Different Judgments for the Same Case! How Should the Act of Issuing Invoices to Third Parties with Surplus Invoices Be Characterized?

Surplus invoice fraud refers to the situation where a business with actual sales does not issue invoices to the real purchasers because the counterparties do not need them, resulting in surplus input tax credits, which are then used to issue invoices to third parties for a fee. In practice, there is controversy over how to characterize the act of issuing invoices to third parties with surplus invoices. This article aims to explore this issue by examining two similar judicial cases.
I. Case Observation: The Legal Characterization of Issuing Invoices to Third Parties with Surplus Invoices
Case One: Characterized as the Crime of Issuing False Value-Added Tax Special Invoices
In the case of Huang's false invoicing, Huang's company A was engaged in the wholesale and retail of mobile phones. Since the end consumers usually did not need value-added tax special invoices, A Company had surplus input tax credits. Starting from January 2014, Huang, without any real transactions, used the surplus input tax credits of A Company to issue value-added tax special invoices to downstream enterprises at a rate of 4% to 5% of the invoice amount. The downstream enterprises purchased the invoices from A Company to reduce their tax payments. Eventually, the Intermediate People's Court of Hefei City, Anhui Province, made the final judgment (2018) Wan 01 Xing Zhong 457, determining that Huang, the invoice issuer, was guilty of the crime of issuing false value-added tax special invoices.
Case Two: Characterized as the Crime of Issuing False Invoices
In the case of Wang's false invoicing, in 2020, Wang's company A purchased oil from China National Offshore Oil Corporation and other companies and obtained value-added tax special invoices. When selling the oil, since some purchasers did not need value-added tax special invoices, A Company sold at a discount without issuing invoices, resulting in surplus input tax credits. From December 2020 to May 2022, Ma's company B, in the process of project construction, did not obtain input invoices for the purchased sand and gravel and other raw materials. Ma then asked his employee to contact Wang, who used the surplus input tax credits of A Company to issue value-added tax special invoices to B Company without any real transactions. Eventually, the People's Court of Shayang County, Hubei Province, made the judgment (2023) E Guo 0822 Xing Chu 232, determining that Wang, the invoice issuer, was guilty of the crime of issuing false invoices.
It is evident from the above cases that there is controversy in practice over how to characterize the act of issuing invoices to third parties with surplus invoices, reflecting different understandings of such issues.

II. if the invoice issuer does not have the subjective intention to defraud tax deductions and the recipient has not caused any tax losses, it is not appropriate to classify it as the crime of issuing false value-added tax special invoices.
The commonality of the above two cases lies in that the invoice issuers both had surplus input invoices due to the fact that the real purchasers did not need invoices, and thus they falsely issued the surplus invoices to downstream enterprises. The difference lies in that the final handling results were different.
In Case One, the court held that Huang had the subjective criminal intent and objective criminal act of falsely issuing the surplus invoices for profit, and thus Huang was convicted of the crime of issuing false value-added tax special invoices. The author believes that the classification in this case is inappropriate. Although there were no explicit provisions for exemption from liability in the crime of issuing false value-added tax special invoices before the issuance of the judicial interpretations on tax-related issues by the Supreme People's Court and the Supreme People's Procuratorate, it is clear that those who do not have the intention to defraud tax deductions and have not caused any losses of value-added tax do not constitute the crime of issuing false value-added tax special invoices, which is in line with the spirit of the Supreme People's Court. From the earliest cases such as the acquittal of the Hubei Automobile Mall and the acquittal of Lu Caixing for falsely issuing tax deduction invoices, to the case of Zhang Qiang's acquittal for falsely issuing value-added tax special invoices as per the interpretation of the Supreme People's Court and the Supreme People's Procuratorate [2015] No. 58, etc., it is evident that if the actor does not have the subjective intention to defraud tax deductions and has not caused any losses of value-added tax, they do not constitute the crime of issuing false value-added tax special invoices. In this case, the court only found that the recipient obtained the falsely issued invoices from the issuer with the purpose of paying less tax, without further investigating whether the issuer was aware of the recipient's subjective intention or whether the recipient's use of the falsely issued invoices for input deduction caused any losses of value-added tax. Thus, the court's determination that the issuer was guilty of the crime of issuing false value-added tax special invoices does not conform to the principle of proportionality between crime and punishment and is contrary to the spirit of the Supreme People's Court.
In Case Two, the court did not directly classify the issuer's act of falsely issuing the surplus invoices as a crime. Instead, it further investigated the situation of the recipient, who was found to have truthfully issued the invoices on behalf of others, and the issuer was found to be aware of this. Therefore, the court did not find the issuer guilty of the crime of issuing false value-added tax special invoices. The author believes that this classification is worthy of affirmation. However, whether it constitutes the crime of falsely issuing invoices is still subject to further discussion. The reason is that Article 205-1 stipulates that the crime of falsely issuing invoices refers to the act of "falsely issuing other invoices other than those stipulated in Article 205 of this law, if the circumstances are serious." Although Professor Zhang Mingkai in his book "Criminal Law" (6th Edition) believes that "the phrase 'other than those stipulated in Article 205 of this law' is a limiting element rather than a true constitutive element. Any act of falsely issuing invoices meets the constitutive elements of this crime (except for quantity or amount), and thus may constitute the crime of falsely issuing invoices," the author believes that according to the principle of legality of crimes and punishments and the principle of favoring the defendant, an interpretation of the criminal law that exceeds the literal meaning of the law and is unfavorable to the defendant should not be adopted. From a literal interpretation perspective, the key difference between the crime of issuing false value-added tax special invoices and the crime of falsely issuing invoices lies in the different objects of the crime. The former's object is the value-added tax special invoice, while the latter's object is the value-added tax ordinary invoice. The constitutive elements of the crime of falsely issuing invoices clearly exclude value-added tax special invoices, so falsely issuing value-added tax special invoices should not fall within the scope of the crime of falsely issuing invoices. From the perspective of legislative purpose, the reason for criminalizing the crime of falsely issuing invoices in the Criminal Law Amendment (VIII) was that the Golden Tax System had been upgraded at that time, effectively curbing the criminal and illegal acts of falsely issuing value-added tax special invoices. Unlawful elements then shifted their criminal and illegal purposes and focus to other invoices, and the act of falsely issuing ordinary invoices became rampant. Therefore, the addition of the crime of falsely issuing invoices was to combat the act of falsely issuing ordinary invoices. At the same time, in the book "Explanations of Criminal Law Provisions, Legislative Reasons and Related Regulations," it is clearly stated that "other invoices other than those stipulated in Article 205 of this law refer to ordinary invoices other than value-added tax special invoices or other invoices with tax refund or deduction functions." Therefore, the author believes that in this case, characterizing the act of the invoice issuer using surplus invoices to issue false value-added tax special invoices to the outside as the crime of issuing false invoices is somewhat inappropriate.

III. The root cause of tax losses lies in the invoicing party concealing income and failing to declare and pay taxes truthfully. The invoicing party should be characterized as committing tax evasion and subject to administrative pre-litigation procedures

In Case 2, the act of falsely issuing invoices by the invoicing party using surplus invoices can be broken down into two steps. The first step involves selling goods to the real purchaser by concealing income and not issuing invoices, thereby generating input surplus. The second step involves issuing the surplus invoices to Company B, with which there is no real transaction of goods.

Regarding the first step, according to Article 1 of the "Interim Regulations on Value-Added Tax", entities selling goods are value-added tax (VAT) payers. That is, even if a VAT special invoice is not issued, VAT should still be paid when a taxable activity occurs. Company A sold goods to a genuine purchaser without issuing an invoice or paying taxes, which constitutes a non-declaration of taxation as stipulated in Item 2, Paragraph 2, Article 1 of the Supreme People's Court and the Supreme People's Procuratorate's judicial interpretation on tax-related matters. This behavior constitutes an act of evading tax payment. According to Paragraph 2 of Article 3 of the Supreme People's Court and the Supreme People's Procuratorate's judicial interpretation on tax-related matters, the crime of tax evasion is subject to an administrative pre-procedure. Criminal liability for tax evasion cases must first be pursued through administrative actions by tax authorities, and cannot directly proceed to criminal litigation without first undergoing administrative actions by tax authorities. Therefore, even if this case meets the criteria for criminalization in terms of the proportion and amount involved, the administrative liability of the invoicing party for tax evasion should be pursued first, rather than directly pursuing criminal liability for the crime of tax evasion.

Regarding the second step, Company A falsely issued an invoice to Company B, which Company B deducted accordingly. Since Company B was acting in good faith and did not cause any loss of value-added tax, I believe its behavior should also be classified as tax evasion. This behavior constitutes the act of falsely deducting input tax as specified in Article 1, Paragraph 1, Item 3 of the Supreme People's Court and the Supreme People's Procuratorate's judicial interpretation on tax-related matters, and should also be subject to the administrative pre-litigation procedure. For Company A, it should be classified as an accessory offender to Company B's tax evasion. Since the implementation of Company B's tax evasion is subject to the administrative pre-litigation procedure, the assisting behavior of Company A should be even more so. Therefore, the criminal liability of Company A for assisting in tax evasion should not be pursued directly.

Some argue that Company A should declare and pay value-added tax (VAT) regardless of whether the actual purchaser requires an invoice for the goods it sells. Although Company A paid VAT for falsely issuing an invoice to Company B, it paid the VAT that would have been due had the goods been sold to an actual purchaser. Company B did not pay VAT because it did not obtain an input invoice for the raw materials such as sand and gravel it purchased, but it deducted the input tax using the falsely issued VAT special invoice from Company A when selling, resulting in a loss of VAT revenue. The author believes that the VAT benefits were not diminished due to Company B's deduction. According to Article 1 of the "Interim Regulations on Value-Added Tax," the obligation to pay VAT is related to the occurrence of taxable activities, not to whether an invoice is issued. Without the occurrence of actual sales, even if a VAT special invoice is issued, there is no obligation to pay taxes, and no VAT should be paid. The state should not collect the tax either. In Case 2, Company A falsely issued an invoice without actually selling goods to Company B, and should not have paid VAT. However, it paid VAT to the state for the amount of the falsely issued invoice, and Company B deducted it. The deduction was of the VAT that the state should not have collected in the first place. The two offset each other out, and the VAT tax benefits were not diminished. In fact, the link where the VAT benefits were diminished was when Company A did not pay VAT for selling goods to the actual purchaser. The diminution of VAT benefits was caused by Company A evading its own tax obligations and not declaring, rather than by fraudulent deduction of VAT. Therefore, it is more appropriate to pursue legal responsibility against Company A for tax evasion.