Editor’s Note: Recently, Criminal Trial Reference (Total Issue 147), compiled by the Criminal Tribunal of the Supreme People’s Court (SPC), has been officially published and distributed by the People’s Court Press. Case No. 1668 People v. Pan Moumou et al. (Tax Evasion) included in this book is a typical case of tax evasion through false invoicing and invoice alteration by petrochemical companies. The book clearly states that altering the product names on input and output invoices through false issuance to evade consumption tax in the production link does not constitute the crime of falsely issuing special VAT invoices, and shall be punished as the crime of tax evasion.

01 Adjudicative Logic of the Crime of Tax Evasion in Case No. 1668 People v. Pan Moumou et al. (Tax Evasion)

Case No. 1668 People v. Pan Moumou et al. (Tax Evasion) included in Criminal Trial Reference (Total Issue 147) is a typical and traditional case of tax evasion through false invoicing and invoice alteration by petrochemical trading companies. The basic facts of the case are that between 2013 and 2015, Pan Moumou, Yao Moumou, and Cheng Moumou, through Chongqing Company, Guizhou Company, and Shanghai Company under their control, first obtained a large number of special VAT invoices with the product name of chemical raw materials, then issued special VAT invoices with the product name of refined oil products to external parties, and charged fees ranging from 30 to 80 yuan per ton based on the tonnage stated on the refined oil invoices.

The case was initiated as Pan Moumou et al. were suspected of the crime of falsely issuing special VAT invoices. On December 14, 2017, the Fourth Intermediate People’s Court of Chongqing Municipality rendered a first-instance judgment convicting the three defendants of the crime of falsely issuing special VAT invoices, with sentences of 14 years, 10 years, and 10 years respectively. On April 12, 2021, the Higher People’s Court of Chongqing Municipality handed down a second-instance judgment. The second-instance court held that the three defendants evaded the payment of consumption tax by falsely issuing special VAT invoices and should be convicted of the crime of tax evasion; although the first-instance judgment had clear facts and sufficient evidence, it applied the law incorrectly and charged the wrong crime, which should be corrected. The second-instance judgment revoked the original judgment of the Fourth Intermediate People’s Court of Chongqing Municipality and changed the conviction to the crime of tax evasion for the three defendants, with sentences of 7 years, 6 years and 10 months, and 6 years and 10 months respectively.

The book points out that where an actor, to assist the actual counterparty in altering the product name on the invoice, commits the act of falsely issuing special VAT invoices but has no intent to defraud tax payments and only causes losses of payable consumption tax, such act does not constitute the crime of falsely issuing special VAT invoices. If such act meets the constituent elements of the crime of tax evasion, it shall be convicted and punished as the crime of tax evasion.

In fact, the SPC had issued a clear opinion on the application of charges in invoice alteration cases by petrochemical companies prior to the publication of this Criminal Trial Reference. In Criminal Trial Practice, a national unified textbook for judge training released successively in December last year, a specific conclusion was made that invoice alteration by petrochemical companies does not constitute the crime of falsely issuing special VAT invoices but shall be punished as the crime of tax evasion. The inclusion of Case No. 1668 as a guiding reference case in Criminal Trial Reference further consolidates this authoritative judicial opinion from the perspective of guiding reference cases, with a more direct effect and great significance for guiding the adjudication of similar cases by courts nationwide.

02 Review of the Historical Adjudication Status of Invoice Alteration Cases by Petrochemical Trading Companies

As early as 2012, the State Taxation Administration (STA) issued a special document to regulate the act of non-production enterprises altering non-refined oil invoices to refined oil invoices for external issuance. Pursuant to STA Announcement No. 47 of 2012, where a non-production enterprise sells non-refined oil products externally in the name of refined oil products, it shall be deemed to have engaged in production activities and shall declare and pay consumption tax in accordance with regulations. For example, where a petrochemical trading company purchases heavy oil and residual oil, obtains invoices with the product names of heavy oil and residual oil, then sells the goods externally as fuel oil (a category of refined oil products) and issues invoices with the product name of fuel oil, the trading company shall be deemed to have carried out the taxable consumption tax act of refining heavy oil and residual oil into fuel oil, and shall accordingly declare and pay consumption tax on fuel oil.

Prior to the launch of the Golden Tax System in 2015, grassroots tax authorities were actually unable to grasp the discrepancies in product names on input and output invoices of trading companies, and difficult to detect the act of trading companies obtaining chemical invoices and issuing refined oil invoices externally, due to inadequate tax inspection means and backward technology. This resulted in the ineffective implementation of STA Announcement No. 47 of 2012 in practice, with few cases nationwide where trading companies were subject to tax inspection or even criminal liability after invoice alteration. This situation changed dramatically after 2015. With the launch of the Golden Tax System in 2015 and its continuous upgrading and renovation, tax authorities’ ability to audit and compare special VAT invoices has been qualitatively improved, with a key focus on conducting comparative analysis and risk early warning on taxpayers’ input and output invoices.

In 2017, tax authorities conducted centralized risk identification and investigation of companies nationwide with chemical inputs and refined oil outputs, finding that these enterprises failed to declare and pay consumption tax in accordance with STA Announcement No. 47 of 2012. Thousands of enterprises with similar acts were then selected as consumption tax payment risk households and assigned to local tax authorities for investigation and punishment, triggering a nationwide wave of petrochemical invoice alteration cases.

However, with the launch of the two-year special campaign against false invoicing and tax fraud in 2018 and the support of the tax-police joint case-handling mechanism, grassroots tax and public security departments across the country deviated significantly in investigating and handling invoice alteration cases by trading companies. Many trading companies identified as consumption tax payment risk households were placed on file for investigation on suspicion of the crime of falsely issuing special VAT invoices. In the years after 2018, the number of judicial adjudications of petrochemical false invoicing and invoice alteration cases increased significantly. Affected by the behavioral offense nature of the crime of falsely issuing special VAT invoices, most of these cases were convicted of the crime of falsely issuing special VAT invoices, with principal offenders frequently sentenced to more than 10 years’ imprisonment, and even many judicial adjudications failed to reflect any content related to consumption tax at all.

We conducted a special statistical analysis of judicial adjudications of petrochemical invoice alteration cases at the end of 2022. According to public cases on China Judgments Online from 2018 to 2022, there were 51 concluded petrochemical invoice alteration cases, of which 43 were convicted of the crime of falsely issuing special VAT invoices, only 5 of the crime of tax evasion, 1 of the crime of falsely issuing invoices, and 2 were acquitted. Among the 43 cases convicted of the crime of falsely issuing special VAT invoices, as many as 20 cases involved principal offenders sentenced to more than 10 years’ imprisonment. It can be said that this state of judicial adjudication not only fails to effectively safeguard the collection of national consumption tax but also violates the basic principle of compatibility between crime, responsibility and punishment under the Criminal Law, leaving many defendants who should essentially bear criminal liability for the crime of tax evasion still suffering from disproportionately heavy criminal penalties to this day.

03 Application of Charges in New-Type Invoice Alteration Cases After the Launch of the Refined Oil Module

In fact, the invoice alteration act by petrochemical trading companies as reflected in Case No. 1668 included in Criminal Trial Reference is no longer common today. It can be said that this traditional petrochemical invoice alteration act has been completely eliminated by the launch and operation of the Refined Oil Invoice Module in 2018.

In 2018, the STA issued Announcement No. 1 of 2018, launching the Refined Oil Invoice Module nationwide. The launch of this module system aims to completely crack down on invoice alteration acts by trading companies and strengthen the supervision of consumption tax calculation and payment by production enterprises. The Refined Oil Invoice Module is equivalent to a subsystem attached to the tax control system; any enterprise engaged in refined oil business and required to issue refined oil invoices must first activate this module before issuing invoices externally. The module has two types: the trading enterprise module and the production enterprise module.

For trading enterprises, after activating the trading module, if they intend to issue refined oil invoices externally, they must first input refined oil inventory into the module, either by obtaining invoices issued by other companies through the Refined Oil Invoice Module and downloading the inventory data, or by obtaining customs import payment receipts for refined oil products and downloading the inventory data. In other words, if a trading company fails to obtain module inventory data, it cannot issue invoices stating the product name of refined oil externally, which is the principle of "output restricted by input".

For production enterprises, after activating the production module, they may directly issue refined oil invoices externally without inventory data but are required to declare and pay consumption tax. Where a production enterprise uses refined oil products as raw materials to produce refined oil products and needs to deduct the consumption tax already included in the raw materials, the quantity of raw materials used must be registered in the module in advance, which is the principle of "deduction restricted by input".

It can be said that the launch of the Refined Oil Invoice Module has completely blocked the traditional invoice alteration models and acts of petrochemical trading companies, but has also given rise to some new-type invoice alteration models. The core of these new-type models revolves around falsely inflating module inventory data or directly using the production module for invoice alteration. Examples include falsely inflating module inventory data by forging customs import payment receipts, conducting invoice alteration and issuance by production enterprises directly in arrears of tax, trading companies fraudulently obtaining activation of the production module by local tax authorities through establishing outsourced processing relationships to conduct invoice alteration and issuance in arrears of tax, falsely inflating module inventory data through hacking techniques for invoice alteration and issuance, falsely inflating module inventory data through red-letter offset of refined oil invoices for invoice alteration and issuance, etc.

Despite the emergence of the above new-type invoice alteration models due to the launch of the Refined Oil Invoice Module, with the construction of smart tax in recent years, tax authorities’ means and technical capabilities for consumption tax supervision have been greatly enhanced. It can be said that the life cycle of these new-type invoice alteration acts is extremely short, and they are basically eliminated as soon as they emerge. The protection of national consumption tax revenue has been continuously strengthened, and the situation of tax loss has improved.

In view of the above new situations and developments, it can be said that Case No. 1668 included in Criminal Trial Reference will no longer occur in practice at present. However, the author holds that its adjudicative guiding function still exists and is of great guiding and reference significance for new-type invoice alteration cases. The reason is that new-type invoice alteration acts are essentially no different from traditional ones, with the ultimate purpose and social harm both being the evasion of consumption tax. Therefore, for cases involving new-type invoice alteration acts, courts shall fully refer to and draw on the adjudicative logic of Case No. 1668 and convict the acts as the crime of tax evasion, so as to comply with the basic principles of legality of crimes and punishments and compatibility between crime, responsibility and punishment. For cases previously convicted of the crime of falsely issuing special VAT invoices and defendants still suffering from heavy penalties of more than 10 years’ imprisonment, we also call on local courts to initiate error correction and retrial mechanisms in accordance with the cases included in Criminal Trial Reference, appropriately adjust the application of charges and sentencing, and realize the fairness and justice of the law.