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Inflated costs and expenses to pay back taxes and penalties of 36 million: a case to see the four major tax risks of real estate and development enterprises

Dec. 13, 2023, 5:49 p.m.
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Recently, a local tax bureau in Fujian Province issued a notice to characterize the tax evasion and impose a fine of more than RMB 20 million on a local real estate enterprise for inflating operating costs and sales expenses and underpaying enterprise income tax and land value-added tax. This case is typical and reflects four types of tax risks common to real estate enterprises, i.e., business authenticity risk, cost accounting risk, cost deduction risk and account management risk. This paper intends to combine the illegal facts and characteristics of the enterprises involved in this case to reveal the relevant tax risks of housing and development enterprises.

Ⅰ. Introduction of the case

Company A is a real estate development enterprise, which develops the project of Community A. Company B is an affiliated enterprise of Company A, which is mainly engaged in building construction services. company A signed a construction contract with company B in July 2012, January 2013, and September 2015, respectively, and agreed that company B would provide construction services for the project of Community A, with a total amount of 142 million yuan in the contract, and obtained the total amount of construction invoices of business tax issued by company B, which amounted to 132 million yuan. 132 million yuan.Between 2010 and 2019, Company C provided event planning or consulting services to Company A, and Company A paid and actually declared and expensed sales expenses of 11.77 million yuan. The tax authorities determined that during the period from 2010 to 2019, Company A had the following illegal facts:

(Ⅰ) Inflated development costs

Company A, in order to deduct pre-tax dividends to shareholders, management expenses, financial expenses and other items that cannot be charged before tax, through the fictitious business with Company B and the return of funds, allowed Company B to issue invoices for itself that did not correspond to the actual operating situation, and falsely inflated the project development costs by 37.15 million yuan, and used to charge costs.

1. Combined with electronic data, bank water, in 2012, Company A transferred 14.62 million yuan to Company B. In 2013, Company A transferred 21.27 million yuan to Company B. After deducting the handling fee, Company B flowed back to Company A through Jiang Mou and other personal accounts, totaling 37.15 million yuan.

2. Combined with Company A's internal accounts, Company A's internal accounts recorded that as of 2018, Company A paid Company B a total of 95.47 million yuan for construction and installation works, which was able to correspond to the actual settlement amount and differed from the amount of the invoice obtained by 37.15 million yuan.

(Ⅱ) Inflated sales expenses

Company A inflated sales expenses by 5.84 million yuan by fictionalizing the business with Company C and the return of funds.

1. Combined with the terms of the contract, Company A and Company C agreed to extract commission according to the proportion of sales revenue, but Company A actually paid the amount of commission in accordance with the fixed amount, and in 2017 Company A was in the tail end of sales, but still signed four commission contracts with Company C totaling 2.99 million yuan, which is not in line with common sense.

2. Combined with the payment of funds and bank water, Company A and Company C amount of money to and from the payee are related to Company A, and there is a phenomenon of capital flow back.

3. Combined with the invoice obtaining situation, during the period from 2016 to 2019, a total of 2.67 million yuan of marketing planning fees or promotional activities between Company A and Company C were paid in cash or entrusted to receive and no receipts.

4. Combined with the situation of Company A's internal accounts, its total sales expenses from 2010 to 2019 amounted to 5.92 million yuan, which was the same as the data presented in the electronic data and other data, and differed by 5.84 million yuan from the 11.77 million yuan expensed.

(Ⅲ) Failure to apportion costs in accordance with the law

Company A did not differentiate between the land cost and other costs of the project of Subdivision A, and did not apportion the land cost and common cost of the project according to the saleable area, resulting in inaccurate calculation of taxable income.

(Ⅳ) Inspection results of the tax authorities and proposed penalties

1. It was determined that Company A had underaccrued its taxable income from 2011 to 2019 by means of false contracts, payment of handling fees for fund repatriation, internal and external accounts, etc., and after making cost-sharing adjustments in accordance with the law, it was recognized that it had underpaid enterprise income tax by RMB10,830,000 in aggregate.

2. As Company A had already carried out land value-added tax clearance in 2017 and the clearance had been audited by the competent tax authorities, the tax authorities adjusted the land value-added tax declaration for Company A's inflated development cost of RMB37.15 million and recognized that it had underpaid land value-added tax by RMB3.95 million.

3. It was determined that the behavior of Company A's underpayment of enterprise income tax and land value-added tax totaling 14.78 million yuan during the period from 2010 to 2019 by inflating operating costs and sales expenses was tax evasion, and it was proposed to impose a fine of 22.17 million yuan on its underpayment of tax.

Ⅱ. Business authenticity risk: double liability for tax evasion and false opening

In practice, the tax authorities' determination of business authenticity mainly centers on the checking of goods flow, capital flow, invoice flow and contract flow. Compared with the real business, the fictitious business in the "four flows" there are certain flaws. If the real estate development enterprise increases the cost and deducts items without real business, and thus pays less tax, it constitutes tax evasion, and firstly, it will trigger the risk of adjusting the enterprise income tax and land value-added tax, and it needs to make up for the underpayment of tax, add late payment fees, and bear a fine of 0.5 times to 5 times. If the vouchers of inflated cost are VAT special invoices, the offsetting input tax amount also belongs to the category of underpayment of tax, and it is necessary to make input transfer, make up for the tax, late payment fees and impose a fine. At the same time, if the amount of false invoicing is more than 100,000 yuan, or the amount of loss of national tax is more than 50,000 yuan, it may be transferred to the judicial investigation of the criminal responsibility for the crime of false invoicing of VAT special invoices. The inflated cost is mainly realized through fictitious contract and fund return.

(Ⅰ) Fictitious Contract

At present, the common forms of fictitious contracts mainly include three kinds: first, the unit price of the project cost agreed with the affiliated company is obviously high; second, the construction of the project which has been included in the general contract is signed separately and repeatedly in the false contract; and third, the cost of the project is increased through the fictitious supplemental agreement.

In this case, Company A's fictitious increase in the cost of the project and sales expenses were taken by way of signing supplemental agreements. The reason why the above business is recognized as fictitious business is mainly due to two reasons: from the time, Company A and Company B's construction supplement agreement is signed after the completion of the corresponding project works, Company A and Company C's part of the commission agreement is also signed after the project has entered into the final stage of sales, obviously does not have the necessity and reasonableness. From the content, Company A to pay commission to Company C payment method is inconsistent with its contract, and with the practice of real estate industry commission payment is inconsistent with the other evidence materials to support the authenticity of the business.

(Ⅱ) Return of funds

Funds flow back refers to the funds received and paid through the public account between enterprises, through the private account and back to the paying party's private account. The existence of capital reflux is not necessarily false opening, no capital reflux is not to exclude the suspicion of false opening, but capital reflux is always recognized as the authenticity of the business, to grasp the risk of false opening of one of the important hand. According to Article 54 (6) of the Tax Collection and Management Law, the tax authorities have the right to inquire about the bank deposit accounts of taxpayers. With the tax big data greatly improving the tax supervision ability, the silver tax interoperability also provides a reliable way for the tax authorities to discover the tax violations, and it is very easy to trigger the tax warning if the taxpayer's funds exist in suspicious circumstances.

In this case, Company A signed a contract with Company B for fictitious business, transferring money to Company B through Company A's public account, and then Company B paid the money to the payee's private account which had a related relationship with Company A through a private account, realizing the circulation of funds outside the body. In the process of capital circulation, Company B deducts the corresponding handling fees and makes false invoices to Company A. There is no real agreement between Company A and Company B in part of the business, and the account is only for the purpose of paying handling fees and making invoices.

Ⅲ. Cost accounting risk: tax adjustment for failure to differentiate costs in accordance with the law

According to the "Measures for Handling Enterprise Income Tax of Real Estate Development and Operation Business" (Guo Shui Fa [2009] No. 31), the enterprise must distinguish between the period cost and taxable cost of development products, taxable cost of sold development products and taxable cost of unsold development products according to the regulations for the accounting and deduction of costs and expenses. For the sold development products, their taxable costs should be recognized according to the saleable area and the unit project cost of saleable area that has been realized for sale in the current period, and can be deducted in the current period according to the regulations.

In this case, Company A failed to differentiate the cost of its Project A, contrary to the above rules of tax treatment of cost deduction, resulting in the incorrect identification of the time of cost incurrence on the basis of inaccurate cost charge, which made the relevant cost fail to be carried forward in the year in which the sales were realized, and centrally carried forward in the subsequent years, resulting in the cost accounting in contravention of the principle of income-cost matching, and the tax authorities had the right to differentiate between the cost of land of the project and the cost of The tax authorities have the right to differentiate between the land cost and other costs of the project and make tax adjustments to the costs carried forward in each period of the project.

Ⅳ. Risks of cost deduction: illegal deduction and non-deduction

(Ⅰ) Illegal deduction of non-deductible items

According to the Enterprise Income Tax Law and the Regulations for the Implementation of the Enterprise Income Tax Law, dividends and bonuses paid to investors, late payment of taxes, fines, penalties and losses of confiscated property, ineligible donations and sponsorships, unapproved reserve expenditures, management fees paid between enterprises, rents and royalties paid between business establishments of enterprises, interest paid between business establishments of non-banking enterprises, and operating expenses exceeding the limit shall not be deducted. Interest paid, business entertainment expenses in excess of the limit, advertising and business promotion expenses, and other expenses not related to the acquisition of income are not deductible. If the enterprise converts the above expenditures into some deductible items to be deducted in violation of the law, it should not only make tax adjustments, but also may constitute tax evasion by overstating the costs in the books.

In this case, Company A deducted shareholders' dividends and Company B's management fee before tax, which violated the above regulations. Firstly, the shareholders' dividend is paid by the company's after-tax profit, which should not be deducted before tax; secondly, the management fee paid by Company A to Company B is for the promotion of business development, which does not belong to the expenditure directly related to its income, and should not be deducted before tax; Company A's behavior of deducting the above expenditures in violation of the law belongs to the act of tax evasion, and should be adjusted by tax.

(Ⅱ) Deduction of non-invoiced expenditure items

According to Article 5 of the Measures for the Administration of Pre-tax Deduction Vouchers for Enterprise Income Tax, enterprises shall obtain pre-tax deduction vouchers for their expenditures as the basis for pre-tax deduction. For VAT taxable items, in principle, invoices are used as pre-tax deduction vouchers. In respect of real estate enterprises, enterprises shall not include in the above costs those for which they should obtain but have not obtained legal certificates when summarizing the taxable costs or deduction items. According to the Implementing Rules of the Provisional Regulations on Land Value-added Tax and the Regulations on Administration of Land Value-added Tax Settlement, the deduction of land value-added tax for the amount paid for the acquisition of land use rights, real estate development costs, finance costs and taxes related to the transfer of real estate also requires the provision of legal and valid certificates; if legal and valid certificates cannot be provided, the deduction shall not be made or the deduction shall not be made according to the actual facts. Although the land value-added tax regulations do not uniformly require invoices to be used as the confirmation vouchers for deductions, in the local levy management practice, invoices are used as the basis for confirmation for most deductions.

In this case, since July 2016, Company A paid huge amount of sales expenses to Company C by way of cash payment, etc., neither invoices nor other documents such as receipts, etc., which could prove that the expenses had really occurred, and there was a huge risk of misrepresentation of costs for Company A to deduct the aforesaid expenses before tax. In respect of land value-added tax, the interest expenses paid by Company A can be deducted only if the financial institutions can provide proofs. If the relevant interest arises from the borrowings of the related enterprises, it can only be deducted in accordance with the statutory proportion, which may result in the risk of the deduction amount being lower than the actual expenses.

Ⅴ. Accounts management risk: the hidden danger of tax evasion through off-the-books operation

The "two sets of accounts" are internal and external accounts. The internal accounts are provided internally to reflect the operation of the enterprise in a relatively real way, while the external accounts are provided externally for tax filing and external inspection. With the full digitization of electronic invoices to formally achieve full coverage of the pilot, tax supervision will further reflect the all-round, all-business, all-process, all-intelligent accurate supervision, to play the advantage of "tax by numbers". In the future, if you want to evade tax through two sets of accounts, there is undoubtedly a huge tax risk. Two sets of accounts, i.e., the existence of taxpayers operating outside the accounts, the existence of taxpayers in the external accounts of more expenditure, less income, may be characterized as tax evasion, not only need to pay back taxes, late payment fees, but also will be liable for non-payment or underpayment of taxes 0.5 times more than 5 times the fine, and even be held criminally liable for the crime of tax evasion.

In this case, Company A underpaid the enterprise income tax and land value-added tax by inflating the cost and sales expenses on the external accounts, which has been characterized and punished for tax evasion, and if Company A subsequently fails to pay the tax, late fees and fines on time, it may be transferred to the public security authorities to pursue the criminal liability for tax evasion. It should be emphasized that there are a number of competing tax violations in this case, i.e., the same act may constitute off-the-books operation, inflated costs, and illegal deductions at the same time. For the competing violations, according to the principle of "no two penalties for one thing", only one administrative penalty can be imposed.

Ⅵ. Conclusion: Improvement of Audit Accuracy, Taxpayers Should Pay Attention to Tax Compliance

In this case, the tax authorities discovered Company A's tax violations of inflating costs and listing sales expenses by accessing business information such as contracts and settlement statements, electronic data and financial information such as bank flows, and combining them with the tax-related information they already had. For example, Company A and Company B's construction of the supplementary agreement agreed cost is high, while the settlement statement, the amount recorded in the internal account is low, found that Company A's engineering costs are not listed in the abnormal situation; and combined with electronic data and bank water, found that Company A and Company B's funds receipt and payment of anomalies between the funds, there is a return flow of funds to strengthen the fact that it does not have a real transaction, the fact that the cost of inflated found.

It can be seen that, through the contradiction between the evidence, the tax authorities can find the abnormal situation of the enterprise's business, and through the evidence that can be mutually corroborated, the tax authorities can restore the real transaction, and make a determination on the nature and extent of tax violations. For taxpayers, they should be aware of the accuracy of the current tax supervision, as well as the strength of the tax authorities to investigate and deal with false tax evasion, and pay attention to the prior prevention of tax risks. Taxpayers should fully record the process of conducting business, properly retain contracts, bookkeeping vouchers, etc., to form mutually supportive business information. If self-examination reveals that there are risks in the past business, taxpayers should actively seek professional help to avoid further expansion of tax risks.

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Copyright@2019 Aequity.ALL rights reserved京CP备17073992号-1