoicing fees. The second-instance court believed that there were contradictions in Wang's several statements regarding the personnel responsible for promotion, the pharmaceutical companies he represented, and the amount involved. Wang remitted funds from the pharmaceutical company to his family and friends' individual industrial and commercial households through his personal account Control. Therefore, the second-instance court rejected Wang's appeal, upheld the original judgment, and determined that Wang's behavior constituted the crime of issuing false invoices.

Case three: Pharmaceutical companies were punished for falsely issuing agricultural product invoices

According to the investigation, the company involved in the case fabricated agricultural product purchase business from September 2016 to January 2017 without real goods purchase and sales business, purchasing golden thread lotus and Taizi ginseng from individuals, and issuing 70 value-added tax ordinary invoices. The total amount is 669,908.00 yuan, and the declared deductible input tax amount is 86,701.04 yuan; Fictitious agricultural product sales business, selling golden thread lotus, Taizi ginseng, flower tea, etc. to five companies including Henan Ruian Pharmaceutical Co., Ltd., issued 108 special VAT invoices, with a total amount of 9,443,45.22 yuan and a total tax amount of 1,605,538.47 yuan. The total tax amount is 11,049,883.69 yuan, and tax declaration has been made. The tax authorities believed that the company's behavior of issuing false invoices for the purchase of agricultural products violated the provisions of the "Invoice Management Measures" and imposed an administrative penalty of 500,000 yuan.

Summary: The above-mentioned tax violations of pharmaceutical companies mainly manifest as illegal enjoyment of tax incentives for small and micro-profit enterprises, false issuance of agricultural product invoices, and value-added tax special invoices. These tax violation cases reflect problems in the application of tax preferential policies and the management of invoices by pharmaceutical companies.

ⅡThe main forms of tax risk in pharmaceutical enterprises

The aforementioned cases of tax violations by pharmaceutical companies reveal the manifestations of tax violations by some pharmaceutical companies. In addition to the violation of enjoying tax incentives for small and micro-profit enterprises, issuing false agricultural product invoices and value-added tax invoices, traditional Chinese medicine companies also have tax issues in various aspects such as research and development expenses and sales expenses, as described below.

First, in terms of issuing false VAT special invoices and false agricultural product purchase invoices. In practice, some pharmaceutical companies will collaborate with upstream and downstream enterprises to issue false VAT special invoices, using the method of issuing false special invoices to offset taxes or deduct costs, allowing companies to evade taxes. As for agricultural product purchase invoices, according to China's tax laws, agricultural product purchasing enterprises can issue invoices themselves when purchasing agricultural products from farmers. However, in practice, some pharmaceutical companies maliciously use this policy, taking advantage of the characteristics of "self-invoicing and self-invoicing" of agricultural product purchase invoices, and issuing false agricultural product purchase invoices for cost expenses. As described in the above case, the pharmaceutical company falsely issued invoices for the purchase of agricultural products for tax declaration, and illegally deducted taxes.

Secondly, in terms of illegally enjoying tax benefits. In addition to the aforementioned cases where pharmaceutical companies illegally enjoy tax benefits for small and micro-profit enterprises through registration as individual businesses, there are also cases where pharmaceutical companies have misunderstood the tax preferential policies for high-tech enterprises, leading to tax risks. Pharmaceutical companies use individual industrial and commercial households to illegally enjoy tax benefits for small and micro-profit enterprises, such as using individual industrial and commercial households to falsely issue value-added tax general invoices and falsely list cost expenditures, so that the taxable income of pharmaceutical companies meets the criteria for identifying small and micro-profit enterprises. This allows pharmaceutical companies to enjoy the tax preferential policies for small and micro-profit enterprises in violation of regulations. In terms of preferential tax policies for high-tech, the tax law stipulates that high-tech enterprises can be subject to a reduced corporate income tax rate of 15%, and high-tech enterprises can enjoy preferential policies in terms of extending the carry-over of losses from five years to ten years. However, according to national requirements, in order to be recognized as a high-tech enterprise, a pharmaceutical company needs to meet various conditions such as the number of R&D personnel and R&D expenses. Some pharmaceutical companies, in order to enjoy tax preferential policies for high-tech enterprises, fabricate conditions such as R&D personnel and R&D expenses, allowing the company to illegally enjoy tax preferential policies. Thus, the tax risk of pharmaceutical companies in terms of tax incentives is triggered. The behavior of pharmaceutical companies falsely listing research and development expenses and research and development personnel will also lead to tax issues related to research and development expenses. According to the "Announcement on Further Improving the Policy of Pre-tax Deduction of Research and Development Expenses", (Announcement No. 7 of 2023 by the Ministry of Finance and the State Administration of Taxation) According to the regulations, "For the actual R&D expenses incurred by enterprises in R&D activities that have not formed intangible assets and are included in the current period's profit and loss, on the basis of actual deductions according to regulations, starting from January 1, 2023, an additional deduction of 100% of the actual amount incurred will be made before tax." For the formation of intangible assets, starting from January 1, 2023, they will be amortized before tax at 200% of the cost of intangible assets. According to the policy, if pharmaceutical companies carry out research and development activities, their research and development expenses can be deducted. The original intention of the state's issuance of this announcement is to encourage scientific research and promote scientific and technological innovation and development. However, in practice, in order to pay less taxes, some pharmaceutical companies abuse this additional deduction policy, fabricating research and development activities and expenses, thereby causing tax risks in research and development expenses for pharmaceutical companies.

Finally, in terms of sales expenses. Tax issues related to sales expenses of pharmaceutical companies are often linked to pharmaceutical representatives. Before the "two-invoice system" reform, pharmaceutical companies could adopt a "low-invoice" approach to hand over drugs to pharmaceutical representatives for promotion, and the pharmaceutical representatives would collect promotion fees and other fees from the selling price of the drugs. Under the drug sales process, the pharmaceutical company will not bear the tax and fee costs generated by the promotion fee of the pharmaceutical representative, and the pharmaceutical company can maintain normal tax burden costs. However, after the "two-invoice system" reform, the drug circulation process has been artificially compressed, and the pharmaceutical interest chain has not changed. The pharmaceutical representatives and other intermediate promoters still exist in multiple links. In order to promote drugs, pharmaceutical companies include promotion fees and other expenses in the ex-factory price of drugs, and sell drugs to end users such as hospitals in a "high-price" manner, which facilitates intermediate promoters such as pharmaceutical representatives to obtain benefits. However, the "high-invoicing" method causes pharmaceutical companies to bear the tax burden costs generated by promotion fees and other expenses. In order to offset this part of the tax burden costs, pharmaceutical companies will use false invoices to offset them, thereby returning the costs borne by pharmaceutical companies to normal. If a pharmaceutical company uses this method to offset costs, it may be deemed by the tax authorities to issue false invoices, and the pharmaceutical company may bear administrative or even criminal liability as a result.

ⅢThe strategy of resolving the legal responsibilities faced by pharmaceutical enterprises

The aforementioned pharmaceutical companies' tax violations, such as issuing false invoices and illegally enjoying tax incentives, can lead to administrative and even criminal liability. The following text will analyze the strategies for resolving administrative and criminal responsibilities of pharmaceutical companies.

In terms of administrative responsibility. Pharmaceutical companies can respond to administrative liability risks from the perspective of subjective intention and the authenticity, rationality, and relevance of the expenses. First, in terms of subjective intent, according to the provisions of the "Notice of the State Administration of Taxation on the Handling of Taxpayers Obtaining Falsely Issued Value-added Tax Special Invoices" (Guo Shui Fa [1997] No. 134), some tax authorities believe that in practice, determining whether pharmaceutical companies constitute tax evasion. It is only necessary to find out whether they have the objective behavior of tax evasion, without the need to find out whether they have the subjective intention of tax evasion. However, in judicial cases and the approval of the State Administration of Taxation, it is believed that tax evasion should be determined based on the objective tax evasion behavior and subjective tax evasion intention of the perpetrator. For example, the "Reply of the State Administration of Taxation on Whether the Correction of Declaration and Payment of Taxes during the Tax Inspection Period Affects the Qualification of Tax Evasion Behavior" (Tax General Letter [2013] No. 196) and the Beijing Zhongyou Guomen Oil Material Sales Co., Ltd. and the Shunyi District State Taxation Bureau of Beijing The Administrative Ruling on Review and Trial Supervision ((2017) Jingxing Shen 1402) clearly states in the reply that "the taxpayer actively corrects and declares and pays taxes before the tax inspection by the inspection bureau, and the tax authorities have no evidence to prove that the taxpayer has subjective intent to evade taxes." "Not treated as tax evasion"; In the judgment document, the court also believed that "according to Article 63, Paragraph 1 of the Tax Collection and Administration Law, taxpayers forge, alter, conceal, or destroy account books and vouchers without authorization, or list excessive expenses or do not list or underlist income in the account books." Or if the tax authorities have notified the tax authorities to declare but refuse to declare or make false tax declaration, and fail to pay or underpay the tax payable, it is tax evasion. From the situations listed in this provision, the subjective aspects of the parties involved are the necessary constituent elements for determining tax evasion..." Therefore, pharmaceutical companies can prove that their actions do not constitute tax evasion from the perspective of not having the subjective intention of tax evasion, and they should not bear administrative responsibility. Similarly, pharmaceutical companies can also prove that their actions do not constitute false invoicing by proving that they do not have the subjective intention to issue false invoices. Secondly, it is necessary to prove the authenticity, rationality, and relevance of the expenditure. In the pharmaceutical industry, the promotion fees and other expenses of pharmaceutical representatives often lead to tax risks. The reason is that some pharmaceutical companies cannot prove the authenticity, reasonableness, and relevance of the promotion fees and other related expenses. According to Article 8 of the "Enterprise Income Tax Law," "the reasonable expenses actually incurred by enterprises related to income, including costs, expenses, taxes, losses, and other expenses, are allowed to be deducted when calculating the taxable income." From this provision, it can be seen that the actual expenses incurred by pharmaceutical companies, such as promotion expenses, can be deducted if the pharmaceutical company can prove their authenticity and reasonableness. As for how pharmaceutical companies should prove the authenticity, rationality, and relevance of promotion expenses and other expenses, according to Article 7 and Article 8 of the "Announcement of the State Administration of Taxation on the Issuance of the Measures for the Administration of Pre-tax Deduction Vouchers for Enterprise Income Tax" (No. 28 of 2018), Enterprises can prove the authenticity, rationality, and relevance of the expenses through retained materials such as contract agreements, expenditure basis, and payment vouchers. The retained materials can be internal or external vouchers, and enterprises can use these materials to deduct promotion fees and other expenses before tax.

In terms of criminal responsibility. According to Article 10 of the "Interpretation of the Supreme People's Court and the Supreme People's Procuratorate on Several Issues Concerning the Application of Laws in Handling Criminal Cases of Harmful Tax Collection and Management", "For the purpose of inflating performance, financing, loans, etc., without the purpose of tax fraud, and without causing tax fraud losses due to deduction, If the crime is not punished according to this crime, if it constitutes other crimes, criminal responsibility shall be pursued according to the law. This provision, through reverse enumeration, indicates that in the case where the perpetrator does not have the subjective purpose of deceiving taxes and does not cause tax losses, The perpetrator does not constitute the crime of issuing false value-added tax special invoices. For example, in the Supreme Court case "Zhang Mouqiang's false issuance of value-added tax special invoices and declaration of innocence," the court also believed that the perpetrator did not subjectively have the purpose of deceiving national taxes and objectively did not cause losses to national taxes. It does not have the social harm in the sense of establishing the crime of issuing false VAT special invoices in the criminal law. Therefore, as mentioned earlier, under the "two-invoice system," pharmaceutical companies deduct the tax burden cost of promotion fees borne by "high-invoice" by issuing false special invoices, and the false invoicing behavior of pharmaceutical companies will not cause losses to the national tax revenue. Nor does it have the subjective purpose of deceiving the state tax. Therefore, the behavior of pharmaceutical companies does not possess the corresponding subjective malice and social harm of this crime, and pharmaceutical companies do not constitute the crime of issuing false VAT special invoices.

Ⅳ The Concluding

The frequent risk of false invoicing and tax evasion in pharmaceutical companies is related to the identification and application of tax preferential policies and the management of invoices in pharmaceutical companies. For pharmaceutical companies, establishing a sound tax compliance system, correctly applying tax preferential policies, and strictly managing invoices can help companies avoid tax risks. If a pharmaceutical company is liable for administrative or criminal liability due to tax risks, it can demonstrate from both the facts and legal provisions that its behavior does not constitute false invoicing or tax evasion. When unable to cope with tax risks, pharmaceutical companies can rely on the power of professionals to effectively respond to tax administrative or criminal responsibilities, avoid the expansion of risks, and bring more serious legal responsibilities to the company.