Editor's Note: Recently, the frequent occurrence of financial counterfeiting cases has attracted great attention from the relevant authorities, with the Supreme Court, the Supreme Prosecutor and many other departments striving to crack down on financial counterfeiting, and the regulation continues to tighten. Usually, financial counterfeiting boosts corporate profits, thus contributing to more tax revenue, so the tax bureau generally does not intervene. However, financial counterfeiting is inevitably accompanied by false invoicing, inflated costs and other circumstances, under the surface of the false prosperity of the enterprise still lurks a great tax risk. This paper analyzes the tax risks behind financial counterfeiting by combining recent cases and regulatory trends of relevant departments for the benefit of readers.

Ⅰ.The multi-departmental crackdown on financial counterfeiting, financial counterfeiting cases occur frequently

(I) Multi-departmental efforts to crack down on financial counterfeiting

1. The Supreme Court issued typical cases of financial counterfeiting

On June 26, the Supreme People's Court issued five typical cases of financial counterfeiting, including two civil cases and three criminal cases, according to the different degrees of fault of the person in charge of the enterprise, the securities issuer, the sponsoring brokerage firm, the financial adviser and the accounting firm, and the relevant responsible persons assumed the civil liability or accepted the criminal punishment in accordance with the law. These cases focus on civil liability to compensate for the losses of victims and criminal liability to deter potential offenders, thereby warning market participants and effectively curbing financial counterfeiting.

2. The State Council forwarded the Opinions on Further Improving the Comprehensive Punishment and Prevention of Financial counterfeiting in the Capital Market by the Securities and Futures Commission and other 6 departments.

The Opinions on Further Improving the Comprehensive Punishment and Prevention of Financial Counterfeiting in the Capital Market” was jointly formulated by the CSRC, the Ministry of Public Security, the Ministry of Finance, the People's Bank of China, the General Administration of Financial Supervision, and the State-owned Assets Supervision and Administration Commission of the State Council, and approved by the State Council on July 5, and formally forwarded by the General Office of the State Council. The Opinion clearly states that financial counterfeiting seriously disrupts the normal order of the capital market and must be resolutely combated and curbed.

3. The Supreme People's Procuratorate issued the “Answers to Relevant Questions on Handling Criminal Cases of Financial Counterfeiting”.

On August 16, the Supreme People's Procuratorate issued the “Answers to Questions on Handling Criminal Cases of Financial Counterfeiting”. The Answer establishes the tone of “strict” and takes a resolute attitude to combat financial counterfeiting. It emphasizes all-round, full-chain accountability for all subjects involved in financial counterfeiting, including, but not limited to, companies that commit financial counterfeiting and their directors, supervisors, senior management or actual controllers, as well as intermediaries that assist the company in committing counterfeiting or providing false supporting documents.

(Ⅱ) Tightening of securities regulation and frequent occurrence of financial counterfeiting cases

Case 1: Jiangsu Shuntian's counterfeiting case

On July 6, Jiangsu Sunshine Company Limited (“Jiangsu Sunshine”) announced that it had recently received the Decision on Administrative Penalty and the Decision on Market Entry Ban issued by the China Securities Regulatory Commission (“CSRC”). The penalty decision letter pointed out that the private network communication business in which Jiangsu Sunshine was involved was actually a false self-recycling business that constituted a closed loop and had no real business substance. According to the announcement, during the period from 2009 to 2021, Jiangsu Suntian falsely increased its operating revenue by more than RMB 10.3 billion, falsely increased its operating costs by nearly RMB 9.4 billion, and falsely increased its total profit by more than RMB 930 million in its annual reports. In response, the SFC imposed a fine of 10 million yuan on Jiangsu Suntian and imposed a three-year ban on the company's legal representative from the securities market.

The dedicated network communication case mentioned in the announcement originated in 2021 when the dedicated network communication business of Shanghai Electric Communication Technology Co. blew up. Up to now, more than ten listed companies have been involved in this case, including Hongda New Material, RiskControl, Guorui Technology, etc., some of which have been dealt with by special treatment (ST) or even face the risk of delisting, involving an amount of close to hundreds of billions of yuan. This special network communication counterfeiting case is through Sui Moli control of a number of interrelated enterprises, the use of advances, issuing false invoices and other means to build a false contract flow, capital flow and bill flow, and then through the return of funds to the continuous cycle, in order to elevate the profits of each enterprise in the chain, to achieve the goal of financial counterfeiting.

Case 2: Huadao Biological Counterfeiting Case

On July 5, the Securities and Futures Commission (SFC) announced a decision on the punishment of Suzhou Huadao Bio-pharmaceutical Company Limited (referred to as “Huadao Bio”) for securities counterfeiting in the process of applying for listing and issuance. The decision shows that between 2019 and 2021, Huadao Bio falsely issued a large number of invoices and falsified sales records, resulting in misrepresentation of sales revenues and profits disclosed in its Prospectus.Between 2019 and 2022, Huadao Bio falsely issued invoices to a number of individuals or enterprises with which it had no actual business dealings, and in order to satisfy the intermediary's need to conduct due diligence, it falsely issued invoices on a number of occasions, and then reissued invoices in red. red-checking and re-invoicing, ultimately inflating profits by more than 35 million yuan over the three years.

(III) Summary: Be alert to the tax risks behind financial counterfeiting

Although in the case of financial counterfeiting, the intermediary organization and the enterprise involved in the case are usually investigated for the crime of providing false documents, assuming liability for compensation for faults, and prohibiting the legal representative from entering the capital market and other criminal, civil and administrative liabilities. However, financial counterfeiting is usually accompanied by false contracts, capital flow back and other issues, and often involves the issuance of invoices that do not match the content of the real transaction, inflated revenues and costs, and even violent false opening and then repeated red flushing and other operations with great tax risks, so financial counterfeiting is not only a key concern of the securities regulatory issues, which is also worth the attention of the tax risk and in-depth discussion.

II. Invoicing for transactions without substance is prone to criminal administrative risk of false invoicing

Risk 1: There is still criminal risk for false invoicing not for the purpose of cheating tax credit

In practice, there are cases in which even false invoicing that is not for the purpose of counterfeitingulently offsetting taxes has been convicted of the crime of falsely issuing VAT invoices.In 2018, Zhang Mou, the de facto controller of a petrochemical company in Guangxi, in order to improve the company's performance, negotiated with Wang Mou to sign a false iron ore procurement contract through a number of companies controlled by both parties to increase the company's profits falsely. All parties to the transaction issued VAT invoices in accordance with the amount and quantity of the actual transaction. In the first trial, the court found that Wang's and Zhang's behavior constituted the crime of false VAT invoices and the amount was huge, and sentenced them to nine years and six months and five years of imprisonment respectively. After the defendants filed an appeal, the court of second instance upheld the original judgment.

After this case, the discussion of the crime of false invoicing has been hotly debated in both academic and practical circles. Some viewpoints believe that the legal interest protected by the crime of false invoicing of VAT is the specialized management order of invoices, which does not require the result of causing the loss of national tax, and the transactions corresponding to the invoices in this case are false transactions, so the invoices are falsely invoiced, and the crime of false invoicing should be punished as a crime of false invoicing. Some other viewpoints believe that the subjective behavior of the perpetrator does not have the intention of jeopardizing the national tax, only for the false performance, financing loans and other normal business needs, did not cause the loss of national tax, to the criminal liability is not conducive to the protection of the private economy and business development.

In response to this question, the new tax-related judicial interpretations issued in March this year gave a clear answer. According to the “Supreme People's Court Supreme People's Procuratorate <Interpretation on Several Issues Concerning the Application of Law in Handling Criminal Cases of Hazardous Tax Collection and Administration>” (Legal Interpretation [2024] No. 4), the second paragraph of Article 10 stipulates that “for the purpose of inflating the performance, financing, loans, etc., not to counterfeitingulently offset the tax, and did not cause tax counterfeitingulently lost due to the offsetting, will not be punished by the crime, and constitutes other crimes. Criminal liability shall be pursued for other crimes in accordance with the law.” However, this article is not an “exemption gold medal” for all financial counterfeiting cases, and “not punished for this crime” means that on the basis of satisfying the above purpose and result elements, the crime of false opening of VAT special purpose shall not be punished. On the one hand, not all financial counterfeiting cases in practice satisfy the above purpose and result elements, and on the other hand, this article belongs to Article 205, which cannot be applied to the crime if other crimes are committed in the financial counterfeiting. Due to the complexity of the legal relationship between financial counterfeiting, the purpose and result of the elements of the argument is cumbersome, whether or not to apply the above provisions of the crime need to be discussed in conjunction with the circumstances of the specific case, even if there is a clear judicial interpretation, the enterprise involved in the case is still facing a greater tax criminal risk.

Risk 2: Even if it does not constitute a crime, it still has to face administrative tax penalties.

The introduction of the new judicial interpretation has blocked part of the criminal risk of non-compliant invoicing, but the administrative risk still exists. According to Article 21 of the Revised Measures of the People's Republic of China for the Administration of Invoices of the People's Republic of China of 2023, false invoicing includes issuing invoices for others, issuing invoices for oneself that are not in line with the actual business situation, allowing others to issue invoices for oneself that are not in line with the actual business situation, and introducing others to issue invoices that are not in line with the actual business situation. It can be seen that, in order to falsely increase the performance, financing, loans and other purposes of the invoice, although in accordance with the current judicial interpretation does not constitute a crime, but because of the financial counterfeiting is usually through the “empty turn”, “go single” and other non-commercial substance of the implementation of the counterfeitingulent trade methods, its The invoices issued are in line with the definition of false invoicing in administrative law, and according to Article 35 of the Measures for the Administration of Invoices, the tax authorities may impose a maximum fine of 500,000 RMB on the basis of confiscation of the illegal income.

In practice, there have been cases where the taxpayer's behavior did not affect the calculation of the tax amount and did not result in the loss of state tax, which did not constitute tax evasion, but was punished by the tax authority due to the existence of false invoicing. For example, in Xu Tax Penalty [2022] No. 2, the Tax Bureau considered that the company's inclusion of the invoices of RMB21.8 million in the cost account and then elimination of the invoices did not affect the enterprise income tax. However, the above invoices obtained by the company did not correspond to the actual business, which constituted false invoicing, and the company was eventually fined 300,000 RMB. As another example, in the administrative penalty decision No. 62 of Shao Shui Yi Jian [2021], the tax bureau did not recognize the act of issuing special invoices for offsetting and then red flushing as tax evasion, but imposed a fine of RMB10,000 for the company's act of falsely issuing VAT special invoices.

However, not all applications for tax refund for overpayment of tax on inflated profits will be supported. On the one hand, many financial fraud cases span a large period of time, and the overpayment of tax exceeding the time limit no longer meets the time limit conditions for tax refund, and the subjective state of an enterprise that has overpaid tax due to inflated profits should be a knowledge of the overpayment, and the time limit should be calculated from the date of settling the payment of tax, which is not conducive to the fight for the benefit of the time limit; on the other hand, with the persistence of the opposing voices and inconsistency of the practice in different places, the application for tax refund may also face Some practical obstacles.

Risk 4: Risk of tax evasion by artificially adjusting tax burden through connected transactions

In practice, group enterprises may make full use of the tax advantages of subsidiaries by taking advantage of the integration of their own resources, digesting group profits and artificially adjusting the tax burden. For example, if the enterprises in the group have profits and losses or a subsidiary still has the amount of pre-tax profits to make up for the losses, it may utilize the connected transactions to transfer the profits of the profitable enterprises to the loss-making enterprises. Specifically, by the profit-making enterprise to purchase goods or services from the loss-making enterprise, the loss-making enterprise can turn the loss into profit, and the profit-making enterprise can charge the expenses to reduce the taxable income. Then, for example, if there are enterprises within the group enjoying lower tax rates, the profits may be transferred to enterprises with lower tax rates that can enjoy tax incentives through connected transactions, thus reducing the tax burden.

The tax authorities have always been highly concerned about the fairness of the price and commercial reasonableness of connected transactions and are authorized to make adjustments to unreasonable transaction prices. According to Article 47 of the Enterprise Income Tax Law of the People's Republic of China, “Where an enterprise implements other arrangements that do not have a reasonable commercial purpose and reduce its taxable income or income, the tax authorities shall be entitled to make adjustments in accordance with reasonable methods.” The transaction arrangement mentioned above is intended to fully utilize the tax advantages of each enterprise, and reduces the state's tax compared to a situation where no tax arrangement is made, and the tax authorities have the right to make adjustments. Further, such arrangements, due to the lack of commercial reasonableness and the main purpose of tax avoidance, may violate the crime of tax evasion or even tax evasion, and may be exposed to the risk of paying back taxes, imposing late fees, or even incurring administrative and criminal liabilities.

Risk 5: Misapplication of tax policy to reduce tax liability triggers tax evasion risk

Profit is not equal to taxable income, so even if financial falsification falsely increases profit, it does not necessarily result in more tax payment. For example, an enterprise may incorrectly classify part of its originally taxable income as non-taxable or tax-exempt income, or incorrectly add and deduct research and development expenses of intangible assets, salaries of disabled persons, etc., in order to reduce the amount of enterprise income tax payable. In addition, some enterprises may apply to be recognized as high-tech enterprises, technologically advanced service enterprises, software enterprises, etc., or enjoy the preferential policies for the encouraged industries in the western region by submitting false information, in order to apply a lower EIT rate and reduce the EIT tax burden.

In the aforesaid manner, the taxpayer maliciously utilized the tax incentives to make false tax declaration, which led to the consequence of non-payment or underpayment of tax payable, which is in line with the determination of tax evasion, and is also in line with the situation of “the taxpayer adopts deception, concealing means to make false tax declaration or non-declaration, and avoids payment of tax in a larger amount” stipulated in the tax evasion crime, which is very likely to lead to subsequent administrative and criminal risks.

Risk 6: Reducing tax burden by inflating costs after inflating profits is a tax evasion risk

Enterprises that adopt the behavior of inflating revenues for the purpose of going public or obtaining bank loans will inevitably lead to an increase in the enterprise income tax and value-added tax of the current year, which will essentially increase the tax burden of the enterprise. Some enterprises, after realizing their illegal purposes, adopt the tactic of inflating costs to turn the enterprise from profit to loss, and offset the overpayment of income tax in the year of inflated income by paying less enterprise income tax in the subsequent years.

Although in the view of the enterprise, the overall tax burden of the enterprise is not reduced, and even the enterprise may have paid more income tax in general. However, according to the provisions of Judicial Interpretation No. 4 of the Law Interpretation [2024] of the Two High Commissions, the composition of the crime of tax evasion is evaluated on the basis of each taxable year: “Paragraph 1 of Article 201 of the Criminal Law stipulates that ‘the amount of tax evaded as a percentage of taxable amount’ means that the perpetrator's tax liability is not reduced, and the amount of tax evaded is the same as the amount of tax payable. ', means the ratio of the total amount of each tax evaded by the perpetrator in a tax year to the total amount of tax payable for that tax year; if the tax period is not determined according to the tax year, it shall be determined in accordance with the ratio of the total amount of each tax evaded in the year prior to the date on which the last act of tax evasion occurred to the total amount of tax payable for that year.”

Therefore, if, for example, an enterprise pays an additional 1 million yuan of EIT in 2019 and then avoids paying 500,000 yuan of EIT in 2020, the overpayment of tax in 2019 cannot offset the amount of tax evasion in 2020, and there is still a risk of constituting a tax evasion offense.

Ⅳ. The development of enterprises must pay attention to tax compliance

In practice, the outbreak of financial counterfeiting cases is usually accompanied by penalties from the Securities and Futures Commission (SEC), with less mention of tax aspects. Indeed, from the perspective of tax administration, tax authorities usually do not intervene because inflated revenues and fictitious profits may lead to increased taxes. However, in general, when an enterprise exaggerates its financial performance by inflating revenues, it is often accompanied by the act of inflating costs in order to balance the books, which is likely to involve illegal activities such as false invoicing, and which lurks a great tax risk. For example, in some cases, in order to whitewash its financial statements, an enterprise may inflate its sales revenue by creating false transactions, and at the same time fictionalize its costs and expenditures accordingly, such as purchasing costs and service expenses. Once discovered, the enterprise will not only be liable to pay back taxes, but will also face the risk of administrative or even criminal penalties. Therefore, in the long run, enterprises should strengthen their internal management and establish a sound financial supervision mechanism to ensure the authenticity and transparency of their business activities, so as to effectively prevent tax risks and realize sustainable development.

Business practice is extremely complex, and each case of financial counterfeiting has its own characteristics. Whether the new judicial interpretation of the crime of counterfeitingulent invoicing can be applied to the crime, whether it has resulted in loss of tax, whether it is tax evasion, the specific amount of counterfeitingulent invoicing or tax evasion, the geometry of the specific amount of tax evasion, and which grade of sentencing should be applied, each of these issues may lead to different conclusions in a specific case. At a time when various departments frequently speak out against financial counterfeiting in the capital market and take measures to crack down on it, the tax risk after false prosperity deserves the attention of taxpayers, who should hire professionals to intervene in a timely manner to safeguard the legitimate rights of the enterprises when they are audited or even triggered by criminal risks due to financial counterfeiting.