Editor's Note: The decentralization of the source of waste materials has led to the dilemma of the lack of invoices at source in the renewable resources industry, and some recycling enterprises have solved the problem of pre-tax deduction for enterprise income tax by making their own vouchers for booking. In recent years, some regional tax authorities no longer recognize the behavior of enterprises' homemade vouchers for booking, and based on the provisions of Measures for the Administration of Vouchers for Pre-tax Deduction of Enterprise Income Tax (State Administration of Taxation Announcement No. 28 of 2018), they consider that the enterprises' acquisition of waste materials have not obtained legal and valid deduction vouchers, and make the treatment of reissuing and exchanging invoices and adjusting the supplementary tax for the enterprises, and the relevant enterprises face a huge economic burden. Based on the tax policy in the field of renewable resources and the relevant provisions on pre-tax deduction of enterprise income tax, this article analyzes the pre-tax deduction vouchers of renewable resources recycling enterprises for the reference of the majority of enterprises in the renewable resources industry.

I. Case: A recycling enterprise accounted for pre-tax deduction of income tax with homemade vouchers and was required to adjust the back tax of more than 80 million yuan

A recycling enterprise was established in June 2022, mainly engaged in the recycling and sale of steel scrap. The company purchased steel scrap from individual suppliers and sold it to downstream enterprises. In order to solve the problem that the individual supplier at the source did not issue invoices to it, the company issued invoices to the downstream enterprises by applying the simplified tax method stipulated in the Announcement on Improving the VAT Policy on Comprehensive Utilization of Resources (Announcement of the Ministry of Finance and the State Administration of Taxation No. 40 of 2021) in the sales segment, and accounted for cost deduction with homemade vouchers in the purchasing segment.

In February this year, the local inspection bureau inspected the tax-related situation of the Company during the period from its establishment to December 2023 and considered that the Company had acquired scrap steel amounting to RMB325,401,063.60 during the period in question without obtaining legal and valid vouchers, which had been carried forward to the operating costs in full. In accordance with the provisions of the Measures for the Administration of Pre-tax Deduction Vouchers for Enterprise Income Tax (Announcement of the State Administration of Taxation No. 28 of 2018), the Inspection Bureau served a Notice on Tax Matters to the Company in May 2024, informing it that it should have obtained but had not obtained invoices as pre-tax deduction vouchers, and instructing it to make up and exchange invoices that complied with the regulations within 60 days from the date of being informed. As the company was unable to issue and replace the invoices within the time limit, the Inspection Bureau issued a “Decision Letter on Tax Matters” to the company after the expiration of the time limit. According to Article 16 of the Measures for the Administration of Pre-tax Deduction Vouchers for Enterprise Income Tax, it considered that its expenditures should not be deducted before tax in the year of occurrence and the total taxable income should be adjusted upward by RMB325,401,063.60, and demanded that the company should pay a retroactive enterprise income tax of RMB8,000 million and impose a late charge of RMB2,000 million. The company was required to pay a retroactive EIT of more than RMB 8,000,000 and to pay late fees.

After the implementation of Announcement No. 40, many recycling enterprises directly connected to the source suppliers of waste materials to take the above business model, the tax treatment of homemade vouchers as a voucher for pre-tax enterprise income tax, the model is based on the special nature of the industry and the recycling segment of the low-profit tax concessions under the role of a variety of factors, with a certain degree of objectivity and reasonableness. However, according to the current levy management practice, as in the case of this article, the resource recycling enterprises with homemade vouchers are faced with the risk of homemade vouchers not being recognized, being adjusted to pay back taxes and late payment fees, and in addition, they may also be used in violation of Article 23 of the Measures for the Administration of Invoices, which states that “any unit or individual shall use invoices in accordance with invoice management regulations, and shall not have the following behaviors: (5) use other vouchers instead of invoices” as the reason for the violation of the Measures. (e) Substituting other vouchers for invoices” as the reason for fines.

II. The renewable resources industry has long been a problem of pre-tax deduction of enterprise income tax, the enterprise homemade vouchers recorded in the accounts face the risk of adjusting the back tax, plus late payment fees

The source of the industry chain of renewable resources industry is decentralized, often by natural persons, buying stations and other retailers to gather waste materials, and then enter the recycling process. The decentralization of the source leads to the dilemma of source invoicing in the renewable resources industry. In response to the lack of pre-tax deduction vouchers for enterprise income tax in the recycling segment of waste materials, the relevant tax policies in the field of renewable resources are less responsive, and some of them, such as the 1994 Notice of the Ministry of Finance and State Administration of Taxation on the Issues of Transportation Costs and Waste Materials Allowed to Deduct the Input Tax Amounts (Cai Shui Zi [1994] No. 12, which has been (repealed) provides for the acquisition of waste materials by waste materials recycling business units to individual residents can be issued by the tax authorities to supervise the “acquisition vouchers” as financial vouchers, the “State Administration of Taxation on Strengthening the Management of Value-added Tax on Waste Materials Notice” (Guoshuifan [2005] No. 544, repealed) is to further clarify that the “acquisition vouchers” can be used as financial vouchers. (State Taxation Letter [2005] No. 544, repealed) further clarified the issuance requirements of such “acquisition vouchers”, stipulating that the recycling business unit can only issue acquisition vouchers to urban and rural residents (excluding individual operators) and non-business units when acquiring waste and old materials, and shall not be used for the acquisition of other places.

After the repeal of the above policy in 2008, there was basically no similar policy issued to solve the problem of pre-tax deduction of enterprise income tax in the field of renewable resources. In practice, renewable resources enterprises have tried to alleviate the problem of pre-tax deduction of EIT through a number of methods, but there are quite a number of tax-related risks: some recycling enterprises, in order to solve the problems of VAT input deduction and pre-tax deduction of EIT, have obtained the invoices from the third party, which triggered the risk of false invoicing and evasion of tax; some enterprises have borne the burden of VAT by paying the full amount of output tax, or have chosen the VAT on simplified basis, and have been subject to VAT on the basis of purchasing waste materials with their own purchase certificates. Some enterprises bear the full burden of paying VAT on output items or choose the simplified VAT calculation and record the invoices in the enterprise income tax with the homemade vouchers and supporting business materials such as purchase contracts, payment vouchers and pound bills when purchasing waste materials; some regional tax bureaus follow the idea of Cai Shui Zi [1994] No. 12 and allow enterprises to issue invoices for the acquisition of agricultural products at the end of agricultural products acquisition invoices, but the face of the invoices do not show the words “acquisition of agricultural products”. The above two types of vouchers are subject to the risk of not being recognized, being adjusted to pay back taxes, and being subject to late payment fees - the above two types of vouchers are subject to the risk of not being recognized, being adjusted to pay back taxes, and being subject to late payment fees - the above two types of vouchers are not recognized.

In 2018, the State Administration of Taxation (“SAT”) promulgated the Measures for Administration of Pre-tax Deduction Vouchers for Enterprise Income Tax (SAT Announcement No. 28 of 2018), of which Article 9 clarifies the administrative requirements for pre-tax deduction vouchers for enterprise income tax, where an enterprise shall use invoices as pre-tax deduction vouchers if it purchases goods from a taxpayer that has already applied for tax registration and the counterparty is a unit not required to apply for tax registration according to the law, or an individual engaged in a If the other party is a unit which is not required to register for taxation or an individual who engages in small amount of sporadic business, the expenditure shall be deducted by the invoice issued by the taxation authority on behalf of the taxpayer, or the receipt voucher and the internal voucher. However, in the renewable resources industry, the unit price of scrap steel, scrap aluminum and other waste materials is high, and when the supply volume reaches a certain level, the sales of individual suppliers can reach millions or even tens of millions of dollars, which is far more than the standard of small-sized sporadic business operations (for those who pay tax on a periodical basis, the starting point of value-added tax (VAT) is 5,000-20,000 yuan of monthly sales; and for those who pay tax on a sub-taxation basis, it is 300-500 yuan of sales per time or per day), then according to the the provisions of Announcement No. 28, recycling enterprises obtaining waste materials from such individual suppliers should use invoices as pre-tax deduction vouchers. In the current practice, many local tax authorities, in accordance with the provisions of Announcement No. 28, require enterprises to make up for the invoices, but the actual situation is that individual suppliers are unwilling to make up for the invoices for the recycling enterprises, for the occurrence of a long period of time of the business recycling enterprises may not be able to find the source of the many individual suppliers, and some local tax authorities have directly determined that the enterprises did not obtain legal pre-tax deduction vouchers, and require the enterprises to adjust the Some local tax authorities directly recognize that the enterprises have not obtained legal pre-tax deduction vouchers, and require them to adjust and pay the enterprise income tax and late payment fees, and the enterprises are facing an extremely heavy economic burden.

III. In line with the authenticity, relevance and reasonableness of the cost of expenditure should be allowed to deduct before the enterprise tax

In the case of real cost expenditures, the renewable resources enterprises can not obtain invoices and self-made vouchers to account for the pre-tax deduction of enterprise income tax in practice there are many disputes. Article 8 of the Enterprise Income Tax Law stipulates that “reasonable expenditures actually incurred by an enterprise in connection with the acquisition of income, including costs, expenses, taxes, losses and other expenditures, shall be allowed to be deducted when calculating taxable income”, i.e. “authenticity” is established, “Relevance” and ‘Reasonableness’, while Circular No. 28 makes detailed provisions for the deduction of vouchers according to the identity of the counterparty as mentioned above.

There is a view that enterprises should be allowed to record self-made vouchers for pre-tax deduction if they have real costs and expenditures. The Enterprise Income Tax Law, as a superior law, specifies that pre-tax deduction can be made for the expenditures actually incurred by an enterprise if they satisfy the authenticity, relevance and reasonableness, and Article 19 of the Taxation Levy and Administration Law specifies that the enterprise shall make deductions according to the principles of “lawful and effective” and “reasonable” in accordance with the provisions of Article 19 of the Taxation Levy and Administration Law on account books and bookkeeping. The provisions of Article 19 of the Tax Collection Management Law on account books and bookkeeping only specify that enterprises should keep accounts and accounting on the basis of “legal and valid” vouchers, and do not make requirements on the form of pre-tax deduction vouchers, and Circular No. 28 breaks through the provisions of the previous law to impose formal requirements on pre-tax deduction for taxpayers. There is a view that, on the one hand, Circular No. 28 is based on Article 20 of the Enterprise Income Tax Law, which provides that “the specific scope and standard of income and deduction and the specific methods of tax treatment of assets stipulated in this chapter shall be stipulated by the competent departments in charge of finance and taxation under the State Council”, which makes specific management requirements for pre-tax deduction vouchers. In the case that the counterparty does not meet the small amount of sporadic provisions, the current tax law provides that there are ways to issue invoices for tax registration and invoices on behalf of the recycling enterprises can obtain invoices for pre-tax deduction of enterprise income tax through the aforementioned ways; on the other hand, under the supervision idea of “controlling tax with invoices”, mutual auditing of both parties to the transaction is realized through invoices for the purpose of On the other hand, under the supervision idea of “controlling tax by invoices”, it is necessary to realize mutual auditing of both parties through invoices to ensure the authenticity of business and to guarantee the full amount of national taxes.

In the author's opinion, the homemade vouchers should not affect the deduction of real and reasonable expenditures before EIT, and the cost expenditures incurred by enterprises in line with the provisions of Article 8 of the EIT Law should be allowed to be listed before tax. On the one hand, the invoice is an important kind of pre-tax deduction voucher for enterprise income tax, but it is not that no deduction is absolutely not allowed without the invoice, and it is not that deduction is definitely allowed with the invoice, and the invoice that complies with the regulations is only a kind of legal and effective voucher for pre-tax deduction, but it is not the only legal and effective voucher. On the other hand, the renewable resources enterprises cannot obtain the invoice as the pre-tax deduction voucher due to the long-established practice of the industry and the objective status quo, but the invoice is only a kind of voucher to support the expenditure, and should not be criticized for obtaining the invoice as the “form” requirement in the case of the enterprises with real cost expenditure. In addition, from the perspective of anti-avoidance of tax, if enterprises are not allowed to make pre-tax deductions and make general tax adjustments and cost reductions when they do not have the intention to evade tax and have real expenditures, they are taxing non-existent “income”, which is not in line with the principle of levy of the enterprise income tax and is detrimental to the legitimate rights and interests of enterprises.

IV. Can “reverse invoicing” solve the problem of pre-tax deduction vouchers for income tax of resource recycling enterprises?

The “Announcement of the State Administration of Taxation on Matters Relating to ‘Reverse Invoicing’ by Resource Recycling Enterprises to Sellers of End-of-Life Products to Natural Persons” (Announcement of the State Administration of Taxation No. 5 of 2024), which came into effect on April 29 this year, clarifies that the invoices issued by eligible recycling enterprises in accordance with the provisions of the reverse invoicing can be used as the vouchers for deduction of EIT before income tax. Vouchers. This policy is one of the solutions for recycling enterprises to solve the problem of pre-tax deduction vouchers, but in actual operation, there may be the following difficulties: Firstly, Announcement No. 5 explicitly stipulates that when a resource recycling enterprise “reverse invoices” to a seller for the first time, it should obtain the approval of that enterprise on the matters of “reverse invoicing” and “handling taxes and fees”. The first is that Circular 5 clearly stipulates that when a resource recovery enterprise “reverse invoicing” to a seller for the first time, it should obtain the seller's consent on “reverse invoicing” and tax matters and retain relevant supporting materials, and if the seller does not agree, the resource recovery enterprise shall not “reverse invoicing” to it. ”, the recycling enterprise can not be “reverse invoicing” to obtain pre-tax deduction vouchers; Secondly, the “reverse invoicing” is also facing the same problem of the limit, a single seller sales of waste materials in no more than 12 months in a row “Reverse invoicing” cumulative sales of more than 5 million yuan in a continuous period of not more than 12 months, the recycling enterprise will not be able to reverse invoicing, the seller needs to register as a business entity in accordance with the law, according to the provisions of their own invoices; Third, the resource recycling enterprise in the seller ‘reverse invoicing’, it is impossible to know that the seller is currently a tax deduction voucher. Thirdly, when the resource recycling enterprise “reverse invoicing” the seller, it is unable to know the sales amount of the seller which has been applied to “reverse invoicing” at present, and may face the problem of not being able to issue invoices due to the exceeding of the limitation, and it is unable to obtain the vouchers for pre-tax deduction, which also affects the normal conduct of the transaction.

In addition, it is worth noting that the “reverse invoicing” policy responds to the problem of the “first ticket” in the resource recycling business, and the invoices issued by eligible recycling enterprises can be used as input credit vouchers for VAT and pre-tax deduction vouchers for enterprise income tax. The invoices issued by qualified recycling enterprises in the reverse direction can be used as VAT input credit vouchers and pre-EIT deduction vouchers. However, for the case of homemade vouchers of recycling enterprises in practice, some local tax authorities may change the caliber of law enforcement, requiring enterprises to obtain pre-tax deduction vouchers for income tax through “reverse invoicing”, and no longer recognizing the homemade vouchers of enterprises, and if enterprises continue to follow the practice of homemade vouchers for booking in the previous period, they may be faced with the risk of adjusting the supplementary tax. If enterprises continue to follow the previous practice of homemade vouchers, they may face the risk of adjusting the tax.

V. Summary

The Measures for the Administration of Pre-tax Deduction Vouchers for Enterprise Income Tax (Announcement of the State Administration of Taxation No. 28 of 2018) makes uniform requirements for the pre-tax deduction vouchers for enterprise income tax of the purchaser based on the identity of the seller, which is conducive to the maintenance of the order of tax collection and administration, improvement of the efficiency of collection and administration and guarantee of full collection of tax. However, in the case processing, if directly applying the Announcement No. 28, without distinguishing whether there is a real purchasing business, whether real and reasonable cost expenditure has been incurred, without grasping the reasons and circumstances of the enterprise's self-manufactured vouchers, and denying the real cost expenditure of the resource recovery enterprise only on the ground that the vouchers are unlawful, then it is ignoring the specificity of the recycling business and the actual situation, which is contrary to the principle of fairness of tax and is not in conformity with the EIT Law. Substantial provisions on cost deduction. The practice of requiring enterprises to adjust the full amount of income tax will bring an excessive tax burden to enterprises, which is not conducive to the balance between the protection of taxpayers' rights and the collection of national tax, and even less conducive to the sustainable development of the resource recycling industry.