Recently, a metallurgical steel enterprise obtaining confirmed false VAT invoices for tax adjustment dispute administrative reconsideration case handled by Huashui was concluded, and the respondent, Inspection Bureau of a Municipal Taxation Bureau, changed the tax treatment decision under reconsideration in the reconsideration procedure, and no longer adjusted the enterprise's income tax payment, and the enterprise effectively avoided the loss of back payment of income tax and late payment fee totaling more than RMB 11 million. The core dispute and resolution of this case are briefly shared with a view to providing useful reference for enterprises with similar problems in resolving tax-related disputes

I. Case Summary

Company A is a steel smelting enterprise located in City X. The business scope of the enterprise includes smelting, manufacturing and sales of special steel. The main production process is to smelt stainless steel scrap, stainless steel scrap and steel sand to produce steel billets, which are sold to downstream enterprises for further processing into stainless steel and other products. Due to the company's own strength, raw material procurement scale is huge, many individual steel scrap recycling hope and company A to carry out cooperation, individual Zhao is one of the representatives. Zhao acquires scrap from all over the country, there are sufficient sources of goods, but because it can not issue VAT invoices, can not reach the supplier threshold set by the A company. In order to facilitate business cooperation, Zhao contacted Company B, a scrap steel recycling and operating company located in City Z. Zhao first sold scrap steel to Company B, and then Company B sold scrap steel to Company A, and issued special VAT invoices to Company A.

In October 2020, the Inspection Bureau of Z Municipal Taxation Bureau issued a Decision on Tax Treatment to Company B, which determined that Company B had issued VAT invoices to downstream enterprises at a total price and tax amounting to RMB8 billion without any actual business operation. At the same time, the Notice of Proven False Invoicing and the Letter of Concurrence were sent to the competent tax authorities of almost all the downstream enterprises of Company B, requesting the competent tax authorities of the downstream enterprises to conduct concurrent investigations.

In October 2021, the Inspection Bureau of a Municipal Taxation Bureau issued a "Decision Letter on Tax Treatment" to Company A, which determined that: the VAT invoices obtained by Company A from Company B had been confirmed to have been falsely issued by the Inspection Bureau of Z Municipal Taxation Bureau, and Company A was required to make a reversal of input tax on the obtained invoices, make up the VAT of RMB 4.6 million yuan, plus a late fee of RMB 3.5 million yuan; make up the Urban Maintenance and Construction Tax and late fee, and the surcharge on local education fee, The total amount of urban maintenance and construction tax and late payment fee, education surcharge and local education surcharge was 600,000 RMB; the taxable income was increased by 27 million RMB, the enterprise income tax was 6.7 million RMB, and the late payment fee was 4.4 million RMB; Company A received the Decision on Tax Treatment and paid the total amount of 19.8 million RMB of tax and the late payment fee according to the requirements.

II. Hierarchical Goal Setting for Tax-Related Dispute Resolution in this Case

In November 2021, Huashui was commissioned to help Company A initiate the legal remedy process of administrative reconsideration. We completed tax investigations on Company A, Zhao and the scrap steel recycling retailer who supplied Zhao, and Company A's downstream customers in the shortest possible time, clarified the business model of the case, and set three levels of objectives:

(I) Arguing that the business model of "retailer--Zhao Mou--Company B--Company A" was established, and that the invoices involved in the case were fully consistent with the transactions. The invoice in question is fully consistent with the transaction and is a legal and compliant invoice, which can be used for input credit and pre-tax deduction in accordance with the law, and the enterprise should be refunded the VAT and surcharge, enterprise income tax, and all the late payment fees.

(II) Arguing that Company A obtained the VAT invoice in good faith, which can be deducted before tax in accordance with the law, and at the same time, the enterprise should not be charged late fee for VAT, and should refund the late fee for VAT, enterprise income tax and enterprise income tax paid by the enterprise.

(III) It is argued that the relevant procurement business of Company A has really occurred and the procurement cost meets the authenticity, reasonableness and relevance, which can be deducted before tax according to the law, and the enterprise should be refunded for the retroactive payment of enterprise income tax and the late payment of enterprise income tax.

At the same time, we also clarified to the enterprise that, according to past experience, it was more difficult to characterize this case as a fully legal and compliant invoice or a bona fide acquisition of false invoices, and that the third level of the goal was more realistic, and the enterprise accepted our viewpoint. In the process of administrative reconsideration of this case, a large amount of evidence that could support the real establishment of the scrap steel purchase and sale business was submitted, and Company A was represented to fully express its reconsideration opinion, and the reconsideration authority conducted several rounds of opinion exchange and communication.

In June 2023, the Inspection Bureau of a Municipal Taxation Bureau changed the original Tax Treatment Decision and made a new Tax Treatment Decision to Company A, canceling the treatment decision of recovering 6.7 million RMB of enterprise income tax and adding 4.4 million RMB of late payment fee. The administrative reconsideration proceedings in this case were concluded by way of settlement between the parties and the reconsideration proceedings were terminated.

III. Core Rpresentation in This Case

(I) There was a real trade in steel scrap between Company A and Company B in this case.

During the period involved in the case, Company A reached a cooperative relationship with Zhao, an individual recycler of scrap steel, for the supply of scrap steel.

In this case, Zhao, as a natural person, in the purchase of steel scrap from the retailer, although there is no written contract, but should be recognized that Zhao and the retailer in the period of the real oral relationship between the purchase and sale of steel scrap. Zhao and Company B both used the "instructed delivery" method to transfer the right of goods, and the goods were directly transported by the retailer to the yard of Company A. After Company A purchased the scrap steel and other goods, it actually received and used them to produce semi-finished products such as steel embryos, and sold them to downstream customers for further processing into finished products.

(II) The case conforms to the business model of waste and old materials recycling as stipulated in the tax law

Approval Reply of the State Administration of Taxation on the Relevant Taxation Issues of Waste Materials Recycling Business (Guo Shui Han [2002] No. 893), "Waste materials acquisition personnel (non-unit personnel) in the community to acquire waste materials, and directly transported to the purchaser (manufacturer), the waste materials business unit based on the actual occurrence of the business between the two parties above, to waste materials acquisition According to the actual business between the two parties, the waste materials operating unit will issue vouchers for the acquisition of waste materials to the waste materials acquiring personnel, and make purchases in the financial processing, and at the same time issue VAT invoices or ordinary invoices to the purchasing party, and make sales in the financial processing, and transfer the purchasing money paid by the purchasing party to the waste materials acquiring personnel by way of cash. In view of the fact that this mode of operation is determined by the current operating characteristics of the waste materials industry, and that the waste materials operating unit did collect the same amount of payment when issuing the special VAT invoice and did have the same amount of goods for sale, the conduct of the waste materials operating unit in issuing special VAT invoices is not contrary to the relevant tax provisions and should not be characterized as false opening".

In this case, Zhao constituted the recycler, Company B constituted the recycling enterprise, and Company A constituted the scrap-using enterprise. The "retailer-Zhao-Mou-Company B-Company A" scrap purchase and sale relationship was truly established, and Zhao-Mou truly provided the goods to the applicant. In the flow of payment, company A real to company B payment, company B through its control of ZhouMou private account real to ZhaoMou payment; Company B according to the actual supply quantity, amount, to company A invoice, there is no over-issuance of the situation. And the case in question, the flow of funds ultimately flowed to the retailer, the normal flow of payment for goods, did not form a closed loop, does not constitute a return of funds.

Therefore, the business in question is in full compliance with the provisions of the State Taxation Letter [2002] No. 893, and the invoices in question do not constitute false invoices according to the law, and they are legal input deduction vouchers. The Inspection Bureau of a Municipal Taxation Bureau concluded that the invoice issued by Company B to Company A was false invoicing without sufficient investigation of the goods purchased by Company A. The factual finding was unclear and its conclusion could not be established.

(III) The loss of the input credit function of the invoices in question does not necessarily lead to the loss of the function of recording costs, i.e. pre-tax deduction.

VAT input deduction and pre-tax deduction for income tax have different requirements for vouchers. VAT adopts the double standard of "economic substance + legal form", and does not allow input deduction for those who have real purchasing behaviors but have not obtained compliant invoices issued by the seller. Income tax has always adopted the standard of economic substance and legal form, according to Article 8 of the Enterprise Income Tax Law, "reasonable expenses actually incurred by the enterprise in relation to the acquisition of income, including costs, expenses, taxes, losses and other expenses, are allowed to be deducted in the calculation of taxable income". Therefore, costs and expenses that meet the requirements of authenticity, reasonableness and relevance can be deducted before tax. Although the Announcement of the State Administration of Taxation on the Issuance of Measures for the Administration of Pre-tax Deduction Vouchers for Enterprise Income Tax (Announcement No. 28 of 2018 of the State Administration of Taxation) puts forward more stringent requirements for the administration of deduction vouchers, it itself is a normative document of the State Administration of Taxation and cannot negate the basic principle of pre-tax deduction as stipulated in the superior law, the EIT Law.Company A authentically purchases scrap steel and produces Company A really purchased steel scrap and produced steel billet, which was confirmed by internal documents and relevant suppliers' testimonies, and there was no dispute between the two parties. Regardless of whether the input invoice was a compliant deduction voucher or not, it should be recognized and acknowledged that Company A had incurred the procurement cost, and Company A was allowed to make pre-tax deduction for the real incurred procurement cost.

IV. The implications of the resolution of the dispute over the tax adjustment of the invoice obtained by the enterprise in this case

(I) Tax-related disputes: "Evidence is king".

Tax authorities to make processing decisions, taxpayers to put forward the defense, need to be built on the objective facts, tax-related disputes properly resolved on the premise of restoring the objective facts. In this case, although the competent tax authorities of company B have made a notice of confirmed false opening, but after our unremitting investigation and evidence collection, repeatedly put forward the evidence, company A provides evidence sufficient to prove that its real procurement of scrap steel, due to the value-added tax input deduction and income tax deduction standards are different, the tax authorities can still make a decision to allow pre-tax deduction. For scrap enterprises, business information carries significant evidential significance. Scrap enterprises must pay attention to tax compliance and properly retain business information to avoid tax-related risks.

(II) Obtaining invoices that have been proved to be falsely issued by the upstream tax authorities, and the downstream enterprise can still raise a defense

For the competent tax authority of the upstream enterprise, the Notice of Confirmed False Invoicing means that it recognizes that there is no real sales business between the upstream enterprise and the downstream enterprise. However, on the one hand, when the upstream enterprise belongs to a large platform enterprise, due to the huge amount of invoicing, the upstream tax authority may not be able to verify clearly, which may lead to bias in its conclusion, on the other hand, even if there is no real business between the upstream and downstream enterprises, it doesn't mean that the downstream enterprise has not made real purchases from the third party. For the behavior of obtaining invoices in lieu of real purchases, although obtaining invoices in lieu of real purchases belongs to the acceptance of false invoicing in administrative law, the downstream enterprise still has room for defense in terms of enterprise income tax.

(III) Legal Remedy Procedures to Facilitate Legitimate Tax-Enterprise Reconciliation

Administrative reconsideration belongs to the internal error correction mechanism of tax authorities, which is characterized by the lack of third-party participation and the non-externalization of contradictions. The purpose of administrative reconsideration is often not to win or lose, but to softly resolve the conflicts between tax enterprises with a solution recognized by both parties. In the procedure of reconsideration hearing, both sides of tax and enterprise discover the defects of the tax authority's decision to deal with the penalty by giving evidence, questioning and debating, and reach a consensus on the facts of the case and the application of the law, after which the tax authority takes the initiative to adjust the original administrative behavior, the enterprise takes the initiative to withdraw the application for reconsideration, and both sides take one step back, and finally can coordinate the tax-related disputes to be resolved smoothly in a harmonious way.