Editor's Note: Since the beginning of this year, multiple departments such as the Audit Bureau and the National Tax Bureau have clearly requested strict investigation of irregular tax incentives and fiscal refund policies issued by various regions. In response, regions such as Jiangxi, Zhejiang, Shanxi, and Tianjin have launched a series of documents in response to central guidance, and the cleanup work for local tax incentives and fiscal refund policies is in full swing, which has had a significant impact on relevant private enterprises. Based on this, This article will systemically interpret the legal responsibilities of illegal tax incentives and fiscal refunds, further analyze the adverse impacts on relevant enterprises, and propose response recommendations, combined with relevant documents issued by various departments in recent months.

01

The Cleanup of Illegal Tax Incentives and Fiscal Refund Policies

Ⅰ.On July 18th, 2024, the 2nd plenary session of the 3rd Central Committee of the Communist Party of China called for strictly prohibiting illegal policies to offer preferential treatment and standardizing tax preferential policies

On July 18th, 2024, the 2nd plenary session of the 3rd Central Committee of the Communist Party of China adopted the Decision on Further Deepening Reform and Promoting China's Modern Industrial Economy and Inclusive Development, which proposed "to eliminate and abolish various regulations and practices that interfere with the unified market and fair competition throughout the country. Standardize local laws and regulations for investment promotion, strictly prohibit illegal preferential policies, and 'Strengthen tax systems that are conducive to high-quality development, social fairness, and market unity. Optimize tax system structure. Study and formulate tax systems that adapt to new forms of business, and fully implement the principle of tax legislation. Standardize tax preferential policies and improve support mechanisms for key areas and key links. In the context of building a nationwide unified market, the intensity of cleaning up these policies is expected to continue to increase.

On April 10, 2022, the Central Committee of the Communist Party of China and the State Council issued an "Opinion on Accelerating the Construction of a National Unified Market," officially proposing the construction of a national unified market. On March 5, 2024, the "Annual Work Report of the State Council" further proposed accelerating the construction of a national unified market, and one of the key points in this construction is to regulate improper market competition and market intervention behaviors. In the past, in the process of attracting investment, various regions have often introduced a series of tax preferential policy or fiscal refund policies to attract large companies to settle down, which allowed these companies to enjoy policy-related dividends beyond ordinary enterprises,breaking the fair competition environment in the market and being unfavorable for the construction of a high-level socialist market economy system. Under the background of building a national unified market, the cleaning up efforts for these policies are expected to continue to increase.

 Ⅱ. On June 25, 2024, the audit report showed that the organizations of tax and other departments were not in place in terms of revenue collection, and it is necessary to collect all receivable revenue and return it to the granary

On June 25, 2024, the Audit Office of the State Council made a "Audit Report on the Implementation of the Central Budget and Other Financial and Budgetary Matters for the Year 2023" on behalf of the State Council. In the first part of the report on the audit of central financial management, it was found that "tax and customs departments did not organize financial revenue. During the audit of the tax and customs departments' tax collection and import supervision, it was found that due to the lack of strict management and system loopholes, tax losses occurred. Income tax, consumption tax, real estate tax, and value-added tax were not collected by the tax authorities. In the audit recommendation section, it requires "to plug system loopholes, collect all receivable revenue and return it to the granary, consolidate the recovery of financial revenue growth." It can be seen that there are loopholes in tax collection management and system loopholes in the performance of tax revenue collection by tax authorities, and illegal tax concessions are one of its manifestations.

Ⅲ. On June 13, 2024, the State Council promulgated the "Fair Competition Review Regulations" which prohibit preferential tax treatment for specific business operators

The "Fair Competition Review Regulations" shall come into effect on August 1, 2024. The regulations explicitly prohibit local governments from giving preferential tax treatment and financial subsidies to specific business operators. Specifically, it is as follows: "Article 10: Policies and measures drafted by the drafting unit shall not contain any content that will have an impact on production and operation costs without legal or administrative regulations basis or without approval by the State Council. (1) Give preferential tax treatment to specific business operators; (2) Give selective and differentiated financial rewards or subsidies to specific business operators." The above content shows that the policy prohibits giving preferential tax treatment to specific business operators and cannot give selective and differentiated financial rewards or subsidies to specific business operators. According to my understanding, many local governments attract investment by negotiating with prospective enterprises and offering preferential policies such as tax exemption and financial subsidies to encourage enterprises to settle down. The promulgation of this regulation will have an impact on investment promotion models and enterprise layout.

Ⅳ. On January 18, 2024, a press conference on tax services for high-quality development was held by the National Tax Bureau. The National Tax Bureau stated that it would seriously investigate and handle tax issues related to improper investment promotion.

 The tax department will next carefully implement the central leadership and the State Council's deployment and requirements for accelerating the construction of a national unified market, adhere to strict, standardized, fair and civilized law enforcement, continuously optimize tax collection and management services, seriously investigate tax issues in irregularities in attracting investment, and help accelerate the construction of a nationwide unified market that is efficient, standardized, fair, competitive, and fully open.

Ⅴ. The cleanup of irregular tax incentives and fiscal refunds at the local level

On January 19, 2024, the General Office of the Jiangxi Provincial People's Government issued an "Announcement on Implementing the Financial structural  reform Implementation Plan for the Deepening of Provincial-level Financial Reforms" (Ganfu Hall [2024] No. 1), gradually cleaning up inappropriate tax incentives and fiscal refund policies. The section of the announcement titled "Strengthening the Seriousness of Financial Systems" states: "By 2025, all cities and counties should gradually eliminate policies that fully retain or increase refunds of fiscal revenue to development zones, urban new areas, scenic spots, and other functional areas, as well as specific industries and enterprises. Those that need support should be arranged through standardized transfer payment. Inappropriate market intervention and subsidies or refund policies linked to tax and fee income should be gradually cleaned up. Those that have been issued without an execution period should be approved through the relevant procedures after determining the execution period. After the expiration of the execution period, they should be stopped." These regulations have been made on local investment promotion policies.

In addition to Jiangxi Province, the "Regulations on Optimizing the Business Environment in Zhejiang Province" issued by the 14th National People's Congress of Zhejiang Province states that "the people's governments at all levels and relevant departments should strictly implement the negative list for market access stipulated by the state, do not formulate a negative list for market access in nature, and promptly clear outdated policies that hinder the order of a unified national market; during investment promotion, they should not promise preferential conditions in violation of laws, regulations, rules, and national policy provisions." In 2024, tax work conferences in Shanxi and Tianjin also pointed out that they would investigate and rectify local tax issues in improper investment promotion. Guided by the spirit of central documents, various regions have introduced measures to clean up irregular tax incentives.

From the above documents, it can be seen that the state has increasingly recognized the disadvantages of local governments giving individual enterprises inappropriate tax incentives. In the next step, these irregular policies will be brought to the agenda for cleaning up. As for currently existing irregular tax incentives, what legal risks will they face? Let's explore it below.

02

The legal risks of illegal tax preferential policies and fiscal refunds

The recent policy documents issued by the central leadership and the State Council have reflected the government's determination to clear illegal tax preferential policies and fiscal refunds. From the perspective of local governments, which are the main entities implementing policies, there are legal risks involved in both the establishment and cleansing processes of not administering according to law. For companies that temporarily enjoy tax preferential policies, they are unlikely to escape legal risks of not paying taxes according to law, and even individual cases may involve criminal risks of fraudulent invoices. Here successively analysis:

Firstly, government agencies that violate the law by establishing tax preferential policies and fiscal refunds are in violation of the Law on Tax Collection and Administration. According to Article 3 of the Law on Tax Collection and Administration, "the introduction, suspension, reduction, exemption, repayment, and restitution of taxes shall be implemented in accordance with the provisions of law; where such measures are stipulated by the State Council through legislative action, they shall be implemented in accordance with administrative rules formulated by the State Council. No organs, units, or individuals may make any decisions on the introduction, suspension, reduction, exemption, repayment, or restitution of taxes that violate the provisions of laws and administrative rules and regulations, and shall be subject to administrative liability for any illegal actions taken by their immediate responsible personnel and other responsible personnel; where such actions constitute a crime, criminal liability shall be pursued in accordance with the law." According to Article 84 of the Law on Tax Collection and Administration: "any illegal decisions on the introduction, suspension, reduction, exemption, repayment or restitution of taxes made by government agencies without authorization shall be invalidated in accordance with this Law. The corresponding tax arrears shall be collected, and any excess tax collected shall be refunded. The immediate responsible personnel and other responsible personnel shall be subject to administrative sanctions. Secondly, any violations of the law and administrative regulations that result in illegal decisions on taxation will be subject to investigation and punishment in accordance with relevant laws and regulations. Therefore, it is crucial for local governments to strictly implement legal requirements and comply with all relevant laws and regulations when implementing tax policies to ensure fair competition and market stability.

Secondly, the government's efforts to clear tax incentives and financial refunds should be carried out in accordance with the law. In fact, the state has already taken action to standardize and clear tax and fee preferential policies. For example, in 2014, the State Council and the Ministry of Finance issued policies to request that localities clear illegal tax preferences. However, due to the comprehensive review of tax and fee preferences, which has a significant impact on some enterprises, in 2015, the State Council issued a notice on the relevant matters related to tax preferences, which stipulates that preferential policies already issued by localities should be continued to be implemented; those without a fixed term should be established a transition period, during which they should continue to be implemented. The preferential policies in contracts signed between enterprises and the government are still valid. For those already fulfilled, there is no retroactivity. This is a result given based on actual conditions and the principle of reliance protection. Although the above policies have not been thoroughly implemented, they have served as a warning to governments at all levels to carry out their duties in accordance with the law. So far, few local governments have issued normative documents to implement tax preferences and financial refunds within their respective regions. More commonly, they directly implement refunds or sign agreements with individual enterprises. In the case of signing agreements, as a main party in the agreement, the government should be cautious when implementing the review of illegal tax preferences and financial refunds, and handle the relationship with the introduced enterprises in a legal and compliant manner based on the content of the agreement.

Thirdly, enterprises that have temporarily enjoyed tax preferences and financial refunds will face significant tax risks. The principle of taxation legislation and the relevant provisions of the Tax Administration Law have been in place for a long time. Enterprises that decide to take risks and choose "Tax Depression" are a risk-reward combination. From the perspective of tax payment risks, on one hand, for enterprises that have not yet enjoyed preferential policies, their investment promotion agreements with the government or government-representative urban infrastructure companies may not be effective; on the other hand, previously enjoyed tax preferences may be recovered by tax authorities due to illegal acts or improper tax handling after receiving tax preferences and financial refunds. In addition, some enterprises combine false invoicing with the policy of receiving financial refunds, which poses a significant risk of fraudulent invoice crimes.

Thus, both parties involved in implementing illegal tax preferences and financial refunds face different legal risks when setting up and clearing these programs. What industries will be affected by these risks? We will discuss this next.

03

The cleanup of irregular tax incentives and fiscal refunds will have an impact on which industries?

The industries related to the cleaning of tax incentives and fiscal refunds are quite diverse. One category is new platform-type industries, such as "headquarters economy", "online freight platform", and human resources companies. Another category is traditional industries that have inherent problems that result in relatively high actual tax burdens, such as coal, recycled resources, steel, and non-ferrous metals in bulk commodity trade industries. In addition, there are also enterprises that use different types of enterprises (individuals, partnerships) for tax planning. Specifically:

For new platform-type enterprises, due to their light asset-based operations and the provision of intangible services to external parties, platform enterprises may engage in the creation of shell invoice issuer such as individual entrepreneurs' micro enterprises to receive invoices and handle bookkeeping services, while using methods such as obtaining illegal subsidies through false accounting or tax refunds to obtain illegal profits. Under the current situation of cleaning up illegal tax incentives and fiscal refunds, these entities that obtain illegal profits through false accounting or tax refunds will be difficult to maintain.

For traditional enterprises, there are characteristics such as high transportation and storage costs, scattered and numerous purchasing sources, and the inability to obtain compliant invoices. Some enterprises may register parts of their trade in "tax deductions zones" to use local tax incentives and fiscal refunds, as well as methods such as bookkeeping by local authorities to offset tax problems caused by difficulty in obtaining upstream invoices. However, under the current situation of cleaning up illegal tax incentives and fiscal refunds, this type of enterprise layout will no longer be advantageous.

For taxpayers who use individual income tax planning and partnership planning to transform their personal income such as salary and labor remuneration into operating income by establishing individual income tax entities in tax deductions zones to reduce tax burden through local tax deductions and local fiscal refunds. However, under the current situation where local authorities are strictly investigating illegal refunds and cleaning up illegal tax incentives, the preferential policies of tax deductions or fiscal refunds may gradually tighten. The aforementioned tax avoidance methods are at risk of being subject to tax adjustments, taxes with interest added, and even facing the risk of being characterized as tax evasion criminal liability risks.

04

How can related enterprises respond to the situation of cleaning up illegal tax incentives and fiscal refunds?

After analyzing the impact of cleaning up illegal tax incentives and fiscal refunds on related industries and enterprises, how can enterprises that have registered in the aforementioned regions respond?

Firstly, closely monitor policy stability: Enterprises that have enjoyed fiscal refund policies should review the legality of the investment promotion agreements, pay attention to the latest regulatory trends, analyze the risks of compliance, and timely adjust their business models. At the same time, in the process of implementing investment promotion agreements, enterprises should review whether they have fulfilled the obligations stipulated in the agreement, such as whether the financial refunds obtained are used for the agreed fields or projects, and whether the personnel management structure is consistent with the requirements of the agreement, etc., to avoid legal risks caused by improper use of financial refunds.

Secondly, strictly follow the authenticity of business operations: Having real business operations is the basis for issuing invoices and also a prerequisite for obtaining fiscal refunds. Enterprises that enjoy preferential policies should have a complete business process and pay attention to the retention of business and tax-related materials. Particular attention should be paid to whether there are phenomena such as proxy or commissioning, timely investigation should be made to ensure that there is no inconsistent three flows. If there are behaviors such as direction delivery or fund-raising and payment, they must retain relevant documents and agreements of the other party to prove the authenticity of their own business.

Finally, take legal and reasonable relief procedures when necessary: Enterprises that have signed agreements with the government to enjoy local tax incentives and fiscal refund policies but are now being traced and adjusted by the tax authority to pay back previous taxes should actively collect and prepare relevant materials in terms of business, finance, and taxation, carry out reasonable communication with the tax authorities, and when necessary, seek professional help. They should timely maintain their legitimate rights and interests through administrative reconsideration and administrative litigation.