Editor’s Note:

Since its implementation in April 2024, China’s reverse invoicing policy has been in place for more than two years. Under this policy, qualified resource recycling enterprises may obtain compliant tax vouchers through reverse invoicing when purchasing waste and used materials from natural-person sellers of discarded products, thereby alleviating, to some extent, the long-standing lack of source invoices in the resource recycling industry. As the policy continues to be implemented, relevant tax cases have shown that improper application of reverse invoicing may give rise to new tax risks. Against this backdrop, this article analyzes, by reference to applicable policy rules, regulatory developments and relevant cases, the key tax risks faced by resource recycling enterprises and natural-person sellers of discarded products in applying the reverse invoicing policy, and proposes tax compliance recommendations for reference.

01 Reverse Invoicing: From Policy Implementation to Regulatory Follow-up

Sales without invoices at the source of waste generation, together with the gradual aggregation of waste and used materials through multiple layers into the hands of individual natural-person dealers, have long been an objective reality in the resource recycling industry. This has resulted in a persistent tax compliance challenge: the absence of source invoices in the recycling process. To promote the sustainable and healthy development of the industry, in April 2024, the State Taxation Administration issued the Announcement on Matters Concerning Reverse Invoicing by Resource Recycling Enterprises to Natural-Person Sellers of Discarded Products (STA Announcement [2024] No. 5) (Announcement No. 5). Announcement No. 5 specifies that, from April 29, 2024, qualified resource recycling enterprises (recycling enterprises) may issue invoices to natural-person sellers of discarded products (natural-person sellers) through reverse invoicing when purchasing waste and used materials. Special VAT invoices issued through reverse invoicing may serve as vouchers for recycling enterprises to claim input VAT credits; reverse-issued invoices that comply with applicable requirements may also serve as vouchers for pre-tax deduction for enterprise income tax purposes. This policy has provided the resource recycling industry with a pathway to obtain compliant source-level tax vouchers. However, how to correctly understand and apply the policy, and how to balance economic benefits with tax compliance in business models, have also become new issues facing the industry.

On December 29, 2025, the National Development and Reform Commission and the Ministry of Finance issued the Notice on Implementing the Large-Scale Equipment Renewal and Consumer Goods Trade-In Policy in 2026 (Fa Gai Huan Zi [2025] No. 1745), which expressly calls for the continued promotion and implementation of the reverse invoicing system for recycling enterprises issuing invoices to natural-person sellers, together with strengthened regulation. Judging from local practices, tax regulation surrounding reverse invoicing has continued to proceed along two dimensions: verification of transaction authenticity on the enterprise side, and administration of taxes and fees on the natural-person side.

On the enterprise side, tax authorities have continued to strengthen supervision over the transaction authenticity of recycling enterprises. In many localities, tax authorities have established regulatory platforms for the comprehensive utilization of recycled resources, guiding upstream and downstream enterprises to conduct recycling transactions through integrated IoT data cloud platforms. Through these platforms, tax authorities can obtain real-time information on recycling enterprises’ purchases and sales, logistics routes, fund flows and other data, thereby verifying the authenticity of reverse invoicing transactions and screening for potential tax-related risks.

On the natural-person side, the administration of taxes and fees for natural-person sellers has also been strengthened in parallel. Announcement No. 5 provides that, when recycling enterprises issue invoices to natural-person sellers through reverse invoicing, they shall handle tax and fee filing matters on behalf of such sellers and pay the corresponding taxes and fees in accordance with applicable rules. Meanwhile, the Implementing Regulations of the Value-Added Tax Law, effective January 1, 2026, further clarifies the mechanism under which payers withhold and remit VAT on behalf of natural persons. These mechanisms help strengthen the regulation of taxable transactions conducted by natural persons, facilitate the aggregation of sales information of natural-person sellers, and improve the precision of tax administration. Some local tax authorities have also relied on the prepayment ledgers retained by recycling enterprises in the course of reverse invoicing to comprehensively review lists of natural-person sellers. By combining basic information of natural-person sellers, their tax filing status, risk monitoring data and other information, such authorities conduct comparisons and risk screening with respect to the annual final settlement and payment of individual income tax on business income.

02 Tax Risks for Recycling Enterprises in the Application of Reverse Invoicing

1. Where a natural-person seller has an individual business registered under his or her name, reverse invoicing may give rise to seller-eligibility risks

Announcement No. 5 provides that reverse invoicing applies to natural-person sellers, which specifically include two categories: first, natural persons who sell discarded products that they have used themselves; and second, natural persons who sell discarded products acquired by them, provided that their cumulative sales amount under reverse invoicing within any period of no more than 12 consecutive calendar months does not exceed RMB 5 million. It should be clarified that, in the context of tax law, the term “natural person” under Announcement No. 5 does not include individual businesses. In practice, recycling enterprises often purchase discarded products from individual businesses, in which case reverse invoicing is not applicable. In current reverse invoicing practice, there have been cases where, after a recycling enterprise issued an invoice through reverse invoicing, the tax authority informed the enterprise that the natural-person seller had an individual business registered under his or her name, and that purchases from such seller could not be covered by reverse invoicing. The enterprise was therefore required to void the relevant invoices or issue red-letter invoices for them.

2. Failure to promptly verify the sales threshold of natural-person sellers, resulting in improper application of reverse invoicing

Announcement No. 5 provides that one of the conditions for a natural-person seller to be eligible for reverse invoicing is that the cumulative sales amount under reverse invoicing within any period of no more than 12 consecutive calendar months shall not exceed RMB 5 million. For natural-person sellers whose cumulative sales amount under reverse invoicing exceeds RMB 5 million, Announcement No. 5 requires recycling enterprises to guide them to complete tax registration. In practice, some individual natural-person dealers have sales amounts far exceeding the threshold under Announcement No. 5. In the course of actual business operations, they may split transactions in order to satisfy the conditions for reverse invoicing. In such cases, invoices issued by recycling enterprises through reverse invoicing may give rise to risks such as separation between the invoice and the underlying goods, disallowance of input VAT credits, or even characterization as falsely issued invoices.

3. Insufficient transaction authenticity or mismatch with the applicable business scope, resulting in improper application of reverse invoicing

Announcement No. 5 provides that recycling enterprises shall be responsible for the authenticity of the materials submitted when handling reverse invoicing matters and for the authenticity of their resource recycling business, and shall fulfill their tax obligations in accordance with law. Where a recycling enterprise is found to have submitted false materials to obtain reverse invoicing qualification, or where the underlying resource recycling transactions are found to be not genuine, the tax authority will revoke its reverse invoicing qualification and pursue liability in accordance with law. It follows that transaction authenticity is a fundamental prerequisite for recycling enterprises to apply the reverse invoicing policy. This includes not only the authenticity of the identity of the natural-person seller and the source of goods, but also the requirement that the relevant transactions genuinely fall within the scope of resource recycling business. According to an article published by China Taxation News Online on June 2, 2026, Company A was principally engaged in purchasing scrap copper, processing it into copper rods, and selling the finished products. From March to December 2024, the company purchased copper rods from other regions and resold them. As the company had not obtained input VAT invoices for its purchases of scrap copper, and in order to enjoy the VAT immediate refund upon collection policy, its actual controller contacted 29 natural persons, fabricated payment flows in the absence of any genuine goods transactions, and caused Company A to issue 43 special VAT invoices to the above-mentioned natural persons through reverse invoicing, with a total amount including tax of RMB 130 million. The court held that Company A and its actual controller had committed the crime of falsely issuing special VAT invoices. Company A was fined RMB 100,000. As the actual controller voluntarily repaid the tax amount involved in the falsely issued invoices, he was sentenced to three years’ imprisonment, suspended for three years. In this case, Company A did not have any genuine purchase transactions of discarded products from natural persons. Moreover, what it actually purchased was copper rods rather than discarded products. Therefore, it did not meet the conditions for the application of reverse invoicing.

4. Failure to pay taxes and fees handled on behalf of natural-person sellers within the prescribed time limit, giving rise to the risk of suspension of reverse invoicing qualification

Under Announcement No. 5, when recycling enterprises issue invoices to natural-person sellers through reverse invoicing, they shall, in accordance with applicable rules, handle filing matters for VAT, surcharges and individual income tax on behalf of natural-person sellers. They shall also submit the Report on Taxes and Fees Handled on Behalf of Taxpayers and the Detailed Report on Taxes and Fees Handled on Behalf of Taxpayers to the competent tax authority within the filing period of the following month, and pay the taxes and fees handled on behalf of such sellers as required. If a recycling enterprise fails to pay such taxes and fees within the prescribed time limit, the competent tax authority may suspend its reverse invoicing qualification and recover the unpaid or underpaid taxes and fees, together with late payment surcharges, in accordance with applicable rules. Meanwhile, Announcement No. 5 does not specify how a recycling enterprise should be treated after its reverse invoicing qualification is suspended, including whether, when and how such qualification may be restored. As a result, if the enterprise fails to handle and pay the relevant taxes and fees as required, its reverse invoicing operations may be unable to continue.

5. Where a natural-person seller does not agree to reverse invoicing and does not apply for invoice issuance by the tax authority, the enterprise may face obstacles in obtaining source vouchers

According to Announcement No. 5, when a recycling enterprise issues an invoice to a natural-person seller through reverse invoicing for the first time, it shall obtain the natural-person seller’s consent to reverse invoicing and to the handling of taxes and fees on his or her behalf, and shall retain the relevant supporting materials. If the natural-person seller does not give such consent, the recycling enterprise may not issue an invoice to him or her through reverse invoicing; instead, the natural-person seller may apply to the tax authority for invoice issuance. The upstream side of the resource recycling industry is primarily composed of natural persons and individual dealers. Even with the full implementation of reverse invoicing, practical issues remain, such as the low willingness of some individual dealers to cooperate, high communication costs in connection with the handling of taxes and fees on their behalf, and cumbersome invoicing procedures. Where a natural-person seller does not agree to reverse invoicing and does not apply to the tax authority for invoice issuance, the recycling enterprise can neither issue an invoice through reverse invoicing nor obtain the corresponding vouchers through invoice issuance by the tax authority on behalf of the natural-person seller. As a result, the problem of missing source vouchers may persist. Consequently, in the short term, the enterprise may continue to face issues such as insufficient input VAT credits and inadequate vouchers for cost deduction. If this is coupled with weak financial and tax management, inadequate internal controls, and irregular retention of supporting materials, it may further give rise to a chain of risks, including abnormal tax burden ratios, non-compliant cost deductions, and incorrect application of preferential tax policies.

03 Tax Risks for Natural-Person Sellers in the Application of Reverse Invoicing

1. Splitting sales income under another person’s name may give rise to tax administrative liability

Announcement No. 5 provides that natural-person sellers may enjoy tax and fee incentives applicable to small-scale taxpayers, such as VAT exemption for monthly sales not exceeding RMB 100,000 and VAT calculated at a reduced rate of 1% instead of the 3% levy rate. In practice, some natural-person sellers, in order to improperly enjoy tax incentives or circumvent the reverse invoicing threshold, may use another person’s identity information and bank account to enter into purchase and sale contracts with recycling enterprises, with the recycling enterprises issuing invoices through reverse invoicing to the nominal natural-person sellers. Under this arrangement, the actual seller of the waste and used materials is the individual natural-person dealer, while the natural-person seller named on the invoice is another individual. As a result, the actual transaction party is inconsistent with the party named on the invoice. From the perspective of the tax base, selling waste and used materials under another person’s name may constitute splitting sales income or concealing income, thereby giving rise to risks such as payment of back taxes, late payment surcharges and administrative fines.

2. Failure to complete the annual final settlement and payment of individual income tax on business income as required may result in tax recovery

According to Announcement No. 5, where natural-person sellers sell discarded products through reverse invoicing, recycling enterprises shall prepay individual income tax on business income on their behalf at 0.5% of the sales amount. By March 31 of the year following the year in which reverse invoicing occurs, natural-person sellers shall, on their own, complete the annual final settlement and payment of individual income tax on business income with the competent tax authority at the place where their business is managed. If the tax authority discovers that a natural-person seller has failed to complete the annual final settlement and payment of individual income tax on business income as required, it will take tax recovery measures in accordance with law and require recycling enterprises to cease issuing invoices to such seller through reverse invoicing. In such circumstances, the natural-person seller may be required by the tax authority to pay back taxes and late payment surcharges.

3. Failure to distinguish individual-business operations from personal business may render the reverse invoicing policy inapplicable

As discussed above, the term “natural person” under Announcement No. 5 does not include individual businesses. Where a recycling enterprise purchases discarded products from an individual business, reverse invoicing is not applicable; instead, the individual business shall issue invoices on its own in accordance with applicable rules. Natural-person sellers who have registered an individual business, or who have an individual business registered under their names, should accurately distinguish their personal transactions from the business operations of the individual business. Failure to do so may lead to confusion over the identity of the seller, resulting in inconsistencies among the invoicing party, the actual supplier, and the parties involved in the fund flows. For natural-person sellers who, after reaching the reverse invoicing threshold, continue their business through an individual business, they should also ensure consistency among the contracting party, the actual supplier, the parties involved in the fund flows, and the invoicing party. This helps avoid the inapplicability of the reverse invoicing policy due to confusion over transaction parties, as well as risks of back taxes, late payment surcharges and invoice compliance issues.

04 Tax Compliance Recommendations for Resource Recycling Enterprises

Under the reverse invoicing model, natural-person sellers should, on the one hand, declare and pay taxes in accordance with law, with particular attention to their obligation to complete the annual final settlement and payment of individual income tax on business income. Where a natural-person seller has an individual business registered under his or her name, he or she should also accurately distinguish personal transactions from the business operations of the individual business, and substantiate the authenticity of transactions through bank transfers, retained contracts, settlement documents and other supporting materials. On the other hand, recycling enterprises should place transaction authenticity at the core of their compliance efforts and embed risk prevention and control throughout the processes of natural-person seller onboarding, transaction document retention, and tax dispute response. Specifically, recycling enterprises may improve their tax compliance management in the following aspects:

1. Improve the onboarding process and contractual clauses for natural-person sellers

First, when entering into purchase and sale contracts with natural-person sellers, recycling enterprises may stipulate in writing the obligations of natural-person sellers to cooperate with reverse invoicing and to truthfully provide relevant information. The contracts may also specify their liability for breach where, for reasons attributable to them, the recycling enterprise is unable to apply the reverse invoicing policy. This helps prevent potential losses in advance. Second, recycling enterprises may require natural-person sellers, at the time of contract signing, to provide a letter of undertaking stating that they do not have any individual business or enterprise registered under their names, as well as records of searches regarding their investments or positions held, so as to avoid situations where invoices issued to them through reverse invoicing are deemed non-compliant because they have individual businesses registered under their names. In addition, materials such as identity verification documents of natural-person sellers, consent documents for the first-time application of reverse invoicing, authorizations or confirmations for the handling of taxes and fees on their behalf, and undertakings regarding the supply of goods by natural-person sellers should also be retained for future inspection.

2. Establish a full-process mechanism for retaining relevant materials

Recycling enterprises applying the reverse invoicing policy shall be responsible for the authenticity of the materials submitted when handling reverse invoicing matters and for the authenticity of their resource recycling business. In the course of business operations, they should clearly identify their role in the transaction chain, perform genuine trading functions, and ensure consistency among the contract flow, goods flow, fund flow and invoice flow. In addition, in accordance with the requirements of Announcement No. 5, recycling enterprises shall retain materials capable of proving transaction authenticity, including purchase contracts or agreements for discarded products, transportation invoices or vouchers, weighbridge slips, transfer payment records and other documents. They shall also establish purchase ledgers that record in detail the time and place of each purchase, the seller and his or her contact information, the name, quantity and price of the discarded products, and other relevant information, for future inspection.

3. Establish and improve mechanisms for tax risk review and dispute response

Recycling enterprises should conduct regular tax self-inspections. Where abnormal transactions or indicators are identified, they should analyze and assess the relevant tax risks and make timely rectifications. In the event of a tax inspection, recycling enterprises should promptly preserve evidence supporting business compliance, actively cooperate with the tax authorities’ review, and provide explanations on key matters such as transaction authenticity, source of goods, fund payments and tax treatment. For cases that have already given rise to complex tax disputes, or that may involve potential criminal risks, recycling enterprises should seek professional support in a timely manner for tax dispute resolution and criminal risk prevention and control, so as to minimize the risks of administrative penalties and criminal liability, and safeguard their lawful rights and interests