Electric power companies may face the dilemma that suppliers are not qualified to issue VAT special invoices in the procurement process, and cannot deduct VAT inputs and EIT costs; in the production and marketing process, "surplus tickets" and sales on behalf of the power company are prone to involve the risk of false invoicing. From the perspective of enterprises, how to identify these risks and take corresponding countermeasures to curb the problem of false invoicing by combining with the requirements of tax compliance has become the focus of enterprises' attention. This paper makes a systematic description of the risks of false invoicing in the electric power industry and puts forward corresponding preventive suggestions.

I.Interpretation of the law by case

(I) Upstream company constitutes the crime of false opening, and downstream power company is characterized by the tax bureau as obtaining false opening

Beijing Municipal Inspection Bureau announced the administrative penalty decision against Beijing Zhongmou Electric Power Equipment Company , and found that during the period from January 2016 to December 2018, it mainly had the following problems: i. adopting tax evasion means, non-payment or underpayment of tax payable of more than 1 million yuan; ii. illegally obtaining more than 30 VAT input invoices, amounting to nearly 3 million yuan, with a tax amount of nearly 0.5 million yuan; and according to the Law of the People's Republic of China on Administration of Tax Collection" and other relevant laws and regulations, it was found that it constituted tax evasion and false VAT invoices, and was sentenced to administrative treatment of recovering more than 1 million yuan of tax and administrative penalty of imposing a fine of more than 500,000 yuan.

The upstream enterprise of Zhongmou Electric Power Equipment Company, which is a trading enterprise of Youmou, was subject to a tax audit in the same year and was found to have committed the crime of false VAT invoicing due to the existence of false VAT invoices for others and the amount of such invoices was huge. Subsequently, the tax authorities investigated the enterprises involved in its false VAT invoices and imposed administrative penalties on the enterprises in this case. 

(II) Power Company Changes Invoice Name to Fraudulently Obtain Tax Benefits, and Tax Authorities Characterize Tax Evasion

A certain An Power Generation Co., Ltd. was registered and established in Hebei Province, engaging in the production and supply of electric power and heat.In February 2018, the Inspection Bureau of a certain municipal tax bureau in Hebei Province ascertained that during the period from 2009 to 2016, the enterprise existed the tax-related illegal act of changing wood chips into cotton firewood to falsely issue invoices for the purchase of agricultural products, improperly obtaining the VAT tax preference of instant tax refund as well as the corresponding tax preferential policies for enterprise income tax. It was found that the enterprise's changing wood chips into cotton firewood from 2009 to 2015 was false invoicing of acquisition of agricultural products, and the enterprise was required to return the instant tax refund and pay back the VAT, and the other false acquisition invoices were not allowed to be used as the vouchers for pre-tax deduction of the enterprise income tax, and that the change of name constituted tax evasion, and the enterprise was required to pay back the tax and late payment fee, and imposed a penalty of 0.5 times of the amount of the tax.

The court held that according to Article 22 of the Measures of the People's Republic of China for the Administration of Invoices, "invoices shall be issued in accordance with the stipulated time limit, order and columns, all of which shall be issued at one time in a truthful manner and stamped with the special seal for invoices. No unit or individual shall engage in the following acts of false invoicing: (a) issuing invoices for others or for themselves that do not correspond to the actual operation of the business;" "does not correspond to the actual operation of the business" includes the name of the product, the unit price and the quantity of the product does not correspond to the actual operation of the business. Ltd. changed the actual acquisition of wood chips to cotton firewood when issuing the acquisition invoice, which belongs to issuing invoices that are inconsistent with the actual operation of the business. The Decision on Tax Penalty is in line with the law, the applicable law is correct and it is upheld.

(III) Summary

Upstream and downstream enterprises in the power industry as well as within the power industry have more links involving false invoicing behavior due to years of industry practice. In the above two cases, the electric power company may be caused by the upstream company constituting the crime of false invoicing, which triggered the tax authorities for the enterprise to accept the invoices of the behavior of the audit, but also may be caused by the enterprise itself in order to realize the tax concessions and change the name of the enterprise constitutes the false invoicing behavior. In practice, the power company may also involve other risks of false invoicing, the author from the power company procurement and production and sales of the two major links to organize and summarize the possible risk points are as follows.

II.Risk of False Opening in Electricity Company Operations

(I) False-declaring risk in the procurement operations of power companies

1. False invoicing by an upstream enterprise implicates the power company in false invoicing risk

In the above case, the power company was implicated in the upstream false invoicing, and the tax bureau determined that the VAT invoices it obtained constituted false invoicing. Thermal power companies, which account for the largest portion of power companies, are suppliers of raw materials to coal companies. For the sake of resource allocation, thermal power and heat and power companies inevitably need to purchase coal resources from small enterprises or distributors that distribute coal, and are usually unable to obtain VAT invoices, and certain coal companies enter into transactions by means of falsely issued VAT invoices. Since February 28, 2020, Inner Mongolia launched a 20-year operation to reverse 20 years of special rectification in the coal sector, followed by a number of other provinces, including Shanxi, Yunnan, Sichuan, Xinjiang, etc., which also launched self-correction in the coal sector. Subsequently, in March 2021, the Central Office and the State Council issued the Opinions on Further Deepening the Reform of Tax Levy and Administration, which explicitly took coal and other industries as a key area of concern, and severely cracked down on illegal and criminal behaviors of fraudulent and evasive tax evasion in the coal and other industries, and the risk of tax-related risks in the coal industry was focused on. The tax-related risks of the coal industry have been focused on. The corresponding tax-related risks of downstream enterprises, especially the risk of false invoicing, have been significantly increased.

Enterprises are reminded that the upstream enterprises constitute false invoicing, and the power company as the invoiced party may have five different treatment results due to different behavioral characterization:

(1) The invoiced party will not be dealt with, while the input tax can be deducted;

(2) The party to whom the invoice is issued constitutes a bona fide acquisition of false VAT invoices, and only the input tax is transferred out;

(3) The transferee party obtains the non-compliant invoice, input item is transferred out and late payment fee is added;

(4) As a result of the recipient party's false acceptance of the invoice, in accordance with Article 63 of the Tax Collection and Administration Law and Articles 1 and 4 of the Circular of the State Administration of Taxation on Issues Concerning the Handling of Fraudulently-Opened VAT Invoice Acquired by Taxpayers (Guoshuifa [1997] No. 134), the tax authorities shall characterize the party as having committed tax evasion, and impose a fine of not more than five times of the amount of the evasion, and, if the input tax is greater than the output tax, it will also reduce the amount of If the input tax is greater than the output tax, the amount of input tax retained will be reduced;

(5) The invoiceecee accepts invoices falsely, and according to the provisions of Articles 22 and 37 of the Measures for the Administration of Invoices and the Interpretation of the Supreme People's Court on Several Issues Concerning the Application of the Decision of the Standing Committee of the National People's Congress on the Punishment of Crimes of False Issuance, Counterfeiting and Illegal Sale of VAT Special Purpose Invoices, the tax authorities may consider that the behavior of the invoiceecee constitutes the act of "letting other people issue invoices for itself which do not conform to the actual business situation The tax authorities may consider that the behavior of the invoiced party constitutes "allowing others to issue invoices for themselves that are inconsistent with the actual operation of business", thus determining that the invoiced party constitutes false invoicing, in which case the invoiced party may be transferred to the public security organs to investigate the criminal liability, and the relevant persons in charge may face the criminal penalties, and the crime of falsely issuing special invoices for value-added tax is a felonious crime, which will have a great impact on the operation and life of the invoiced party.

As "controlling tax by invoice" is still an important way of tax collection and management at the present stage of China, the enterprise has a single pre-tax deduction voucher, and the tax risk of false invoicing crime is high, and it is also a crime that can be constituted by both the invoicing party and the party to be invoiced, therefore, the risk of the electric power company accepting false VAT invoices is not to be underestimated.

2. Electric power companies make up the inputs through false invoicing

As mentioned above, some electric power companies have difficulty in obtaining VAT invoices, however, there is a "ceiling" in the price of electricity, and electric power companies cannot offset input tax and are bound to be unable to bear the high cost. Some power companies have purchased VAT invoices from other enterprises, such as purchasing VAT invoices from other coal companies with general taxpayer qualification, and requesting labor companies to issue VAT invoices for false labor relations.

3. Electricity companies change their names and issue false invoices in order to enjoy tax incentives

In the above case, a power generation company in Hebei improperly obtained national tax incentives by changing the invoice name, and its behavior was recognized as false invoicing. For the consideration of environmental protection, the state has introduced a number of tax incentives for clean energy enterprises in the power generation industry and enterprises upgrading traditional industrial industries and equipped with environmentally friendly equipment and technologies, such as the Circular on VAT Policies on Wind Power Generation issued by the Ministry of Finance and the State Administration of Taxation in 2015, which stipulates that "since July 1, 2015, taxpayers who selling self-produced electric power products produced by using wind power, the policy of 50% instant VAT refund will be implemented." Some electric power companies see the tax incentives "dividend", by changing the name of the invoice and other forms of obtaining the corresponding tax relief, may constitute false invoicing.

(II) the risk of false invoicing in the production and sales business of electric power enterprises

1. The sale of "surplus tickets" by power companies constitutes false invoicing.

The downstream of the electricity sales company is mostly individuals or self-employed, and such consumers are less likely to have the need for VAT special invoices for deduction. The electricity sales company can obtain surplus VAT special invoices by agreeing with the individuals or not issuing VAT special invoices, and then sell them to the enterprises that need to use them for deduction. For example, an electronic company in Jieyang City obtained eight VAT invoices falsely issued by an upstream power generation enterprise between September and December 2016, and both the electronic company and its upstream power generation enterprise were found guilty of falsely issuing VAT invoices.

2. "Sales on behalf of electricity" in the electricity sales segment may be recognized as false invoicing.

When a power generation company signs a supply contract with a power sales company, it usually specifies the subjects of both parties and the amount of electricity to be supplied. However, in practice, there are some power generation companies that do not supply enough electricity and need to be supplied with electricity by other power generation companies, and the VAT invoices obtained by the power sales company are usually issued by the original power generation company, and the power generation companies are found to have failed to provide the relevant invoices or certificates to supply electricity to each other in the process of tax inspections. In the course of tax inspection, it was found that the power generation companies were unable to provide relevant invoices or supporting documents for supplying electricity on behalf of the power generation companies, it was determined that the power generation companies had falsely invoiced each other, and it was then determined that the VAT invoices issued by the original power generation companies for the power sales companies were falsely invoiced, and it was determined that the power sales companies accepted the false invoices. The risk of false invoicing in the sale of electricity on behalf of power companies is unique to power companies, and companies in the upstream and downstream of the power industry may be subject to audit by the tax authorities as a result.

III.Strategies for Dealing with Suspected Falsification in the Power Industry

In recent years, with the continuous advancement of tax digitization, the transparency of tax information has been increasing. Efficient tax management and audit procedures have made compliance with tax regulations a crucial concern for power companies. Shifting from reactive solutions to proactive compliance measures, enterprises are now focusing on preventing potential issues related to tax matters. This shift has ushered in a new phase of development for legal services in taxation.

(I)Obtainment of "Dependent Party" VAT Special Invoices to Meet the Elements of Falsification Crime

Power companies acquire goods from small and medium-sized coal enterprises or distributors, obtaining VAT special invoices from their affiliated enterprises. If these transactions involve genuine goods, they should be considered as affiliated transactions, not constituting falsification. The State Administration of Taxation's interpretation of "affiliated invoicing" clarifies that such invoicing does not fall under the category of falsely issued VAT special invoices. The recipient can claim input tax deductions. However, the lack of sufficient evidence regarding the establishment of affiliated relationships and the authenticity of transactions may lead tax authorities to accuse the involved parties of falsification.

(II) "Truthfully Outsourced Invoicing" Does Not Constitute Falsification**

Difficulty in obtaining VAT special invoices is a common phenomenon in the power industry, leading power companies to potentially engage others to issue invoices without fraudulent intentions. However, as described in the determination of the recipient's behavior, acquiring truthfully outsourced VAT special invoices may still carry the risk of constituting falsification. In defense, companies can prove the authenticity of transactions, lack of tax evasion intent, and no loss to the national tax revenue. Legal documents such as the Supreme People's Court's response letter of soliciting opinions on identifying the nature of activities related to "outsourcing" in the name of relevant companies and the Supreme People's Procuratorate's opinion on fully leveraging prosecutorial functions to serve the "six stabilizations" and "six guarantees" specify that truthful outsourcing actions, without fraudulent intent and causing no loss to national VAT revenue, do not constitute the crime of issuing false VAT special invoices.

(III) Mitigating the Risk of "Mismatched Descriptions" in Falsification**

As mentioned earlier, power companies may face situations where the description on the invoice does not align with the actual transaction, potentially triggering tax authorities' scrutiny. According to the "Invoice Management Measures," any entity or individual is prohibited from engaging in falsification, including issuing or letting others issue invoices that do not match the actual business situation. Inconsistencies in invoice descriptions constitute falsification under this regulation. Both the issuing and receiving companies face the risk of being recognized by tax authorities as engaging in illegal falsification, leading to administrative penalties. If the company can prove the authenticity of the transactions, it can argue that there was no intent to deceive for tax purposes.

IV.Best Practices for Ensuring Regulatory Compliance in the Daily Operations of Power Companies

(I) Strengthening Precautionary Measures: Conduct Thorough Due Diligence on Suppliers

Power companies are exposed to potential risks of falsification in both procurement and production-sales processes, necessitating proactive measures from the outset. Before engaging in transactions, companies should heighten awareness of invoice falsification, prioritize the issue, and implement necessary risk prevention measures. It is recommended that the recipient thoroughly understands the trading partner before transactions, considering factors such as their business scope, scale, and relevant qualifications for risk assessment. During transactions, companies should conduct payments through bank accounts and verify the consistency of bank account information with that on the invoice. Upon receiving an invoice, the company should request supporting documents from the invoicing entity and meticulously cross-check invoice details. If doubts arise about the acquired invoice, payment and declaration of related input taxes should be temporarily postponed, especially when dealing with large-scale purchases or long-term suppliers.

(II) Enhancing Invoice Systems and Preserving Relevant Evidence

Power companies must ensure that the acquisition of invoices stems from genuine transactions, and the integrity of procedures in each phase of authentic business transactions must be maintained. This involves ensuring correspondence of invoice information, traceability of goods transportation, and consistency of the receiving entity. Additionally, contractual provisions related to invoice terms should be refined:

- Clearly define the invoicing obligation of the receiving party, giving preference to suppliers capable of providing specified invoices.
- Specify settlement methods in contracts while defining the time frame for the receiving party to provide invoices.
- Explicitly state the types of invoices the receiving party should provide.
- Clearly outline compensation liabilities resulting from delays in invoicing or issuance of non-compliant invoices.

(III) Establishing Corporate Tax Health Checks and Tax-Related Risk Response Mechanisms

The corporate tax health check mechanism refers to the establishment and implementation of a comprehensive tax compliance management system by companies in their daily operations. This involves periodic self-assessment, self-supervision, and self-correction of tax compliance status. Power companies should establish robust tax management systems, conduct regular internal tax compliance assessments, establish mechanisms for self-supervision of tax compliance, and promptly respond to tax department inspections, thereby creating and refining tax health check mechanisms.

Moreover, as power companies operate in a capital-intensive industry with substantial transactions and intricate tax issues, it is imperative to establish a comprehensive tax risk management mechanism. This includes engaging professional tax lawyers to assist in resolving tax disputes and safeguarding the interests of the company. Identifying and preventing tax risks should be proactively addressed by conducting regular assessments of compliance in business operations and tax-related risks.