Iron and steel industry is an important pillar industry of China's national economy. With the tightening of tax control, tax-related risks will bring greater negative impact on the development of iron and steel enterprises. In order to realize the sustainability of iron and steel enterprises' operation, it is necessary to strengthen the control of tax-related risks of iron and steel enterprises' own procurement. The raw materials of steel enterprises are mainly iron ore and steel scrap, of which steel scrap is a renewable resource. Compared with the production of steel from iron ore, the production of steel from steel scrap can effectively save iron ore, coke and raw coal, and at the same time, reduce carbon dioxide and solid waste emissions. However, the large tax risk in the procurement of steel scrap has become a bottleneck affecting the large-scale use of steel scrap by steel enterprises. In order to help steel enterprises to enhance their risk prevention awareness and improve their ability to deal with tax-related risks, this paper summarizes the four tax-related legal risks in the procurement process in light of the actual situation of procurement business of steel enterprises for reference.

I. Risk of reduced credits due to changes in tax rates

Among the various existing taxes, VAT accounts for more than half of the tax burden of steel enterprises. Reducing the VAT rate will lower the VAT tax burden of the steel industry. The tax burden of steel enterprises has been lowered twice since my country's reform, the first time is from May 1, 2018, the VAT rate of manufacturing and other industries will be reduced from 17% to 16%, and the second time is from April 1, 2019, to deepen the reform of VAT, the current 16% tax rate of manufacturing and other industries will be reduced to 13%. on September 22, 2020, our country committed at the United Nations General Assembly that "China will strive to achieve carbon peaking by 2030 and carbon neutrality by 2060." In order to reach the goal of carbon peaking and carbon neutrality, there may be room for continued VAT reductions in the steel industry.

Lowering the VAT rate will reduce the cash flow pressure on steel companies, which is good news for steel companies. However, steel companies should also pay attention to the tax-related risks arising from the VAT rate adjustment. In the past, during the stage of VAT rate adjustment, there were a large number of cases in which buyers and sellers disputed the VAT invoicing rate and sued to the court.

For example, in the case of (2020) 冀07民终936号, X Iron and Steel Company and T Steel Pipe Tower Company signed a steel purchase and sale contract, and the payment time column of the contract agreed that "the full amount of payment in advance before the delivery of the goods, lifting fees and transportation and miscellaneous charges". After the contract was signed, the parties continued to fulfill the contract by making periodic payments and delivering and invoicing the goods. The parties continued to perform the contract even after the contract overstayed, but T Steel Pipe Towers never fully paid for the goods until after the VAT rate was reduced on April 1, 2019, when T Steel Pipe Towers fully paid for the goods, and X Steel Co. issued 13% VAT invoices for the portion of the payment made prior to April 1 together with the portion of the payment made after April 1. T Pipe & Tower requested Steel X to issue VAT invoices at the rate of 16% for payments made before April 1, and to reduce the contract price by the same percentage as the tax reduction for steel purchased after April 1.

After hearing the case, the court held that the contract belonged to the sales mode of "payment in advance", and according to the provisions of the VAT Law, the time of incurring the VAT obligation for the sale of goods by payment in advance is the day when the goods are issued, so it did not support the first request of T Pipe Tower. Regarding the second request, the court held that T Steel Pipe Tower Company's delayed performance, the contract had exceeded the time limit, and the transaction price of the steel purchased after April 1 belonged to the agreement was unclear, and recognized the way of adopting the third party's price as claimed by X Steel Company, so it did not support T Steel Pipe Tower Company's second request.

Combined with the case, we suggest that steel companies should pay attention to the following aspects of risk prevention. First, steel enterprises should have an in-depth understanding of the VAT policy, for example, they should understand that the time of occurrence of tax obligations is different between the direct collection mode and the advance payment mode. Secondly, steel enterprises should pay attention to the changes of tax policy in time and do a good job of risk prevention of tax policy changes. Enterprises should be possible across the tax policy changes in the period of the transaction, the contract to prepare for risk prevention in advance, timely and counterparty communication contract price adjustment matters. Even if the tax policy has not yet changed, steel enterprises can also be in the contract for the tax situation to make a prior agreement, so that once the policy changes, the enterprise will be able to grasp a more favorable situation, to avoid losses.

II. Risk of failure to obtain invoices due to failure to agree on invoicing

Purchasing enterprises ask selling enterprises to issue VAT invoices, on the one hand, due to legal requirements, and on the other hand, purchasing enterprises can use them for VAT input deduction to save costs. However, in practice, different enterprises have different degrees of business standardization, and sometimes the purchaser may still encounter the situation that the seller does not issue VAT invoices. Especially when there is no agreement on this matter in the contract, the two parties are more likely to have disputes and even resort to the court.

In cases involving non-agreement on invoicing, the courts have ruled both in favor of the seller and in favor of the buyer, with three different outcomes.

The first decision is to fully support the invoicing request. For example, in the case of (2020) Lu 07 Civil Final No. 2592, the court pointed out that although the contract signed by the two parties did not agree to issue invoices, but according to the relevant provisions of the law, the issuance of invoices is an ancillary obligation, and the purchaser's request for the issuance of VAT invoices has a factual and legal basis.

The second pattern is that although the request is supported, it is not considered to be within the scope of the court's jurisdiction. For example, in the case of (2020) Beijing 02 civil final 5763, the court held that, according to the relevant provisions of the "Tax Collection and Management Law", the seller should issue the corresponding invoice, but because of the invoice and tax matters, belongs to the state tax authorities of the administrative supervision, does not belong to the scope of the people's court, so it does not support the litigation request.

The third type is not to support the request at all, that there is no agreement that the corresponding invoice of value-added tax should not be issued, for example, in the case of (2018) E0102 Minchu No. 358, the court held that, because the two sides did not agree to issue value-added tax invoices when signing the contract, and the loss was not proved by submitting evidence, so it is not supported.

Regarding the invoicing matters, China's Tax Administration Law and Provisional Regulations on Value-added Tax both stipulate that the seller has the legal obligation to issue invoices. Therefore, even if the contract does not agree on invoicing matters, the seller should still issue invoices. In addition, Article 599 of the Civil Code stipulates that the seller shall deliver to the buyer, in accordance with the agreement or the custom of the transaction, relevant documents and information other than the documents for the extraction of the subject matter. Since the Civil Code has expressly provided for the arrangement of documents, the court should support the buyer's request on this basis and should not refuse to deal with it on the grounds of the administrative supervision of the State tax authorities.

Therefore, steel companies should have a clear agreement at the time of the transaction on matters involving VAT invoices, including whether to issue VAT invoices and which party is responsible for the corresponding taxes. Considering the first risk point mentioned in this article, arrangements should also be agreed upon in the event of a change in the VAT rate in order to prevent disputes from arising.

III. Risk that the procurement vouchers cannot be used for pre-company income tax expense

The raw materials of steel enterprises are mainly iron ore and steel scrap. There are various sources of steel scrap, the more formal channel is to purchase through large-scale production and processing enterprises, usually this channel can obtain VAT input invoices. However, this type of large-scale enterprises in the production process is not enough scrap, more scrap from social life, through the retailer, individual suppliers to pool supply to the steel enterprise. In the latter case, steel companies are usually unable to obtain sufficient VAT invoices. This brings certain risks to the payment of enterprise income tax by steel enterprises.

Before the introduction of the Administrative Measures for Pre-tax Deduction Vouchers for Enterprise Income Tax, there is no clear provision in our law as to whether the pre-tax deduction vouchers for enterprise income tax can be used as non-invoiced vouchers, such as collection vouchers. However, the Enterprise Income Tax Law stipulates that all reasonable expenditures actually incurred by an enterprise in connection with the acquisition of income can be deducted before tax, and there is no restriction on the vouchers. In practice, the tax authorities often require invoices to be used as pre-tax deduction vouchers when collecting enterprise income tax. The iron and steel industry has few upstream invoices, and a large number of costs cannot be deducted before tax, which creates a heavy tax burden. After the introduction of the Measures for the Administration of Pre-tax Deduction Vouchers for Enterprise Income Tax, some non-invoiced vouchers can also be used for deduction, which are called internal vouchers, mainly referring to the original accounting vouchers produced by enterprises for the purpose of accounting for costs, expenses, losses and other expenditures. Specifically, if the counterparty is not required by law to apply for tax registration of the unit or engaged in a small amount of sporadic business individuals, its expenditures can be invoices issued by the tax authorities or receipt vouchers and internal vouchers as a pre-tax deduction vouchers, receipt vouchers should be set out in the name of the recipient unit, personal name and identity card number, the expenditure items, the amount of money received and other relevant information.

However, in practice, these internal vouchers are not recognized by the tax authorities due to irregularities and other reasons. Therefore, steel enterprises should fully understand the provisions of the tax law, especially the accounting laws and regulations on the filling and use of internal vouchers, and do a good job in standardizing internal vouchers to pay attention to and prevent such risks.

IV. the upstream enterprises suspected of false opening is implicated in the administrative and criminal risks

Iron and steel enterprises need a large number of raw materials of steel scrap, and most of the sources of raw materials of steel scrap are social life, very scattered, and usually have to be assembled through small merchants. These small traders are unable to issue special VAT invoices, while large steel companies need special VAT invoices for input credits. As a result, steel companies have developed special trading structures to deal with both the fragmented raw material source market and the invoicing problem. That is, small traders in the name of recycling enterprises and steel enterprises for transactions, while in the transportation is agreed to small traders to deliver scrap directly to the steel enterprises.

In this mode of transaction, the source of scrap is very often not held by the recycling enterprise, but the small traders directly contact with the steel enterprises that use the material. The role of upstream recycling enterprises in the supply of raw materials is relatively weak, resulting in the tax authorities will consider recycling enterprises as "invoicing enterprises" only, and do not believe that there is a real transaction. On the other hand, the main risk for recycling companies is that they issue VAT invoices to downstream steel companies, but are unable to obtain invoices from retailers and small merchants, so some may engage in irregular operations, such as failing to pay the full amount of tax on sales invoices, or using surplus invoices and other irregular invoices for deduction on input invoices. Once the recycling enterprises are audited by the tax authorities due to proven false invoicing, doubtful business operations or missing links, the downstream iron and steel enterprises are exposed to the risk of reversal of VAT input tax credits.

Specifically, when an upstream enterprise is audited by the tax authorities, the downstream steel enterprise is usually required to provide relevant materials of "three flows" (i.e. logistics, capital flow and ticket flow) for the purpose of co-audit. If there is the so-called separation of invoices and goods and the return of funds in the co-investigation, it is easy to be recognized by the tax authorities as false invoicing and face the risk of being transferred to the public security authorities for investigation of criminal cases of false invoicing. On the other hand, even if the steel enterprises are not recognized as malicious false VAT invoices but are recognized as bona fide acquisitions, they will still be required to carry out VAT input tax transfer. In practice, recycling enterprises are usually unable to bear the back tax and corresponding penalties, and downstream steel enterprises are more likely to be impacted.

Therefore, the following suggestions are made for steel enterprises to prevent losses due to the involvement of upstream enterprises in false VAT invoicing. First, steel enterprises should do a good job of tax compliance, improve the level of business tax compliance, should fully understand the national tax laws and regulations and tax policies, standardize the business process, complete the transaction materials, and ensure that the business process is traceable. Secondly, iron and steel enterprises should strengthen their tax professional capacity building and enhance the ability to deal with tax-related legal issues professionally. Once involved in tax-related cases, they should actively cooperate with the tax authorities and take timely countermeasures, and if necessary, they can also seek the assistance of professional tax lawyers.