Editor's Note: On 18 March 2024, at the press conference on the judicial interpretation of the "Two High Commissions", the spokesperson of the Supreme Prosecutor's Office explicitly pointed out that "petrochemical, coal and other industries are still the high incidence of the crime of fraudulent invoicing of taxes". Under the background of coal mining quota system, coal mining enterprises usually adopt off-the-books operation and other ways to sell coal mined in excess of the quota, and it is difficult for downstream coal trading enterprises to obtain legal certificates for VAT input tax deduction and EIT deduction when purchasing coal from them, so some of them make use of third-party invoices to obtain input invoices on behalf of the enterprises. In addition, the traditional transport mode of individual drivers also brings the problem of obtaining invoices for coal trading enterprises, and the emergence of new vehicle-less transport modes relieves this problem and brings new tax risks at the same time. This paper will take the predicament of coal trading enterprises as the starting point and briefly analyse the administrative and criminal tax risks faced by coal trading enterprises under the new situation.

I. Difficulty in obtaining compliant invoices, grim survival situation of coal trading enterprises

In practice, due to the difficulty of obtaining upstream goods invoices and transport invoices, it is common for coal trading enterprises to obtain special invoices through a third party. On the one hand, in order to promote the optimisation and upgrading of the energy industry, China has implemented a quota system for coal mining, and the part of over-mining quota cannot be sold normally, which leads to the sale of "cash coal" without invoice by some coal mines, and it is difficult for purchasers to obtain input invoices for tax deduction and pre-tax deduction of EIT, and they are caught up in the predicament of abnormally high tax burden. On the other hand, short and medium-distance coal transport is mainly road transport, and its business entities show the characteristics of "many, small, scattered and weak", with low willingness to issue VAT invoices, and the coal trading enterprises are unable to obtain compliant certificates for input tax deduction and pre-corporate income tax deduction. Admittedly, the new vehicle-less transport mode has effectively solved this problem, but the recent outbreak of several cases of false invoicing on network freight platforms has also brought new tax risks to coal trading enterprises that obtain transport invoices.

Secondly, coal trading enterprises face the administrative risk of being characterised as fraudulent or tax evasion and paying back taxes and late fees.

(i) False invoicing, tax evasion and referral to the judiciary are all qualitatively handled.

According to the existing cases, coal trading enterprises, as the recipient enterprises, were found to be in tax evasion and false invoicing situations, and the treatment in practice was inconsistent. For example, in the tax administrative penalty case of a mining investment company in Xinjiang, the tax authorities determined that the company purchased coal from an individual, who provided the company with VAT invoices issued by four other companies, and the company paid for the goods in accordance with the invoice price and tax less 2%, which was determined by the tax authorities to be tax evasion by over-listing the expenditures in order to underpay the tax payable. In the tax penalty case of a coal company in Ordos City, the tax authorities determined that the company had committed false invoicing through the criminal judgement of the upstream invoicing party and the transcripts of the relevant personnel, and at the same time, the company was qualified as tax evasion. As in the case of a coal purchasing and marketing company in Liaoning, due to the outbreak of false invoicing cases on the network freight platform, the transport invoices obtained on the basis of real transactions were found to be falsely invoiced, and were qualified as tax evasion by the tax authorities.

Different findings bring different legal liabilities to coal trading enterprises that obtain invoices. In case of tax evasion, if the invoicee actively cooperates with the inspection and pays the tax, late payment fees and fines, it can avoid the administrative risk of escalating to the criminal risk of tax evasion. If the invoiced party is identified as false invoicing, there is a possibility that the enterprise will be transferred to the public security organ to be identified as a false invoicing crime. For example, in the above mentioned tax penalty case of a coal company in Ordos City, as the false invoicing reaches the criteria for filing a case, the tax authority does not impose tax penalties for the time being, and instead, the case will be transferred to the judicial organ to investigate the criminal responsibility.

(ii) Coal trading enterprises are exposed to the risk of paying back taxes and late fees

In practice, once the invoices obtained by a coal trading enterprise are recognised as false invoices, regardless of whether the invoices are characterised as false invoices or tax evasion, the enterprise will be exposed to the risk of paying VAT and late fees, and the cost expenses corresponding to the invoices obtained will not be allowed to be deducted before the EIT and thus will be exposed to the risk of paying the EIT tax and late fees. For a coal trading enterprise, if the cost deduction is denied and the EIT is adjusted due to the fact that the invoices obtained are deemed to be falsely issued, the survival of the enterprise will face greater challenges. According to the Enterprise Income Tax Law and its implementing regulations, reasonable cost of sales and cost of goods sold actually incurred by an enterprise in its production and operation in relation to the acquisition of revenue are allowed to be deducted before the enterprise income tax. We believe that the enterprise in question should focus on proving the authenticity of its business and provide contracts, pound bills and other supporting materials to meet the requirements of authenticity, reasonableness and relevance of the costs and expenditures, so as to strive for the real expenditures to be deducted before EIT, thus avoiding the risk of facing a huge amount of retroactive payment of EIT and late payment fees.

III. Coal trading enterprises will be exposed to the criminal risk of the offence of false VAT invoicing

(i) Dispute as to whether the obtaining of a special invoice by a coal trading enterprise by paying an "invoicing fee" constitutes the offence of false invoicing

In practice, there has been a high incidence of cases in which coal trading enterprises that obtained special invoices through a third party have been found guilty of the offence of fraudulent issuance of VAT special invoices, with the common denominator being the payment of "invoicing fees" or "ticket points" by the coal trading enterprises. Firstly, it is controversial whether the payment of "invoicing fee" or "ticket point" constitutes an offence, as "invoicing fee" or "ticket point" may not be a part of the coal trading business. The "invoicing fee" and "ticket point" may not necessarily be fees paid by the coal trading enterprise for the purpose of false invoicing, but may also be the comprehensive discounted operating costs. Secondly, it is also controversial whether the payment of "invoicing fees" and "ticket points" necessarily constitutes the offence of false VAT invoicing. Judge Teng Wei of the Supreme Court pointed out in "The Interpretation and Application of the Two High Courts <Interpretation of Several Issues Concerning the Application of Law to the Handling of Criminal Cases of Endangering the Administration of Tax Levy>" that: "The recipient of a falsely issued VAT invoice often pays the "invoicing fee" and "tax point" as the basis for the offence of falsely issuing VAT invoices. In the name of paying "invoicing fees" and "tax points", the invoiced party often obtains input invoices from others and then deducts them, thus forming the relationship between the invoicing party and the invoiced party of illegally selling and illegally purchasing VAT invoices at the same time. For the invoiced party, if the invoiced party obtains the false invoice and then cheats to offset the tax, the invoiced party uses the criminal means of illegally purchasing the VAT invoice to achieve the criminal purpose of falsely issuing the VAT invoice, which is a guilt by association of the purpose behaviour and the means behaviour, and is convicted and punished in accordance with the principle of the heaviest punishment, i.e., convicted and punished in accordance with the provisions of Paragraph 2 of Article 208 of the Criminal Law; if the invoiced party illegally purchases the VAT invoice, it is not used to cheat to offset the tax, and the invoiced party does not use it to cheat to offset the tax. If the recipient illegally purchases VAT invoices and uses them for other purposes instead of fraudulently offsetting the tax, if the other purposes do not constitute a crime, it constitutes the crime of illegally purchasing VAT invoices; if the other purposes constitute other crimes, it constitutes the crime of illegally purchasing VAT invoices and the crime of implicating the other purposes." That is to say, the key to judge whether the invoices obtained by paying the "ticket points" constitute the crime of false invoicing is whether they are fraudulently offsetting the tax. In our opinion, based on the special characteristics of the coal industry, the purpose of enterprises paying "ticket points" to obtain invoices is not necessarily to fraudulently offset taxes. For a coal trading enterprise that obtains invoices from a third party in a genuine transaction, it should take the authenticity of its business as the starting point and prove that it has not objectively caused any loss of tax and subjectively does not have the purpose of fraudulently offsetting the tax, so as to strive for not being qualified as the offence of fraudulently issuing VAT invoices and to mitigate its criminal liability.

(ii) Circumstances in practice in which the offence of fraudulently issuing VAT invoices has been changed to prosecution of the offence of illegally purchasing VAT invoices

Since the implementation of the Two High Judicial Interpretations, there have been some changes in judicial practice regarding the qualification of invoices obtained by coal trading enterprises through a third party, and there are different cases of sentencing for the crime of false VAT invoices and the crime of illegally purchasing VAT invoices. In the case of Baotou City So-and-so Coal Limited Liability Company and Liu Moumou's crime of falsely issuing special invoices [(2024) Nei 0204 Criminal Beginning No. 41], Defendant Liu Moumou actually operated Defendant Baotou City So-and-so Coal Limited Liability Company, and issued 241 VAT special invoices for Baotou City So-and-so Trading Company Limited through the company without actually purchasing coal from the company, and the Defendant, Defendant Unit and Defendant were convicted of the offence of false VAT invoices. In the case of Taicang So-and-so Coal Company Limited, Liu Moumou, etc., the crime of falsely issuing VAT special invoices, the crime of using them to fraudulently obtain export tax refunds and tax deduction invoices, the crime of illegally purchasing VAT special invoices, and the crime of purchasing forged VAT special invoices [(2024)苏0585刑初230号](the Procuratorate prosecuted them for the crime of falsely issuing VAT special invoices first, and then changed them to the crime of illegally purchasing VAT special invoices). Between October 2019 and July 2021, defendants Liu Moumou and Liao Moumou were convicted of the crime of illegally purchasing VAT invoices after purchasing 83 VAT invoices from four companies, including Huaibei Hongde Transportation Company Limited, by paying invoicing fees without any real transactions. As can be seen from the above cases, there are differences in the criminal offences committed by coal trading enterprises that constitute an offence when there are circumstances in which invoices are obtained from a third party.

IV. How can coal trading enterprises prevent and respond?

Due to the difficulty in obtaining upstream invoices for goods and transport invoices, coal trading enterprises are facing a tough tax compliance situation. We would like to remind coal trading enterprises that they should adopt a combination of pre-emptive and post-control methods to deal with tax risks. Precautionary approach, i.e., improve the internal system to prevent and control risks in daily operation and management, retain business information in a timely manner, and keep complete evidence as a strong support material for the authenticity of the business. Ex post control, i.e., when facing tax-related administrative risks, it should communicate with tax authorities in a timely and positive manner, provide supporting materials for business authenticity, strive for good business qualification, and take tax administrative remedial measures when necessary to avoid administrative risks from escalating to criminal risks; when facing tax-related criminal risks, it should also take business authenticity as the starting point, and strive not to be recognised as the offence of false VAT invoicing or to mitigate its own criminal liabilities.