From the perspective of policy context, there has not been significant change in the operating model of the scrap material industry, and the consistent practice of granting value-added tax (VAT) preferences reflects the country's policy orientation towards resource recycling. However, since the cancellation of the policy of VAT prepayment and refund for the scrap material industry in 2000, and the further cancellation of the VAT exemption for the sale of scrap materials by recycling units in 2008, scrap material recycling enterprises have faced the dilemma of lacking input invoices and bearing a heavy burden of VAT, with difficulty obtaining pre-tax deduction vouchers for corporate income tax.Since 2017, there have been successive outbreaks of fraudulent cases involving scrap material recycling enterprises in various regions of the country. The cases involve numerous upstream and downstream companies, and the amounts involved are enormous. Once the crime of issuing fraudulent VAT special invoices is established, the companies and individuals involved will face serious criminal liability. As a result, in order to avoid the potential risk of issuing fraudulent invoices, many scrap material recycling enterprises have chosen to forgo obtaining input invoices and fully pay the VAT on the sales link, opting instead to use self-made vouchers for cost deduction.Recently, tax authorities in some regions have begun to investigate the tax situation of scrap material recycling enterprises, with particular attention to the issue of pre-tax deduction vouchers for corporate income tax. In this issue, the author combines multiple relevant consultations to analyze the issue of pre-tax deduction vouchers for scrap material recycling enterprises, with the aim of providing recommendations for the scrap material recycling business.

I. Tax Inspection: Scrap material recycling enterprises record transactions using self-made vouchers; tax authorities demand the issuance of invoices and payment of outstanding taxes.

(I) Scrap Steel Procurement Business Recorded with Self-made Vouchers; Tax Authorities Require Invoice Issuance and Tax Payment

Company A Recycling Resources Limited was established in Province D and is a large-scale local scrap steel recycling company. As the suppliers of scrap steel to Company A are mostly individual businesses or individuals, the company cannot obtain sufficient input invoices for VAT deduction and pre-tax deduction of corporate income tax during scrap steel procurement transactions. Therefore, Company A chooses to forgo the right to VAT deduction, issues VAT special invoices in full during the sales process, pays the corresponding VAT, and records the deduction of procurement costs using self-made vouchers created during scrap steel procurement, along with supporting documents such as purchase contracts, payment receipts, and weigh bills.

In September 2021, Company A received a "Tax Matters Notification" from the audit bureau, requiring the company to provide contracts, payment receipts, and other external documents corresponding to scrap steel procurement transactions since its establishment. Additionally, the company was instructed to issue and replace invoices.

(II) Scrap Recycling Company Deducts Costs with Self-made Vouchers; Tax Authorities Order Timely Payment of Taxes and Late Fees

Company B Recycling Resources Limited is a subsidiary of a steel group and is responsible for scrap steel trading operations in Province A. In the process of scrap steel procurement, Company B also faces the challenge of not obtaining VAT special invoices. Similarly to Company A, Company B chooses to record transactions using self-made vouchers to deduct procurement costs and fully pays the VAT during the sales process.

In November 2021, Company B received a "Tax Matters Notification" from the supervisory tax authority, which determined that the scrap steel procurement transactions conducted by Company B in 2019 did not have legitimate pre-tax vouchers. As a result, the company was not allowed to deduct corporate income tax before tax declaration, and Company B was ordered to pay a corporate income tax of 650 million yuan within a specified period, with a daily late fee of 0.05%.

In the above cases, both Company A and Company B chose to deduct costs using self-made vouchers in their recycling operations. However, the local tax authorities did not approve of this practice and made decisions to issue and replace invoices and pay outstanding taxes. This situation is not an isolated case. Until the practical issue of being unable to obtain input invoices in scrap material recycling business is properly addressed, the tax risks such as issuing fraudulent invoices and paying outstanding taxes will continue to exist. Therefore, whether scrap material recycling companies need to pay corporate income tax when recording transactions with self-made vouchers requires consideration of the specific nature of China's scrap material recycling business and the provisions of Chinese tax laws.

II. Challenges and Dilemmas in Corporate Income Tax Deduction for Scrap Material Recycling Enterprises

The suppliers of scrap material recycling enterprises are mostly individuals or individual businesses. The majority of individual suppliers prefer immediate settlement when selling goods, completing the payment, and are unwilling to invest more effort in having invoices issued by tax authorities. Additionally, high unit prices for items like scrap steel and scrap aluminum make it less appealing for individual suppliers to issue invoices, especially when the sales volume reaches a considerable amount, potentially in the millions or even tens of millions for a single individual supplier. Consequently, this leads to recycling enterprises being unable to obtain corresponding invoices for corporate income tax pre-tax deduction during the procurement process.

On June 6, 2018, the State Administration of Taxation issued Announcement No. 28 of 2018, "Administrative Measures for Pre-tax Deduction Voucher Management of Corporate Income Tax." This announcement detailed the scope and requirements of vouchers eligible for pre-tax deduction, clarified concepts related to pre-tax deduction vouchers, management principles, types, tax treatment under basic circumstances, and tax treatment under special circumstances. According to Article 2 of the "Administrative Measures," when calculating the taxable income of a company for corporate income tax, all types of vouchers that prove reasonable expenses related to income are eligible for pre-tax deduction. This indirectly clarifies that "invoices are not the only pre-tax deduction vouchers." According to Article 8, pre-tax deduction vouchers can be classified into internal and external vouchers based on their source. Articles 9, 10, and 11 of the "Administrative Measures" systematically categorize which vouchers can serve as pre-tax deduction vouchers for different entities. While invoices are an obvious choice, the circumstances under which certain internal and external vouchers can be used as pre-tax deduction vouchers are also explicitly defined.

According to China's tax laws and the provisions of the "Administrative Measures," under normal circumstances, when recycling enterprises purchase goods from suppliers who have completed tax registration, they should obtain invoices (including those issued by tax authorities) as deduction vouchers. When purchasing goods from individuals engaged in small, sporadic business operations without the need for tax registration, vouchers issued by tax authorities, purchase vouchers, and internal vouchers can all serve as deduction bases. The "Administrative Measures" state that the criterion for determining small, sporadic business operations is that the sales revenue from taxable project operations conducted by an individual does not exceed the threshold specified in the relevant value-added tax policies. Calculating based on the current standard of small and micro enterprises being exempt from value-added tax if their monthly sales do not exceed 100,000 yuan, recycling enterprises can issue purchase vouchers for goods acquired from individual suppliers up to 1.2 million yuan per year. If the sales revenue of individual suppliers exceeds the aforementioned limit, recycling enterprises should still use invoices (including those issued by tax authorities as required) as pre-tax deduction vouchers. This requirement is disconnected from the actual procurement situation of recycling enterprises, especially for high-priced items like scrap steel and scrap metal, where individual retailers may have annual sales close to millions or even tens of millions. Some tax authorities, unable to verify the authenticity of transactions between individual retailers and recycling enterprises, choose a blanket approach of stopping the issuance of invoices. Recycling enterprises, restricted by the scale of their suppliers' operations, cannot obtain sufficient purchase vouchers to account for costs. This compels recycling enterprises to create self-made purchase vouchers to sustain their operations, exposing them to significant risks of corporate income tax adjustments.

III. Different Approaches to Corporate Income Tax Deduction for Scrap Material Recycling Enterprises

Due to individual suppliers being unable to issue VAT invoices on their own and requiring tax authorities to issue them, some local tax authorities, considering the administrative enforcement risk, are reluctant to issue invoices on behalf of individual suppliers, particularly in the context of the substantial quantities and amounts involved in scrap material recycling. As a result, recycling enterprises face a dilemma in tax processing. They cannot obtain VAT special invoices for input tax deduction and are unable to obtain regular VAT invoices as pre-tax deduction vouchers for corporate income tax. To sustain business operations, recycling enterprises have to resort to printing and issuing other vouchers for corporate income tax pre-tax deduction, leading to varying practices in different regions and different associated tax risks.

(I) Invoices for Scrap Material Purchases

In 2008, the "Notice on VAT Policies for Recyclable Resources" (Cai Shui [2008] No. 157) abolished the policy of "exempting VAT on the sale of scrap materials purchased by recycling units" and "allowing VAT general taxpayers to deduct input VAT based on the amount indicated on the ordinary invoices issued by recycling units, calculated at 10%." Sales of recyclable resources by units and individuals are subject to VAT according to the "Provisional Regulations on VAT" and its implementation rules, as well as relevant regulations from the Ministry of Finance and the State Administration of Taxation. However, individuals (excluding individual businesses) selling their used scrap items are exempt from VAT. General VAT taxpayers purchasing recyclable resources should deduct input VAT based on the specified tax deduction vouchers as per the VAT regulations and rules. The use of special invoices with the term "scrap materials" printed on them has ceased and is no longer eligible as a tax deduction voucher for input VAT. Consequently, in some regions, recycling businesses no longer use special invoices or purchase invoices for scrap material transactions. Instead, they need to obtain invoices issued by tax authorities for transactions with individual suppliers. Although some regions have abolished special invoices, they still allow the use of purchase invoices, enabling recycling enterprises to issue their own invoices as pre-tax deduction vouchers for corporate income tax. The VAT rate for purchase invoices related to scrap materials is zero.

In this operational model, recycling enterprises face considerable tax risks concerning invoice use and pre-tax deduction of corporate income tax. Firstly, considering the provisions of the "Provisional Regulations on VAT" and its implementation rules, purchasing goods from individual suppliers does not fall under the categories of exemption, reduction, or zero-tax rates (excluding sales of personally used scrap items), and therefore, zero-tax rate invoices cannot be issued. Secondly, currently, vouchers marked with the term "purchase" can only be used when taxpayers directly purchase agricultural products from agricultural producers. This does not apply to the scrap material recycling business. According to Article 22 of the "Invoice Management Measures," invoices that do not meet the requirements cannot be used as financial reimbursement vouchers, and any unit or individual has the right to refuse them. For recycling enterprises, self-issued invoices for scrap material purchases present a risk of not being eligible for pre-tax deduction for corporate income tax.

(II) Approved Printed Purchase Vouchers

In practice, considering the uniqueness of scrap material recycling operations, some tax authorities in certain regions permit recycling enterprises to conduct business using self-printed purchase vouchers. While these vouchers cannot be used for VAT input deduction, they are accepted for corporate income tax pre-tax deduction. For example, the "Notice on Strengthening Issues Related to Purchase Voucher Management" (Jing Guo Shui Zheng [2004] No. 8) in Tianjin categorizes purchase vouchers into two types. The first is the "Uniform Purchase Voucher of Tianjin Municipality" (referred to as the "Uniform Purchase Voucher"), which is applicable when taxpayers directly purchase agricultural products from producers and is used for VAT input deduction. The second is the "Purchase Voucher with the Unit's Name Approved by the State Taxation Bureau" (referred to as the "Self-Printed Purchase Voucher"), applicable when taxpayers issue vouchers for goods they purchase but cannot be used for VAT input deduction. Simultaneously, the "Notice on Issues Regarding the Printing and Use of Purchase Vouchers for Scrap Material Recycling in Tianjin Municipality" (Jing Guo Shui Zheng [2007] No. 4) stipulates that recycling units must use purchase vouchers with the unit's name printed on them, as per the requirements outlined in the aforementioned notice from the tax bureau.

These regulations are considered expedient measures to ensure the continuous development of the scrap material industry. They eliminate the administrative enforcement risks associated with tax authorities issuing invoices on behalf of individual suppliers. However, these regulations also provide a basis for recycling enterprises to use self-printed purchase vouchers for pre-tax deduction for corporate income tax. Nevertheless, these regulations still carry certain tax law risks. Firstly, scrap material purchase vouchers do not qualify for VAT input deduction. Recycling enterprises, by issuing their own purchase vouchers for transactions, cannot use them for VAT input deduction, requiring them to fully pay VAT on sales when conducting business. Secondly, with the implementation of Cai Shui [2008] No. 157, central-level regulations regarding scrap material purchase vouchers have gradually been abolished, and various regions have successively canceled these vouchers. In this situation, the instability of management regulations for scrap material purchase vouchers in specific regions has increased.

(III) Privately Printed Purchase Vouchers by Enterprises

In practice, some local tax authorities are unwilling to issue VAT invoices on behalf of scrap material recycling enterprises and have not released relevant regulations on scrap material purchase vouchers. In such regions, scrap material recycling enterprises, to carry out corporate income tax pre-tax deduction, are forced to use privately printed and issued purchase vouchers as accounting documents. Compared to the previous two scenarios, this type of voucher poses higher tax risks in terms of corporate income tax pre-tax deduction.

It is reported that, to promote the development of the local recycling industry and encourage recycling enterprises to conduct business, some provinces and cities have issued guidance documents allowing recycling enterprises to use self-made vouchers as deduction vouchers. However, this situation also raises concerns about the stability of local policies.

IV. Self-Issued Vouchers Should Not Affect the Pre-Tax Deduction of Genuine and Legal Expenditures for Corporate Income Tax

Looking at the relevant provisions of the corporate income tax law regarding pre-tax deductions, it can be summarized that invoices are just one type of "legitimate and effective voucher" for corporate income tax pre-tax deductions, and not the only one. While invoices are an important type of pre-tax deduction voucher, the absence of an invoice does not absolutely disallow deduction, and having an invoice does not guarantee deduction. The key is that the expenditures reflected in deduction vouchers must genuinely and actually occur. It is required that expenditures are genuinely incurred, and the supporting documents for the occurrence of expenditures are authentic and valid. In other words, compliant invoices are just one type of legitimate and effective pre-tax deduction voucher, but not the only legitimate and effective one. Legitimate and effective vouchers do not have uniqueness or exclusivity tied to invoices.

According to Article 9 of the "Implementation Regulations of the Enterprise Income Tax Law" regarding the calculation of taxable income for enterprises, based on the accrual system, income and expenses for the current period, regardless of whether the funds are received or paid, are treated as income and expenses for the current period. Article 8 states that reasonable expenditures related to the actual occurrence and acquisition of income, including costs, expenses, taxes, losses, and other expenditures, should be deducted when calculating the taxable income. From the purchase contracts, payment vouchers, and other business materials of recycling enterprises, it can be seen that the expenditures incurred for the purchase of goods are genuine and reasonable, even if the invoice from the supplier is not obtained, and the entry is made using self-issued vouchers. This still falls under the expenses for the current period. Deducting the actual expenses without invoices from the enterprise's taxable income for the year 2009 complies with the accrual system principle. The tax authorities' practice of disallowing the deduction of expenses without invoices is legally unfounded.

Alternatively, for cases where enterprises should have obtained but did not obtain invoices or other external vouchers, or obtained non-compliant invoices or vouchers, the "Administrative Measures for Pre-Tax Deduction Vouchers of Enterprise Income Tax" provide remedial measures:

1. If the expenditure is genuine and has actually occurred, the counterparty should be requested to issue, replace, or exchange invoices or other external vouchers before the end of the annual settlement and payment period.

2. During the process of issuing, replacing, or exchanging invoices or other external vouchers, if due to special reasons such as the counterparty's cancellation, withdrawal, legal revocation of a business license, or being determined by the tax authorities as a non-normal business entity, it is impossible to issue, replace, or exchange invoices or other external vouchers, the expenses can still be pre-tax deducted based on the following supporting documents confirming the authenticity of the expenditures:

(a) Proof of reasons for being unable to issue, replace, or exchange invoices or other external vouchers (including business deregistration, institutional withdrawal, inclusion in non-normal operating entities, bankruptcy announcements, etc.);(b) Relevant contracts or agreements for the business activities; (c) Payment vouchers for non-cash payments;(d) Proof of goods transportation;(e) Internal vouchers for goods receipt and issuance;(f) Enterprise accounting records and other documents.

Items (a) to (c) are mandatory supporting documents.

We believe that for the "special reasons" where invoices or other external vouchers cannot be issued, replaced, or exchanged, all situations in practice should be considered, not limited to the four reasons of the counterparty's "cancellation, withdrawal, legal revocation of a business license, or being determined by the tax authorities as a non-normal business entity." Factors such as the counterparty evading or being unresponsive, the confiscation of the counterparty's invoices, the inability of the counterparty to operate due to involvement in tax-related criminal cases, etc., should also be taken into account.

V. Scrap Material Recycling Enterprises Should Improve Business Operation Processes and Retain Transaction Materials for Reference

The issue of chaotic use of deduction vouchers in the scrap material recycling industry is closely related to the characteristics of its business operations and the country's tax policies. To address this issue, it is necessary for the country to further adjust and improve relevant tax policies. Additionally, scrap material recycling enterprises need to strengthen management and responses from both internal and external perspectives, especially in the current situation of unstable tax policies.

Therefore, regarding the current issues with deduction vouchers in scrap material recycling business operations, Huashui Lawyers recommend the following. Firstly, recycling enterprises should conduct a tax risk assessment and management based on their current business models, tax processing, local tax policies, etc. They should promptly identify and adjust non-compliant and irregular operations, improve business materials, and guard against potential tax risks. Secondly, when conducting business operations, recycling enterprises should obtain invoices issued by tax authorities as much as possible, especially VAT special invoices. Issuing invoices is the responsibility of tax authorities, and they should process applications for issuing invoices that comply with tax law provisions and provide relevant supporting materials. Thirdly, in regions that have issued regulations on the management of purchase vouchers, allowing recycling enterprises to issue their own scrap material purchase vouchers, enterprises should follow the regulations and use the purchase vouchers accordingly. At the same time, recycling enterprises should closely monitor changes in central and local tax policies to avoid tax risks arising from policy instability. Fourthly, for enterprises that privately print and issue purchase vouchers, they face greater tax risks. Therefore, during business operations, these enterprises should improve transaction models, optimize transaction chains, and complete transaction materials. For example, they should truthfully, accurately, and item by item record the purchase, sale, and inventory of scrap materials, attach materials such as weigh bills, acceptance documents, and payment vouchers to accounting vouchers for purchase and sale transactions, and strive to improve pre-tax deductions for corporate income tax from a substantive perspective, reducing the risk of tax adjustments.