Editor's Note: In the previous issue, we analyzed the overall situation of the epidemic prevention material supply chain and the tax risks faced by various entities in the chain. Among them, epidemic prevention material procurement units face legal risks of tax adjustments and tax evasion due to the upstream enterprises being characterized as falsely issuing special VAT invoices. In practice, there are many cases where the invoice recipient is implicated due to problems with the issuer. If the tax audit cannot be effectively dealt with, it will not only bear huge economic losses, but also face intangible losses such as a downgrade of tax credit and damage to reputation. This article intends to provide suggestions for procurement units to deal with tax audits.

I. Demonstrate the Existence of Real Transactions of Epidemic Prevention Materials with Upstream Enterprises from the Perspective of "Four Flows"

Generally speaking, it is difficult for the competent tax authorities of epidemic prevention material procurement units such as government agencies, urban investment companies, and medical institutions to directly determine that there is a problem of false issuance of special VAT invoices for epidemic prevention materials. Generally, after the upstream enterprises are characterized as falsely issuing special VAT invoices, the case source is pushed downstream through assistance in investigation. The competent tax authority of the procurement unit shall, in accordance with Article 15 of the Measures for the Administration of Invoice Assistance and Investigation in Tax Violation Cases (Trial Implementation) (Shui Zong Fa [2013] No. 66), "In any of the following circumstances, the entrusted party shall file a case for inspection in accordance with the relevant provisions of the Work Procedures for Tax Audit and Inspection: (1) The entrusting party has issued a Notice of Confirmed False Issuance", file a case for inspection, and collect and investigate evidence comprehensively, independently and objectively. Therefore, the primary task of the procurement unit is to actively communicate with the tax authorities and provide comprehensive and detailed business materials from the perspective of "four flows" to prove the authenticity of the epidemic prevention material purchase and sale transactions.

(i) From the perspective of contract flow, the transaction matters stipulated in the contract can prove the real establishment of the transaction relationship.

A contract is an agreement between civil subjects to establish, change, and terminate civil legal relations, reflecting the true intention of both parties to the contract. In the absence of evidence to the contrary that the contract is a forgery, it shall be confirmed according to the contract that the parties to the contract have established a real legal relationship for the purchase and sale of epidemic prevention materials. In the process of evidence collection, attention should be paid to the rationality of the contract clauses, such as whether the quantity, price, quality of goods, delivery, mode of transportation, fund settlement, invoice issuance and liability for breach of contract of the purchased epidemic prevention materials are clearly and definitely stipulated.

(ii) From the perspective of fund flow, the absence of fund reflux can prove the authenticity of the transaction involved.

Fund reflux is an important clue for tax authorities to investigate and deal with cases of falsely issuing special VAT invoices, which refers to the fund being transferred from the invoice recipient to the issuer, and then the issuer returning to the invoice recipient's public account or private account through the public account or private account. For example, if the procurement unit transfers the payment for the purchased epidemic prevention materials to the public account of the upstream enterprise through the public account, and there is no reflux to the public account or private account of the procurement unit, it can be proved that the payment for the purchased epidemic prevention materials has been actually paid, and there is no act of fabricating false transactions. As for the final flow of the funds involved, it is irrelevant to the procurement unit. The procurement unit has fulfilled its contractual obligations by paying for the goods, and the procurement unit cannot decide how the upstream enterprise actually disposes of the payment after receiving it.

(iii) From the perspective of logistics, tracing the trajectory of logistics can prove the authenticity of the transaction involved.

In practice, due to the fact that some conservative tax authorities still hold the concept of "one-to-one" and "point-to-point" transactions, once the phenomenon of "separation of invoices and goods" occurs in the transaction, the tax authorities will "one-size-fits-all" deny the authenticity of the transaction. However, in civil and commercial transactions, transaction efficiency, warehousing, transportation, labor costs, etc. are all factors considered by the transaction subjects, and the transaction mode of one-stop transportation and one-stop transfer of property rights is very common. Especially during the epidemic period, the actual situation of fighting the epidemic has extremely high requirements for the timeliness of epidemic prevention materials, and it is impossible for the entry and exit of epidemic prevention materials to be like ordinary goods transactions, where the sales subject is shipped to the procurement subject after leaving the warehouse, and the procurement subject is distributed to the demand side after leaving the warehouse. It is in line with the background at that time and normal business logic for the supplier to transport the goods directly to the neighborhood committee and other epidemic prevention material users. Therefore, the procurement unit can provide the certificate of transfer of property rights of epidemic prevention materials, transportation documents, detailed list of distribution and consumption of materials by the material user, and testimonies of relevant personnel to prove the authenticity of the transaction involved.

(iv) From the perspective of invoice flow, the obtained invoice is completely consistent with the transaction situation, which can prove the authenticity of the transaction involved.

The issuer and acceptor of the invoice are consistent with the contract transaction subject and the fund payment subject, and there is no inconsistency in quantity and amount. From the legal form, the invoice is a legal and compliant invoice. If there is no other evidence to the contrary that the procurement unit is aware of the problem of separation of invoices and goods upstream, the procurement unit should not be required to bear the tax legal responsibility.

II. Make a Statement of Defense Based on the Specific Circumstances of the Case

In practice, the upstream enterprises are characterized as falsely issuing special VAT invoices, and the tax legal norms do not have the same characterization of the invoice recipient, and there are different handling situations. The epidemic prevention material procurement unit should make a statement of defense based on the specific circumstances of the case.

(i) Strive for the complete legality and compliance of the obtained invoice.

According to the Announcement of the State Administration of Taxation on Issues Related to the Issuance of Special VAT Invoices by Taxpayers to Overseas (Announcement No. 39 of the State Administration of Taxation in 2014), if the issuer has the act of evading tax by obtaining falsely issued special VAT invoices, but has a real transaction with the invoice recipient, collects the payment from the invoice recipient and issues an invoice to it, and the issued invoice is consistent with the actual transaction, the invoice obtained by the invoice recipient does not belong to a falsely issued special VAT invoice. The procurement unit may assert to the tax authorities that it belongs to this situation. The upstream enterprise sold epidemic prevention materials to the procurement unit, collected the payment for the epidemic prevention materials, and issued a special VAT invoice in its own name to the procurement unit that was consistent with the epidemic prevention materials sold. The procurement unit and the upstream enterprise also had a real purchase and sale business. Therefore, the invoice obtained by the procurement unit from the upstream enterprise is legal and compliant, the input tax can be deducted, and the pre-tax cost can also be included.

(ii) Strive for the bona fide acquisition of falsely issued special VAT invoices without paying late payment fees.

According to the Notice on the Treatment of Issues Related to the Bona Fide Acquisition of Falsely Issued Special VAT Invoices by Taxpayers (Guo Shui Fa [2000] No. 187), there is a real transaction between the buyer and the seller, and the seller uses the special VAT invoice of the province where it is located. All contents of the special VAT invoice, such as the name, seal, quantity of goods, amount and tax amount of the seller, are consistent with the actual situation, and there is no evidence to show that the buyer knows that the special VAT invoice provided by the seller is obtained by illegal means. The buyer shall not be treated as tax evasion. The procurement unit can prove that it has a real purchase and sale transaction with the upstream enterprise through the aforementioned business materials, the relevant elements of the obtained invoice are consistent with the actual situation, and it is not subjectively aware of the separation of invoices and goods of the upstream enterprise, so it can strive for bona fide acquisition. For the bona fide acquisition of falsely issued special VAT invoices, it is necessary to reverse the input tax, but there is no need to pay late payment fees, and the pre-tax cost can still be included.

(iii) Argue that invoices are not the only voucher for pre-tax cost deduction.

It should be emphasized that, according to Article 8 of the Enterprise Income Tax Law, cost and expense that meet the requirements of authenticity, rationality and relevance can be deducted before tax, which is not necessarily related to whether an invoice is obtained or whether the invoice is compliant. The Measures for the Administration of Pre-tax Deduction Vouchers for Enterprise Income Tax (Announcement No. 28 of the State Administration of Taxation in 2018) requires that special VAT taxable items be used as pre-tax deduction vouchers with invoices, which is inconsistent with the basic principles of pre-tax deduction in the Enterprise Income Tax Law and violates the principle of tax payment convenience. Especially when the procurement unit has fully proved the authenticity of the procurement of epidemic prevention materials, it is still required to obtain compliant invoices before it can deduct the pre-tax amount, which is a kind of putting the cart before the horse.

(iv) Disagree with the characterization of tax evasion.

1.In terms of objective elements, the procurement unit did not implement the four types of tax evasion acts.

Article 63 of the Tax Collection and Administration Law clearly stipulates four types of tax evasion acts, namely: (1) forging, altering, concealing, or destroying account books and accounting vouchers without authorization; (2) listing more expenses or not listing or listing less income in the account books; (3) refusing to file a tax return after being notified by the tax authorities; (4) filing a false tax return. The procurement unit shall, based on the transaction of purchasing epidemic prevention materials, make financial treatment truthfully, and there shall be no act of setting up two sets of accounts, concealing account books and accounting vouchers, or destroying account books and vouchers without the approval of the tax authorities; the cost shall be paid according to the actual expenditure of purchasing epidemic prevention materials, and there shall be no act of listing more expenses; and there shall be no act of refusing to file a tax return after being notified by the tax authorities, or submitting false tax returns, financial statements and other tax declaration materials to the tax authorities. Therefore, the procurement unit did not implement any of the tax evasion acts.

2.In terms of subjective elements, the procurement unit does not have the subjective intention of tax evasion.

It should be emphasized that when determining that a taxpayer constitutes tax evasion, the tax authorities shall also examine the subjective purpose of the taxpayer and bear the burden of proof. For example, if the procurement unit has checked the business scope, relevant qualifications and other documents of the upstream enterprise and fulfilled its reasonable duty of care, obtained the invoice according to the real transaction of purchasing epidemic prevention materials, and recorded it truthfully, it does not have the knowledge and will to not pay or pay less tax, and does not have the subjective intention of tax evasion.

3.In terms of the consequence, the procurement unit did not cause the consequence of not paying or paying less tax.

The procurement unit actually purchased epidemic prevention materials from the upstream enterprise, paid the tax-inclusive payment to the upstream enterprise, obtained the special VAT invoice issued by the upstream enterprise, and then deducted the input tax and included the cost, and then declared and paid the tax in full to the competent tax authority, without causing the consequence of not paying or paying less tax. The consequence of less tax payment is caused by the supplier's concealment of income and non-declaration and the issuer's deduction of tax by obtaining falsely issued special VAT invoices, which is irrelevant to the procurement unit.

To sum up, the procurement unit can take the business materials involved as the basis, the tax law provisions as the criterion, argue with the tax authorities, firmly disagree with the characterization of tax evasion, and safeguard its legitimate rights and interests.

III. Reference Significance of the Tax Audit Response Case of "Epidemic Prevention Materials"

(i) Improve the business transaction process and consolidate the evidence chain.

No matter what kind of tax treatment decision is made by the tax authorities, and what kind of defense opinion is put forward by the invoice recipient enterprise, it is based on the objective transaction facts, and the standardization of the business process and the completeness of the business materials play an important role in demonstrating the authenticity of the transaction. In this regard, before carrying out business, the invoice recipient enterprise should carefully select the counterparty, take various ways such as online verification and on-site investigation to conduct background investigation on the transaction object, and build the first layer of risk firewall; when carrying out business, conduct risk investigation and prevention on each link and process of the business, especially strengthen the control of goods and the management of documents such as special VAT invoices, so as to ensure the authenticity and legality of the business, and build the second layer of risk firewall; after the completion of the business, timely sort out the business materials, and keep the relevant business materials in electronic and paper forms and assign special personnel to keep them, so as to build the third layer of risk firewall.

(ii) Actively deal with tax audits and resolve tax risks at the front end.

When the invoice recipient enterprise is inspected by the tax authorities, it should improve its awareness of risk response, carefully prepare the business materials involved, restore the original appearance of the business to the tax authorities, and strive to make the tax authorities recognize the authenticity of the business transaction, so as to resolve the tax risks at the front end from the two dimensions of factual evidence and legal application.

(iii) Initiate legal relief procedures to minimize losses.

If the invoice recipient enterprise fails to deal with the tax audit, and the tax authorities still insist on issuing the Tax Treatment Decision and the Tax Penalty Decision, requiring the invoice recipient enterprise to make tax adjustments, and determining that the enterprise constitutes tax evasion and imposing a fine, the invoice recipient enterprise may, in accordance with the provisions of Article 88 of the Tax Collection and Administration Law, file an administrative reconsideration with the tax authority at a higher level than the tax authority involved in the case after paying the tax or providing a guarantee; It can also choose to file an administrative lawsuit with the people's court on the Tax Penalty Decision to safeguard its own rights and interests and minimize losses.