The tax-related issue of connected transactions has always been a complex issue, and its complexity is reflected in the lack of clarity in the national regulations on the one hand, which is prone to produce different understandings in practice and lead to tax-related disputes; on the other hand, it is reflected in the tax enforcement process of the local tax authorities, which is inconsistent with the caliber of the implementation of the localities. According to Article 36 of the Law on Administration of Tax Collection, the business transactions between an enterprise or a foreign enterprise's organization or place established in China that is engaged in production or operation and its affiliates shall be charged or paid in accordance with the business transactions between independent enterprises; and if the tax authorities have the right to make reasonable adjustments if the business transactions between independent enterprises are not charged or paid in accordance with the business transactions between independent enterprises and the taxable income or income is reduced, the tax authorities shall have the right to make reasonable adjustments. The tax authorities have the right to make reasonable adjustments. Based on the complex transaction situation between related enterprises, whether and how to adjust has become a matter of great concern to enterprises. In this paper, we will introduce a real case to analyze the tax adjustment of related enterprise transactions.

I. Brief description of the case

Enterprise A is located in City Y, one of the six largest anthracite coal production bases in China, and in order to expand its sales channels, Enterprise A decided to set up Company B wholly owned by it in City H to sell anthracite coal for it. Company A and Company B signed the Anthracite Coal Sales Contract on March 28, 2020, which stipulates that the execution period is from April 1, 2020 to March 31, 2022, and the settlement price of anthracite coal is executed in accordance with RMB 1,035/ton (price execution basis: from September 12, 2019 to the date of contract signing) March 28, 2020, the market price of anthracite coal in City Y has been stable at RMB1035/tonne, and the market price of anthracite coal in City Y has not fluctuated much in the past three years).In 2021, affected by the international situation and national policies and other factors, the market price of anthracite coal showed high-frequency wide fluctuations, and the fluctuation pattern was far different from that of the usual years, and the highest point even reached the peak of RMB3,000/tonne, as the Due to the substantial increase in market price, the settlement price of A and B was obviously low in comparison, and the tax authorities of Y city required Company A to pay VAT, enterprise income tax and other taxes totaling more than 300 million yuan.

II. Tax-related risks faced in this case

(I) Tax adjustment involves a number of taxes such as enterprise income tax and value-added tax

According to the Enterprise Income Tax Law and its implementing regulations, the Tax Collection and Administration Law and its implementing rules on special tax adjustments, the unreasonable price and profit transfer of internal transactions between related enterprises will bring tax risks of tax adjustment to enterprises. In this case, the tax authority of Y city, i.e., on the ground that the settlement price of A and B is obviously low compared with the market price, requires Company A to make up for the value-added tax, enterprise income tax, as well as the corresponding urban maintenance and construction tax, education surcharge, local education surcharge and other taxes and fees. In addition, if the tax authority of Y city makes tax adjustments to Company A and requires it to make up for the tax, it shall add interest at the same time. Then Enterprise A faces the economic risk of paying huge amount of back tax and interest.

(II) Risk of tax inspection for all tax types

When tax authorities carry out tax inspections, they usually set a time period for inspection and make it clear that all tax-related matters within the time frame will be inspected. And because coal mining enterprises often have irregular land occupation, building, water use and other phenomena in the course of operation, once the tax authorities carry out all-round tax inspection, or trigger a large-scale recovery of multiple taxes, mainly involving cultivated land occupation tax, urban land use tax, real estate tax, resource tax, etc. If the enterprise exists in the situation of tax evasion and avoidance, then the tax inspection does not collect the limitation of the recovery period, and there is no shortage of cases in practice in which the operations of the coal enterprises many years ago have been inspection cases. Therefore, when a taxpayer receives the Notice of Tax Inspection, it should raise its sensitivity, strengthen its awareness of risk prevention and control, and actively communicate with the tax authorities to clarify the scope of tax inspection and the types of tax (or specific matters) involved, so that it can actively prepare the required information during the inspection by the tax authorities, and at the same time carry out self-examination and self-correction of possible problems, and form a written explanation of the disputed matters and submit it to the tax authorities, so as to reduce the risk of tax-related problems. Tax-related risks.

III. In principle, no adjustment will be made for domestic connected transactions with the same actual tax burden.

In order to prevent the frequent occupancy of funds or even gratuitous occupancy between certain associated enterprises, the perennial non-settlement of funds for associated transactions, the long-term accounting of relevant payments in current accounts, transfer of profits and other circumstances to achieve the behavior of paying less tax or no tax, and to avoid the loss of national tax, the State Administration of Taxation issued the Notice on the Measures for Implementation of Special Tax Adjustments (for Trial Implementation) (Guoshifa 〔2009〕 No. 2) (hereinafter referred to as the "the Measures"). Article 30 of the Measures stipulates that, in principle, no transfer pricing investigations or adjustments will be made for transactions between domestic related parties with the same effective tax liability, as long as such transactions do not directly or indirectly lead to a reduction in the country's overall tax revenue. This indicates that China's tax authorities mainly target cross-border related transactions and other tax evasion behaviors to make special tax adjustments. If the transaction is purely domestic, in the case of the same actual tax liability, no tax adjustment is generally made as the tax liabilities of the upstream and downstream parties are able to complement each other, thus not affecting the realization of the national tax revenue from an overall perspective.The General Anti-Avoidance Management Measures (for Trial Implementation) (SAT Decree No. 32) issued by the State Administration of Taxation (SAT) in 2014 also emphasizes that "arrangements unrelated to cross-border The Administrative Measures (for Trial Implementation) issued by the SAT in 2014 (SAT Decree No. 32) also emphasizes that "arrangements unrelated to cross-border transactions or payments" are not applicable.

In short, in the case where the actual tax burden of the related parties is the same, since the transaction is purely a domestic transaction, it will not lead to the loss of national tax revenue as a whole, and in principle, no tax adjustment will be made. In this case, Company B, as a wholly-owned subsidiary set up by Company A, although both of them are related enterprises and the purchase and sale transactions between them are related transactions, there is no difference in the tax rate applicable to Company A and B. In this case, even if Company A's sales price is low, resulting in less payment of enterprise income tax, Company B pays more enterprise income tax due to less deduction of cost when calculating its cost deduction, so that there is no loss of tax revenue for the country. At the level of value-added tax (VAT), since VAT is a turnover tax and only taxes the value-added portion, the value-added of sales at the level of Company A and Company B is certain if Company B sells coal at a certain price to the outside world, and there is no reduction in the VAT paid by Company A and Company B, and there is no loss of VAT for the state. Taking a step back, if Party A increases its revenue and pays back the VAT and EIT, accordingly, Party B should determine the cost deduction for that revenue increased by Company A and reduce the VAT and EIT accordingly. The result of one increase and one decrease is that there is no change in the overall tax burden of the state and no loss of state tax.

IV. Requiring Enterprise A to pay back the tax will lead to double taxation.

In this case, from the business performance situation between enterprise A and B, the goods between the two have been delivered, the payment has been paid in full, the invoice has been issued, and the financial and tax matters involved in the coal transaction between A and B have been processed, and the business has been fully performed. Therefore, in this case, if Company A adjusts the sales revenue and pays back the enterprise income tax and value-added tax, but for that part of the revenue adjusted by Company A, since the downstream Company B has already paid the enterprise income tax and value-added tax, then it faces the problem of double taxation at this time, which is not fair to Company A and B.

The important function of taxation is to regulate income distribution and improve social equity. However, the existence of double taxation makes the tax burden of taxpayers increase, which not only violates the principle of tax fairness, but also harms the interests of taxpayers, and creates additional loss of administrative efficiency-i.e., additional burden of taxation. In this case, Company B belongs to the jurisdiction of the tax authority of City H. In the case that Company B's payment of value-added tax, enterprise income tax and other taxes has been fully credited to the state treasury, because Company A paid back the tax payment corresponding to the adjusted income, Company B has the right to apply for a refund of the excess tax it has repeatedly paid based on the provisions of the Taxation Levy and Administration Law, a series of measures by which Company A paid back the tax and Company B applied for a refund of the tax have not only failed to The series of measures taken by Company A to pay back the tax and Company B to apply for tax refund not only did not actually increase the tax revenue, but also increased the administrative cost of the tax authorities in the places where Company A and Company B were located, which resulted in the impairment of the administrative efficiency and increased the burden of the tax authorities and taxpayers of both places.

V. Summary

To summarize, coal enterprises in their daily operations, in addition to business, but also focus on tax-related risks in the production and operation of enterprises, timely tracking of newly introduced tax policies, improve the compliance management system, the establishment of internal compliance department, so that tax compliance throughout the daily operation of the enterprise, so that involves changes in market pricing, invoicing data, upstream and downstream creditworthiness of major transactions such as tax compliance review. At the same time, we regularly carry out training on tax-related risk prevention, strengthen the awareness of operational compliance, and find timely solutions to prevent the occurrence of tax-related risks.