Editor's Note: On December 31, 2024, the Supreme People's Court issued a retrial administrative judgment around an urban land use tax dispute case, revoking an 11-year-old tax penalty decision. In the author's view, in the case of cognitive differences between the taxpayer and the enterprise on a tax-related matter, it should not be unilaterally characterized as tax evasion, and the taxpayer's right of administrative appeal in administrative and criminal cross-case should be protected in accordance with the law. The judgment of this case is of typical significance and important value, the tax enforcement behavior of the tax authority in the form of mechanical law was not supported by the court, and the taxpayer finally won the lawsuit after more than ten years of twists and turns, and the legitimate rights and interests of the taxpayer were effectively safeguarded.

I. Supreme People's Court retrial example: the case of the revocation of tax evasion penalties by Sanjian Corporation

(i) Basic facts of the case

From August to October 2013, the former Xingning City Taxation Bureau inspected the tax payment status of Sanjian Company from July 2000 to June 2013, and on October 30, 2013, it issued a tax penalty decision. Based on the certified area of the 17 pieces of land in the case under the name of Sanjian Company, the tax authority found that it had committed tax evasion and recovered 6.57 million yuan of urban land use tax for the past 13 years and the corresponding late payment fees, and imposed a fine of 13.15 million yuan, which was double the amount of tax evaded. However, Sanjian argued that although the land use certificate was registered in its name, the company did not actually occupy and use all of the land, and that its act of changing the copy of the land use certificate on the basis of the actual area occupied should not be recognized as tax evasion. Sanjian refused to accept the tax penalty decision and filed an administrative lawsuit, which lasted for more than 10 years through the first, second and retrial proceedings to defend its rights.

In addition, the company and its former legal representative, Wang Moumou, were involved in a criminal controversy. The Intermediate People's Court of Meizhou City, Guangdong Province, convicted Sanjian and Wang Moumou of tax evasion on July 22, 2014, and the criminal judgment set out the content of the tax penalty decision made by the former Xingning Tax Bureau. Following a complaint to the Provincial High Court directing an off-site retrial, the Intermediate People's Court of Zhongshan City, Guangdong Province, changed its verdict to acquittal on April 13, 2017, finding that neither Sanjian Company nor Wang Moumou constituted the crime of tax evasion.

(ii) Views of the courts

1. (2014) Xingning People's Court Xingchu Zi No. 4: Dismissal of Sanjian Company's Claims

On September 10, 2014, the People's Court of Xingning City, Guangdong Province issued a judgment of first instance, holding that Sanjian held the land use certificates of the 17 pieces of land in the case, and that regardless of whether or not it used them, it had the legal obligation to pay land use tax in accordance with the provisions of the Tax Law. The tax authorities imposed a fine of two times the amount of tax stolen on the company for its long-term non-declaration or false declaration, which was in line with Article 63 of the Tax Administration Law. In addition, as its tax violation was in a continuing state, it did not exceed the five-year statute of limitations from the date of the end of the act. At the same time, the facts found in the tax penalty decision have been confirmed in the effective criminal judgment.

2. (2014) Meizhou Intermediate People's Court line final judgment No. 79: dismissing the appeal and affirming the original judgment

On December 17, 2014, the Meizhou Intermediate People's Court of Guangdong Province issued a judgment of second instance, holding that the judgment in the criminal case involving Sanjian had determined that the company constituted the crime of tax evasion, and that the judgment had identified and confirmed the facts and penalty results identified in the tax penalty decision, and that, according to Article 70 of the Provisions of the Supreme People's Court on Several Issues Concerning the Evidence for Administrative Litigation, the criminal judgment in force had the force of res judicata According to Article 70 of the Provisions of the Supreme People's Court on Several Issues Concerning Evidence in Administrative Litigation, an effective criminal judgment has res judicata effect, and the facts confirmed by it do not need to be proved any more, and can be used directly as evidence for the case. Therefore, the facts and results of the tax penalty decision have been bound by the effective criminal judgment and cannot be changed.

3、(2024) Supreme People's Court Xing Re No. 27: Revocation of the First and Second Trial Decisions and Tax Penalty Decisions

Faced with the judgment of losing in the first and second instance, Sanjian did not get discouraged, but chose to apply for retrial to the Guangdong Provincial Higher People's Court. Although the Provincial High Court ruled on November 20, 2019 that the application for retrial was rejected, the company did not give up and proceeded to continue to appeal to the Supreme People's Court, which also finally ushered in a victory in late 2024. The Supreme People's Court pointed out in its December 31, 2024 retrial judgment that the tax penalty decision in the case was based on the area of the certificate as the basis for tax calculation, without taking into account the objective reality of the Company's acquisition of the allocated land in the case, and that the result of the penalty was not comparable to the facts of the violation of the law, the subjective fault, and the extent of the harm done by the Company. In addition, the purpose and motive of the tax enforcement actions did not meet the requirements of strict regulation, fair and civilized law enforcement, and did not prudently protect the company's reliance interests. In the end, the Supreme People's Court ruled to revoke the administrative judgment of the first and second instance and the tax penalty decision.

II. Failure to file a tax return when there is doubt about a tax-related matter does not necessarily constitute tax evasion

This case is a controversial case revolving around urban land use tax. The tax authorities made a tax evasion characterization of the three construction company, recovered its tax late payment fees and imposed a fine of two times, but the company believes that its behavior does not constitute tax evasion, the tax authorities are obviously excessive penalties, which triggered a dispute between the tax enterprises. Which is right or wrong, whether the company's behavior constitutes tax evasion, which needs to be analyzed back to the constituent elements of tax evasion.

Article 63, paragraph 1, of the Law on the Administration of Taxation provides that: "A taxpayer who falsifies, alters, conceals or destroys without authorization his account books and vouchers, or who overstates his expenditures or omits or understates his income in his account books, or who, having been notified by the tax authorities to make a declaration, refuses to make a declaration or makes a false declaration of his tax liabilities, and who does not or underpays his due tax, commits tax evasion". Where a taxpayer evades tax, the tax authorities shall recover the unpaid or underpaid tax, late payment fees, and impose a fine of not less than 50% and not more than five times the unpaid or underpaid tax; where a crime is constituted, criminal liability shall be investigated in accordance with the law." The article connotes four constituent elements of tax evasion, which are the subject element (taxpayer, withholding agent), fault element (intentional), behavioral element (several types of tax evasion) and consequence element (non-payment or underpayment of tax). The focus of the dispute in this case was the fault element, i.e., whether the three construction companies had the subjective willfulness of tax evasion.

Returning to the facts of the case, although the land use certificates of the 17 pieces of land in question were registered in the name of Sanjian, not all of them were actually occupied and used by the company. Specifically, some of the land had not been demolished, some had not been demolished, and there were "two certificates for one land" with the demolished tenants; some land use certificates had been revoked; some land had been judicially auctioned off to the outsiders; and some land had been used as public municipal roads, civic squares and green belts, etc. When declaring the payment of land use tax, Sanjian changed the land use certificates of one of the land use certificates. When declaring the payment of land use tax, although Sanjian Company changed the area on the copy of one land use certificate and did not declare the payment of land use tax for the other 16 pieces of land, but the fact that the land parcel whose area was changed and reduced was indeed used to build a public road, the area occupied by the public road basically matched with the area claimed by Sanjian Company, and at the same time, the other 16 pieces of land involved in the case did have the aforementioned complicated situations. At the same time, the other 16 pieces of land in the case did have the aforementioned complicated circumstances, and the company had a specific historical background and reasons for acquiring the allocated land in the case.

Therefore, although Sanjian did not claim its rights by first applying for change of land certificate from the land department and then paying the taxable tax according to law, but declared the land use tax based on its misunderstanding of the actual occupied land, this was not due to the subjective intention to evade tax, but due to the cognitive difference between the two sides of the tax enterprise on the tax-related matters, i.e., whether the land use tax should be calculated according to the area of the certificate or the area of the actual occupied area. In other words, by declaring the land use tax based on the actual occupied area, Sanjian Company did not have the cognitive element of knowing that the harmful result of non-payment and underpayment of tax would occur, and naturally did not have the subjective will of actively pursuing the evasion of tax payment through the act, and therefore did not have the subjective intention of tax evasion, and should not be characterized as tax evasion.

In addition, the principle of no-fault presumption is the basic principle of tax law enforcement, which means that the tax authorities shall presume that the taxpayer is not at fault and is in good faith when there is no direct evidence proving the taxpayer's malice, i.e., the tax authorities have the burden of proof to prove that the taxpayer is at fault. In this case, the tax authorities did not follow this principle, the land use tax tax basis of the legal application of the issue of whether the company constitutes tax evasion, continue to be based on the certificate of the area of all the land tax, the company based on their understanding of the tax law and knowledge of the eventual failure to make a tax declaration directly characterized as tax evasion, and imposed a fine of two times. This practice clearly violates the principle of no-fault presumption and undermines the establishment of equal and mutual trust in the relationship between the tax authorities and the taxpayers. Since the tax authorities did not satisfactorily fulfill their burden of proof, they should bear the adverse consequences of losing the case.

III. Taxpayers' right to administrative appeal in administrative and criminal cross-cases is protected in accordance with the law

In tax practice, some tax administrative cases may also involve tax evasion and other related criminal offenses during the trial process, and this case is such a cross-cutting administrative and criminal case. The tax authorities issued a tax penalty decision on October 30, 2013 against Sanjian Company. In the criminal case, Sanjian was convicted of tax evasion by the court on July 22, 2014, and was acquitted on April 13, 2017 instead. The first instance administrative judgment in this case was rendered on September 10, 2014, and it can be seen that the court of first instance ultimately ruled to dismiss the claim rather than ruling to dismiss the lawsuit, which means that the court of first instance actually accepted the case. Despite the improper reasoning of the first instance court's judgment, it still procedurally safeguarded the taxpayer's right to administrative appeal.

The reason is that, according to the relevant provisions of the Law of the People's Republic of China on Administrative Penalties and the Law on the Administration of Taxation, Sanjian enjoys the right to institute administrative litigation in accordance with the law in respect of the tax penalty decision made by the tax authorities, and the decision on tax penalty and the decision on tax reconsideration explicitly informs Sanjian of the right to institute administrative litigation, and therefore the company's right to institute administrative litigation shall be protected in accordance with the law. In this case, the tax penalty decision made by the tax authorities involves the substantive rights of taxpayers, and the administrative litigation filed by Sanjian Company against the decision belongs to the scope of administrative litigation. According to the "supreme people's court on the application of the administrative litigation law of the People's Republic of China" of the interpretation of article 87, "in the process of litigation, one of the following circumstances, the suspension of litigation: ...... (f) the trial of the case shall be based on the results of the relevant civil, criminal or other administrative cases, and the relevant case has not been concluded for (F) the trial of the case must be based on the results of the relevant civil, criminal or other administrative cases, and the relevant cases have not yet been completed", the provisions of this article, when the administrative case needs to be based on the results of the trial of the criminal case as the basis for the suspension of the trial of the case, but the court can not be ruled on the dismissal of the administrative counterparty's litigation request, denying the administrative counterparty's right of action. That is to say, for the illegal acts involved, if the tax authorities have already made an administrative penalty decision before transferring the case to the judicial organs for processing, the administrative relative has the right to file an administrative lawsuit against the administrative penalty decision in accordance with the law, and the administrative relative's right to file an administrative lawsuit shall be protected by the law.

IV. Implications and lessons learned from this case

This retrial case of the Supreme People's Court is of great significance to the tax authorities, courts and taxpayers, and provides valuable reference for future tax enforcement, judicial trial and tax practice. Only with the joint efforts of all parties can we build a fairer and more just environment for the rule of law in taxation.

(i) Implications for tax authorities: avoiding selective enforcement and insisting on comprehensive investigations

In this case, the tax authorities, after the original legal person of the company involved in the case and some of his family members and the company's executives were wrongly detained in criminal custody, suddenly initiated a tax inspection and made a decision to penalize a 13-year-long tax matter within a short period of time, and mechanically levied taxes and penalties on all the land involved in the case on the basis of the certified area, which is obviously an improper enforcement of the law. The tax authorities should learn a lesson from this case, adhere to the principle of comprehensive and prudent investigation, and collect taxes in a civilized manner in accordance with the law, thereby establishing a good relationship between the tax authorities and the taxpayers.

(ii) Implications for the courts: balancing the collection of taxes in accordance with the law and the protection of taxpayers' rights and interests

In this case, the Supreme People's Court effectively safeguarded the legitimate rights and interests of the taxpayers by returning to the principles of substantive taxation, equalization of penalties, fair enforcement of the law and protection of reliance interests. When hearing tax cases, the court should analyze the facts of the case and the application of the law in depth, and support the tax authorities to collect taxes according to the law and protect the legitimate rights and interests of the taxpayers, which should not be neglected. In addition, the court should avoid neglecting the substantive review of the legality of administrative acts due to res judicata, and ensure that the legitimate rights and interests of taxpayers are fully protected in the judicial process.

(iii) Implications for taxpayers: insist on defending their rights and believing in the power of the law

The company involved in the case from the taxpayer to the complainant, experienced a long eleven years of rights defense road, during which encountered criminal miscarriage of justice, administrative litigation and other difficulties. However, it was this persistence that allowed them to see the clouds scattering and the Supreme People's Court's retrial judgment eventually revoked the first and second trial decisions and tax penalty decisions. We suggest that when taxpayers face such tax disputes, they should timely hire professional tax lawyers to intervene and provide professional advice and solutions to effectively resolve tax disputes. We believe that with the support of professional power and the persistence of not giving up lightly, everything will eventually see the light of day and usher in the dawn of victory.