Editor's Note: The renewable resources industry is a vital pillar of the circular economy system and a key area supported by national tax policies. Value-added tax (VAT) general taxpayers within the industry who sell self-produced comprehensive resource utilization products and services may qualify for the VAT immediate refund policy, with refund rates reaching up to 100%. While industry practitioners benefit from the advantages of the immediate refund policy, they must also keep compliance requirements in mind and accurately grasp the applicable conditions of the policy. Improper application may result in suspension of eligibility, supplementary tax payments and fines, or even criminal liability. This article outlines the main risk points in policy application and provides compliance recommendations for enterprises, aiming to serve as a reference for industry players.

I. Historical Evolution of the VAT Immediate Refund Policy

Due to the lack of source invoices, the renewable resources industry has long suffered from excessive VAT burdens. To encourage comprehensive resource utilization and promote the development of a circular economy, in April 1995, the Ministry of Finance and the State Administration of Taxation issued the Notice on Exempting Certain Comprehensive Resource Utilization Products from VAT (Cai Shui Zi [1995] No. 44), which began granting VAT exemption benefits to certain comprehensive resource utilization products. As the scale of the renewable resources industry expanded, the state began to explore the VAT immediate refund model — refunding part or all of the tax to taxpayers after collection — thereby ensuring the integrity of the VAT deduction chain while providing tax benefits to the industry.

(A) Tax Exemption Phase (1995-2000)

Cai Shui Zi [1995] No. 44 provided VAT exemptions for certain comprehensive resource utilization products. The Notice of the Ministry of Finance and the State Administration of Taxation on Continuing the VAT Preferential Policies for Certain Comprehensive Resource Utilization Products (Cai Shui Zi [1996] No. 20) extended the exemption arrangement. During this period, the VAT tax benefit for the renewable resources industry was a full VAT exemption.

(B) Coexistence of Tax Exemption and Immediate Refund Phase (2001-2008)

The Notice of the Ministry of Finance and the State Administration of Taxation on VAT Policy Issues Concerning Certain Comprehensive Resource Utilization and Other Products (Cai Shui [2001] No. 198) stipulated that immediate refunds would apply to some comprehensive resource utilization products, while exemptions would be retained for others. The Supplementary Notice of the Ministry of Finance and the State Administration of Taxation on VAT Policies for Certain Comprehensive Resource Utilization Products (Cai Shui [2004] No. 25) further supplemented and refined Cai Shui [2001] No. 198. During the same period, the State Administration of Taxation refined the implementation details through official letter replies, including Guo Shui Han [2003] No. 1151, Guo Shui Han [2003] No. 1164, Guo Shui Han [2004] No. 45, Guo Shui Han [2007] No. 446, and Guo Shui Han [2008] No. 116.

(C) Systematic Construction of the Comprehensive Resource Utilization Immediate Refund System (2008-2015)

In December 2008, the Ministry of Finance and the State Administration of Taxation issued the Notice on VAT Policies for Comprehensive Resource Utilization and Other Products (Cai Shui [2008] No. 156), which systematically organized the VAT immediate refund policies for comprehensive resource utilization, consolidated and unified the immediate refund system, and integrated previously scattered policies. Thereafter, the State Administration of Taxation issued supplementary documents. Cai Shui [2009] No. 163 provided supplementary provisions on the scope of benefits and applicable conditions under Document No. 156. Cai Shui [2011] No. 115 improved the applicable policies for agricultural and forestry residues and further expanded the coverage of benefits. Cai Shui [2013] No. 23 explicitly stipulated compliance with pollutant discharge standards as a prerequisite for enjoying preferential policies. Cai Shui [2015] No. 73 clarified the details of the immediate refund policy for new wall materials.

(D) Formation of the Framework with Document No. 78 and Supplement with Announcement No. 90 (2015-2019)

In June 2015, the Ministry of Finance and the State Administration of Taxation issued the Notice on Issuing the Catalogue of VAT Preferences for Comprehensive Resource Utilization Products and Services (Cai Shui [2015] No. 78). This notice comprehensively integrated the policy content of Document No. 156 and its subsequent supplementary documents, forming a unified Catalogue of VAT Preferences for Comprehensive Resource Utilization Products and Services. The refund rates were standardized into four tiers: 100%, 70%, 50%, and 30%, and a negative list for policy application was systematically established. Announcement of the Ministry of Finance and the State Administration of Taxation No. 90 (2019) adjusted certain items in the Catalogue of Document No. 78. These two announcements together constituted the primary basis for the renewable resources industry to apply the VAT immediate refund policy at that time.

(E) Establishment of the Policy Framework with Rigorous Voucher Management and a Compliance Negative List under Announcement No. 40 (2021)

In December 2021, the Ministry of Finance and the State Administration of Taxation issued the Announcement on Improving VAT Policies for Comprehensive Resource Utilization (Announcement No. 40 of the Ministry of Finance and the State Administration of Taxation , effective from March 1, 2022. This policy continued the institutional framework of "tiered immediate refunds for comprehensive resource utilization," while tightening the qualifying conditions, strengthening voucher management, increasing penalties for non-compliance, updating the preferential catalogue, and supporting a simplified tax calculation policy for renewable resource recycling to address the issue of obtaining invoices upstream. In 2024, the State Administration of Taxation issued the Announcement on Matters Concerning Resource Recovery Enterprises Issuing Invoices in the Reverse Direction to Individual Sellers of Scrapped Products (Announcement No. 5 of the State Administration of Taxation , allowing qualified resource recovery enterprises to issue invoices in reverse to individual sellers of scrapped products. This alleviated the problem of the "first invoice" being missing in the renewable resources industry, providing strong support for the implementation of the immediate refund policy.

II. Different Scenarios of Improper Enjoyment of the VAT Immediate Refund Policy

(A) Failure to Meet Raw Material Proportion Requirements

Tax authorities have previously disclosed a case where a company improperly enjoyed the VAT immediate refund policy. The company involved blended a large quantity of "clean oils," such as palm oil and soybean oil, into the industrial-grade mixed oil it produced. The proportion of blended raw materials reached 48.61% and 56.57% respectively, causing the resulting renewable resource products to fall far below the standard stipulated in the Catalogue of VAT Preferences for Comprehensive Resource Utilization Products and Services (2022 Edition), which requires that "more than 70% of the product's raw materials come from the listed resources." The tax authority lawfully recovered the improperly enjoyed immediate VAT refunds, imposed late payment surcharges, and revoked the company's eligibility for the immediate refund. One of the conditions for the immediate refund policy is that "raw materials must comply with the provisions of the Catalogue," including requirements on the type and proportion of raw materials. If an enterprise purchases finished products directly for resale, or blends raw materials that do not meet the Catalogue's requirements, it fails to satisfy the "self-produced" or "raw material proportion" conditions and is therefore not eligible for the refund.

(B) Failure to Obtain Compliant Invoices

Tax authorities disclosed a tax evasion case where a company improperly enjoyed the VAT immediate refund tax benefit through false declarations. During the period in which the company enjoyed the VAT immediate refund, it purchased a large quantity of renewable resources without obtaining VAT invoices. The company then included the full sales revenue from the products corresponding to these uninvoiced renewable resources in the scope of its refund calculation. The tax authority determined that the company should have obtained invoices but failed to do so, and that the sales revenue from the products corresponding to this portion of renewable resources was not eligible for the immediate refund policy. The authority further found that this constituted a false tax declaration and amounted to tax evasion, and accordingly made a decision to recover the taxes, impose late payment surcharges, and levy a fine.

(C) Fabricating Transactions and Issuing Reverse Invoices

According to a report from the China Tax News, Company A purchased scrap copper, processed it into copper rods, and sold them. During this process, because it did not obtain input invoices for the scrap copper purchased, and in order to enjoy the VAT immediate refund preferential policy, the company fabricated false fund flows and issued fraudulent VAT special invoices in reverse. Ultimately, the court determined that the actual controller of Company A committed the crime of issuing false VAT special invoices, and the actual controller was sentenced to three years' imprisonment with a three-year suspension of execution. Using fraudulent invoices to apply for the immediate refund tax benefit not only means that the refund benefit cannot be enjoyed, but may also lead to criminal liability for the act of issuing false invoices.

(D) Goods Not Qualifying as Renewable Resources

According to a report from the China Tax News, Company C was engaged in the recycling and wholesale of renewable resources. In 2024, the company recycled electrolytic copper plates (which are not waste materials) under the name of "scrap copper" and sold them to downstream enterprises. Upon investigation, the tax authority verified that the goods purchased and sold by Company C were finished electrolytic copper products, which do not fall within the scope of renewable resources as defined in Announcement No. 40. The authority determined that the company should lawfully pay supplementary VAT and related taxes at the rate of 13%. Renewable resources refer to various wastes generated during social production and consumption that have lost all or part of their original use value but can regain use value through recycling and processing. Finished products such as electrolytic copper do not qualify as renewable resources and therefore cannot benefit from the VAT immediate refund policy.

III. Legal Risks of Improper Application of the Immediate Refund Policy

As can be seen from the foregoing, different types of non-compliance in the application of the policy lead to significantly different legal consequences — ranging from corrective actions within a specified period at the minor end, to criminal liability at the severe end.

Situations that do not affect the refund eligibility but require correction refer to cases where the enterprise only has procedural deficiencies, such as incomplete acquisition ledgers, failure to provide a written declaration in a timely manner, etc. However, as long as the business itself is genuine and other conditions meet the requirements of the Catalogue, the tax authority will typically require the enterprise to rectify the issue and submit supplementary materials within a specified period. This does not affect the refund eligibility already enjoyed, nor does it require the payment of back taxes.

Suspension of refund eligibility for a certain period. This situation is usually caused by "qualification barriers" rather than a failure to meet the substantive requirements of the business. The main scenarios include: the taxpayer's tax credit rating being downgraded to Grade C or D; the enterprise being subject to an administrative penalty of a certain standard for violating environmental protection or tax laws and regulations; or the product no longer meeting the technical standards specified in the Catalogue. In such cases, the tax authority will suspend the refund eligibility and will not grant the refund.

If the substance of the enterprise's business does not meet the refund conditions, the enterprise not only faces a suspension of eligibility but also must pay back taxes and late payment surcharges. In serious cases, a fine may also be imposed. Such situations mainly include: failure to meet the raw material proportion requirements; failure to obtain compliant invoices; the goods being misnamed or not qualifying as renewable resources; and fraudulent business activities or fabricated transactions.

In the most serious cases, the enterprise may trigger criminal liability. When an enterprise, while enjoying the VAT immediate refund preferential policy, also engages in conduct that constitutes the crime of issuing false VAT special invoices or the crime of tax evasion, it may face criminal prosecution. For example, Company A fabricated transactions and issued reverse invoices to qualify for the VAT immediate refund policy, and was subsequently convicted of the crime of issuing false VAT special invoices, with the actual controller bearing criminal liability .

IV. Compliance Recommendations for Renewable Resource Enterprises Applying the VAT Immediate Refund Policy

Faced with an increasingly stringent regulatory environment, renewable resource enterprises should build a comprehensive compliance management system covering dimensions such as business substance, invoices and vouchers, raw material standards, environmental compliance, and tax credit rating when applying the VAT immediate refund policy.First, enterprises should operate in compliance based on the authenticity of their business activities, ensuring alignment between the contract flow, goods flow, capital flow, and invoice flow, and maintaining complete business documentation for future reference.Second, enterprises should strictly compare their operations against the standards of the Catalogue of VAT Preferences for Comprehensive Resource Utilization Products and Services, accurately calculate the proportion of raw materials, and ensure that the production of renewable resource products complies with the Catalogue's requirements. If there is any uncertainty or lack of understanding regarding the application of the policy, the enterprise should communicate with the competent tax authority in advance.Third, enterprises should strictly record and maintain acquisition ledgers in accordance with requirements, monitor changes in their tax credit rating, and when applying for a refund, truthfully disclose in a written declaration the status of invoice acquisition, any environmental penalties, and any tax-related violations. When faced with a tax inspection, the enterprise should promptly secure evidence of business compliance, actively cooperate with the tax authority's investigation, and provide explanations focusing on key matters such as transaction authenticity, raw material sources, capital payments, and tax treatment. For complex tax-related disputes, the enterprise should promptly seek professional assistance to prevent the escalation of tax risks.