Editor's Note: The Measures for the Administration of Vouchers for Pre-tax Deduction of Enterprise Income Tax (State Administration of Taxation Announcement No. 28 of 2018) clarifies the requirement of using invoices as vouchers for pre-tax deduction of enterprise income tax. However, in practice, in the case of real cost expenditure, there are numerous problems such as homemade vouchers accounted for due to industry specificity or invoices obtained by the downstream due to upstream false invoicing being recognized as non-compliant, etc., and the vouchers according to which the enterprises make pre-tax deductions are usually facing the risk of adjusting the back-taxes due to non-compliance with the requirements of Announcement No. 28. For the enterprises involved in the case, under the aforementioned circumstances, in addition to striving for full deduction in accordance with the substantive requirements for pre-tax deduction under Article 8 of the Enterprise Income Tax Law, applying the approved levy and properly selecting the approved method is also a way of adjusting the balance between the recovery of tax and safeguarding the legitimate rights and interests of the taxpayers. Based on the policy provisions, this article analyzes the applicable conditions of the approved levy and the statutory adjustment methods, and analyzes the solution to the problem of pre-tax deduction vouchers for the readers' reference.

I. Case: there is real cost expenditure but the invoice obtained was recognized as false billing, and the enterprise income tax adjustment was approved by the average tax rate of the enterprise in the past three years.

Company A is a coal distribution enterprise, which purchases coal from the coal yard and sells it to the thermal power plant, and at the same time needs to be responsible for the transportation of the coal. The person in charge of Company A was introduced by others and entered into a transportation contract with Freight Company B during the period from 2019 to 2020, with Company B undertaking the transportation services and obtaining the transportation invoices issued by Company B. Individual drivers, on the other hand, registered as the actual carriers on the platform of Company B and took orders.2024 In March 2024, due to the suspected false invoicing of Company B and the return of funds from Company A's dealings with Company B, the location of Company A's Audit Bureau received the concordance leads and determined after inspection that Company A had a real demand for coal transportation, but the actual carrier was an individual driver and there was no affiliation between the driver and Company B. There was no real transportation service relationship between Company A and Company B. Therefore, in terms of value-added tax (VAT), Company A was required to pay VAT in accordance with the “Announcement of the State Administration of Taxation on the Issues on the Levy and Replacement of Taxes on Fraudulently Issued VAT Special Purpose Invoices by Taxpayers” ( Therefore, in respect of VAT, Company A was required to make VAT input transfers and impose late payment fees in accordance with the provisions of the Announcement of the State Administration of Taxation on Issues of Taxpayers on Falsely Issued VAT Special Purpose Invoices (“Announcement of the State Administration of Taxation No. 33 of 2012”). In respect of income tax, Company A was not notified to make up for the issuance of invoices, and Company A did not make up for the issuance of invoices or make up for them in accordance with the stipulated time limit. “Approved in accordance with other reasonable methods”, the Audit Bureau approved the adjustment of Company A's enterprise income tax for 2019 to 2020 based on the average tax rate of 1.6% for Company A's income tax for the years from 2021 to 2023.

Article 8 of the Enterprise Income Tax Law provides that “reasonable expenses actually incurred by an enterprise in connection with the acquisition of income, including costs, expenses, taxes, losses and other expenses, are allowed to be deducted when calculating taxable income”, i.e., it clarifies the “authenticity” and “relevance” of the pre-tax deduction of costs. In other words, the requirements of “authenticity”, “relevance” and “reasonableness” for pre-tax deduction of costs have been clarified. In order to improve the efficiency of income tax collection and management, the State Administration of Taxation (“SAT”) issued the Measures for the Administration of Pre-tax Deduction Vouchers for Enterprise Income Tax (“EIT Vouchers”) (SAT Announcement No. 28 of 2018) in 2018, which clarifies the requirements for pre-tax deduction vouchers for EIT, e.g., if an enterprise incurs an expenditure item that belongs to a value-added tax tax (“VAT”) taxable item within its territory, and the counterparty is a VAT taxpayer who has already applied for tax registration, the expenditure is based on invoices (including invoices issued by tax authorities in accordance with the regulations) as pre-tax deduction vouchers. If the enterprise does not obtain the documents required by Circular 28 or the documents obtained are recognized as “non-compliant invoices” or “non-compliant other external documents”, it may not be able to charge the corresponding costs before EIT according to the provisions of Circular 28. As in the above case, Company A has real transportation costs, but the invoices obtained are recognized as false invoices, which do not comply with the requirements of vouchers for pre-tax deduction under Announcement No. 28, and therefore cannot be deducted before EIT.

In the procedures of enterprise self-inspection and tax audit, for the real costs incurred but the vouchers recorded do not comply with the provisions of Announcement No. 28, the enterprises often face the problem of adjusting and paying back taxes, and the adjusted and paid back income tax is usually far more than the actual tax burden of the enterprises, resulting in a great economic burden. For such “after-the-fact” income tax adjustment, as in the previous case, if the enterprise is in line with the approved levy under Article 35 of the Tax Collection and Management Law, it can strive for the application of the approved levy, and reduce the amount of back tax to be paid through the adjustment of the tax calculation method. Adjusting the business with real cost expenditure but non-compliant pre-tax deduction vouchers by means of approved levy is not only in line with the provisions of the Tax Law, but also takes into account the objective requirements of tax collection and the legitimate rights and interests of the enterprises. On the basis of the application of the approved levy, enterprises may also seek to approve and adjust the enterprise income tax at a lower rate by using a reasonable approved method according to the actual situation.

II. Tax liability rate and cost profit margin are statutory methods of authorized levy, which can be actively sought to be applied in individual cases

According to the provisions of Article 47 of the Implementation Rules of the Tax Collection and Management Law, there are several methods for approving the taxable amount as follows: firstly, the tax burden level is approved with reference to the local taxpayers of the same type of industry or the similar industry with similar scale of operation and level of income; secondly, it is approved in accordance with the method of business income or cost plus reasonable expenses and profit; thirdly, it is approved in accordance with the projected or measured amount of the raw materials, fuels, power, etc., which is consumed; and the article also provides that it can be approved in accordance with other reasonable methods. Approved, the article also provides for the approval of other reasonable methods. In practice, there are still some local tax authorities in accordance with the “Approved Collection Methods for Enterprise Income Tax (for Trial Implementation)” (Guoshuifa [2008] No. 30) in the approved collection of taxable income rate, with reference to the scope of the local taxable income rate to determine the taxable income rate of the enterprise for the approval of the adjustment.

That is to say, in the procedure of approved collection, the industry tax burden rate, cost profit rate and taxable income rate are all applicable methods. However, in the application of specific methods, there are differences in the treatment, such as the approval of the tax burden rate, the reference to the tax burden rate of the enterprises in the same industry for which years, the average or corresponding to the annual tax burden rate for approval, etc., there is room for struggle. As in the above case, the income tax for the period in question was adjusted according to the average tax burden rate of the enterprise in recent years, and in practice, there are cases in which the enterprise's income tax for the period in question was adjusted according to the corresponding year's tax burden rate of the industry, e.g., a material company deducted the cost with homemade vouchers from 2020 to 2022, and the Audit Bureau determined that the enterprise “set up books of accounts, but the accounts are confusing or the cost information, income vouchers, income vouchers, and other documents are not in order”. The Inspection Bureau determined that the enterprise “has set up books of accounts, but the accounts are confusing or the cost information, income vouchers and expense vouchers are incomplete, making it difficult to check the accounts”, which is in line with the provisions of the approved levy, and then it was approved with reference to the tax burden level of taxpayers in the same region and in the same industry with similar scale of operation and level of income in the corresponding year. Therefore, in individual cases, enterprises can actively communicate with the tax authorities and strive to apply and adjust the enterprise income tax at a lower level.

III. Selection of approved methods should take into account the actual situation of enterprises and avoid one-size-fits-all application.

In some tax cases, the tax authorities refer to the Approved Collection Methods for Enterprise Income Tax (Guo Shui Fa [2008] No. 30) regarding the range of taxable income rate and mechanically approve the collection of tax by a certain standard of taxable income rate according to the local implementation caliber of the enterprises. For example, due to the source invoice problem in the renewable resources industry, the resource recycling enterprises docking the front-end individual retail households generally account for the pre-tax deduction of enterprise income tax with homemade vouchers such as bank statements. Recently, some local tax authorities have requested resource recycling enterprises to make up and exchange invoices on the grounds that the homemade vouchers are not in line with the provisions of Announcement No. 28, and after the expiration of the deadline, the enterprises are still unable to obtain the invoices, and therefore, they are required to pay 4%-15% taxable tax to the enterprises in accordance with the Approved Measures for Enterprise Income Tax (Guoshifa 〔2008〕 No. 30) regarding the “Wholesale and Retail Trade Industry”. The income tax of the resource recycling enterprises was approved at a taxable income rate of 8% based on the taxable income rate range of 4%-15% in the Measures for Approved Collection of Enterprise Income Tax (Guo Shui Fa [2008] No. 30) for the “wholesale and retail trade industry”.

We are of the view that the selection of the approved collection method should be based on the characteristics of the enterprise's production and operation industry, taking into account the enterprise's geographic location, scale of operation, level of income, level of profit and other factors, and applying a certain approved method across the board not only ignores the actual situation of the industry and the enterprise, but also violates the principle of fairness in taxation.

Taking the above-mentioned case of approved levy on self-made vouchers of resource recycling enterprises as an example, before the implementation of the policy of “reverse invoicing”, the problem of missing invoices at source is a long-term and fundamental tax dilemma in the renewable resources industry, whether it is the life of the production of waste or the production of waste, the invoicing chain in the renewable resources industry has been broken at the source of the supply of waste, and waste materials are collected to many different places in the form of waste materials without invoices. Waste materials in the form of non-invoicing to a large number of individual retailers, and retailers are confined to the heavy tax burden, tax awareness and other reasons, in the sale of its acquisition of waste materials are usually idle to resource recovery enterprises invoicing. As a result, resource recycling enterprises are unable to obtain invoices even when they want to acquire waste materials, and they are faced with the dilemma of not being able to make VAT input deduction and EIT pre-tax deduction. Therefore, in the policy gap period before the introduction of “reverse invoicing”, the adjustment of income tax on homemade vouchers of resource recycling enterprises should fully consider the actual situation of the industry. In addition, due to the adjustment of income tax for homemade voucher matters and the application of authorized levy is a kind of ex post facto adjustment, at this time, the purchase and sale business involved have already occurred, and the corresponding cost, income and so on objectively existed, and through the authorized levy, it may make the enterprise originally have no income or not so much income, but it also has to make up for the tax in accordance with the new tax calculation method. When choosing a specific approved method, it should be based on the principles of substantive taxation and quantitative taxation, combined with comprehensive consideration of the actual situation of business occurrence, profit situation of the enterprise and the industry, etc., rather than applying a certain approved method one-sidedly.

IV. Summary

Because the source of renewable resources, freight and other industries are mostly scattered individuals, enterprises are often unable to obtain invoices as the vouchers for cost recording after the occurrence of the real cost expenditure, or they may use homemade vouchers, such as bank receipts, to record the cost, or they may add new subjects in the trade chain and obtain invoices from them, and they may face the risk of not obtaining legal and valid vouchers for recording the cost and being adjusted to make up for the tax, and obtaining invoices from the third-party company. The invoices obtained from the third party company may face the problem of obtaining false invoices, and the relevant invoices may be recognized as “non-compliant invoices” and thus cannot be deducted before tax. For this kind of income tax adjustment problem of having real cost expenditure but not obtaining compliant certificates for pre-tax deduction, considering the form requirement of pre-tax deduction certificates in Circular No. 28, enterprises can strive for the application of reasonable approval method and reasonable adjustment of income tax in terms of the actual situation of the enterprises in the industry and the level of tax burden.