The Announcement of the State Administration of Taxation on the Issuance of Measures for the Administration of Pre-tax Deduction Vouchers for Enterprise Income Tax (SAT Announcement No. 28 of 2018) establishes the basic principle that non-compliant external vouchers shall not be used as pre-tax deduction vouchers, and at the same time stipulates two avenues of relief, namely, to reissue or exchange external compliant vouchers, and where reissuance or exchange is not possible for special reasons, to provide relevant information to confirm that the expenditures are Authenticity. If an enterprise obtains false invoices and cannot reissue or exchange the invoices when it has real business expenditures, how should it understand and apply Article 14 of Announcement No. 28 to strive for pre-tax deduction? Based on this, this case is intended to analyze the article in conjunction with a case for the reference of enterprises in similar cases. How to seek pre-tax deduction for obtaining false invoices that cannot be reissued or exchanged?

1. Case Sharing: Pharmaceutical Enterprise A Obtains General Invoice for Promotional Services Falsely Issued by Upstream Enterprises

Enterprise A is a biopharmaceutical company whose main business is the production and sale of drug A. The company's main business is the production and sale of drug A. The company's main business is the production of drug A. Because there are a large number of drugs with similar effects to Drug A on the market, and medical institutions and doctors have a high degree of choice, Enterprise A must promote the drug in order to sell the drug to the terminal medical institutions. Therefore, Enterprise A purchases promotion services from Enterprise B, pays the promotion service fee to it and obtains the general invoice for promotion services. In the course of its business, Enterprise B paid the promotion service fee to the next level of agent and arranged the next level of agent to carry out the specific promotion service.

 

Recently, the competent tax authority of Enterprise B determined that Enterprise B was a shell enterprise and characterized the invoices issued by it as false invoices, and sent a Notification of Confirmed False Invoices and a Letter of Concurrence to the competent tax authority of Enterprise A. The competent tax authority of Enterprise A has notified Enterprise B of its false invoices and has notified Enterprise A of its false invoices. The competent tax authority of Enterprise A, in accordance with Article 15 of Announcement No. 28, advised Enterprise A to make up or exchange the invoices in conformity with the regulations within 60 days, among which, if it is impossible to make up or exchange the invoices or other external vouchers due to special reasons, it should provide the relevant information that can confirm the authenticity of its expenditures, in accordance with the provisions of Article 14 of Announcement No. 28.

Enterprise A believes that it should reissue and exchange invoices to the real seller, i.e., the next-level agent, but it is unable to contact the next-level agent, which constitutes a special reason for not being able to reissue and exchange invoices, so it can provide the supporting materials for not being able to contact the next-level agent, and the bank vouchers of the payment made by Enterprise B to the next-level agent, which can prove the authenticity of the expenditure on the promotional services and make the pre-tax deduction.

The tax authorities considered that the documents that could not be replaced or exchanged included only “industrial and commercial cancellation, organization revocation, inclusion in the abnormal business households, bankruptcy announcement”, and the documents that could not get in touch with the next level of agent did not belong to the four kinds, and Enterprise A could not provide the contract signed between Enterprise A and the next level of agent or the payment of the promotion service fee to the next level of agent directly. Moreover, Enterprise A cannot provide the contract signed with the next level of agent, nor can it provide the payment certificate of the promotion service fee paid to the next level of agent directly, therefore, it does not meet the necessary information stipulated in Article 14 of Circular No. 28, and cannot be deducted before tax.

It can be seen that the main dispute in this case lies in the different understanding between the two parties on the specific scope of the required information stipulated in Article 14 of Circular No. 28.

2. Tax law analysis of Article 14 of Proclamation No. 28

Article 12 of Announcement No. 28 stipulates that “non-compliant invoices (hereinafter referred to as ”non-compliant invoices“), such as false invoices from ......, shall not be used as pre-tax deduction vouchers”. ...... shall not be used as pre-tax deduction vouchers".

Article 13 stipulates that "if an enterprise ...... obtains non-compliant invoices ......, it shall, before the end of the current year's remittance period, request the other party to make up for the invoices, exchange invoices, or other external vouchers, if the expenditures are real and have actually occurred. ".

Article 14 stipulates, "If an enterprise is unable to reissue or exchange invoices and other external vouchers in the process of reissuing or exchanging invoices and other external vouchers due to special reasons such as the other party's cancellation, revocation, revocation of business license according to the law, or being recognized by the tax authorities as a non-normal household, the enterprise may, after confirming the authenticity of the expenditures by virtue of the following information, have its expenditures allowed to be deducted before tax:

1. Proof of the reasons for not being able to reissue or exchange invoices or other external vouchers (including proof of industrial and commercial cancellation, withdrawal of organization, inclusion in non-normal business households, bankruptcy announcement, etc.);

2. Contracts or agreements for related business activities;

3. Payment vouchers paid by non-cash means; ...... The first to the third items of the preceding paragraph are the required information".

Accordingly, if the invoice obtained by the invoicee is characterized as false invoicing, the result is that the invoice shall not be used as a pre-tax deduction voucher, but it is not necessarily equal to the false invoices corresponding to the costs and expenses shall not be deducted before tax. Whether the relevant costs and expenses can be deducted before tax depends on whether the business expenses are real or not. If there is no real business, no pre-tax deduction; if there is a real business, in accordance with the law to make up for the invoice, exchange invoices, or provide information to confirm the authenticity of the expenditure, can be deducted before tax. Then, what should be the understanding of the specific scope of the material to confirm the authenticity of the expenditure?

(i) Is the scope of materials that cannot be reissued or exchanged for invoices limited to the four types listed?

There are two uses of the word “etc.” in the legal norms, one is used for braking, that is, “etc.” before the content has been completely enumerated; the other is used to indicate that the enumeration is not exhaustive, that is, “etc.” before the content is not completely enumerated. The contents before “etc.” belong to incomplete enumeration. Can not make up the invoice, exchange invoices for the supporting materials, belong to the incomplete list. Specifically:

According to the method of textual interpretation, Article 14 of Circular No. 28 lists four special reasons for not being able to reissue or exchange invoices, i.e., cancellation, revocation, revocation of business license according to the law, and being recognized by the tax authorities as non-normal households, while Paragraph 1 of Article 14 of Circular No. 28 lists four kinds of supporting materials for not being able to reissue or exchange invoices, i.e., industrial and commercial cancellation, revocation of institutions, inclusion of non-normal business households, and bankruptcy announcements. These four special reasons and four kinds of supporting materials are not one-to-one correspondence, in which the enterprise bankruptcy does not correspond to the cancellation, revocation, revoked business license, listed as a non-normal household in any of the circumstances, and the revocation of business license is not listed in the supporting materials, which indicates that the special reasons and the supporting materials are part of the enumeration.

 

According to the purpose interpretation method, Circular 28 is a normative document formulated by the State Administration of Taxation (SAT), and the SAT explicitly pointed out in its interpretation of Circular 28 that “for the cases where the enterprises have not obtained the external certificates or have obtained the non-compliant external certificates, the Measures provide remedial measures to safeguard the taxpayers' legitimate rights and interests”. It can be seen that the legislative purpose of Article 14 of Circular No. 28 is to protect taxpayers from pre-tax deduction of costs and expenses incurred in real, therefore, all costs and expenses incurred in real, but objectively unable to get in touch with the real seller, the application of this article should be granted.

From the viewpoint of tax enforcement practice, in the case of a company in Xinjiang obtaining false ordinary VAT invoices, a company in Xinjiang purchased mutton from an individual farmer but obtained ordinary invoices from a third-party company, which was recognized by the tax authorities as obtaining invoices that did not comply with the regulations. At the same time, because a company in Xinjiang could not contact the actual supplier, objectively it could not reissue or exchange the invoice, but it was able to provide information such as bank collection records to prove the existence of real goods transactions, so the tax authorities allowed a company in Xinjiang to make pre-tax deductions in accordance with Article 14 of Announcement No. 28. In this case, the tax authority determined that the purchaser was unable to contact the real seller, which was a special reason for not being able to reissue or exchange invoices.

Therefore, the scope of supporting documents for the inability to reissue or exchange invoices should not be limited to the four enumerated categories, but should be within the scope of application of Article 14 of Announcement No. 28 for the cases with similarity to the enumerated categories, which resulted in the objective inability to reissue or exchange invoices.

(ii) Is the scope of a contract or agreement for related business activities limited to contracts in written form?

 

The function of a contract or agreement on related business activities is to confirm the authenticity of the business and there is no requirement as to the form of the contract, which may be any one of the forms prescribed by law. According to Article 469 (1) of the Civil Code, “The parties may conclude a contract in writing, orally or in any other form”, and Article 490 (2), “A contract shall be concluded in writing as prescribed by law or administrative regulations or as agreed by the parties, and the parties have not adopted the written form but one of them has already performed the main part of the obligation”. written form but one party has fulfilled its main obligations and the other party accepts it, the contract is established". Accordingly, the form of contract can be either written, oral or factual.

In addition, from the viewpoint of tax enforcement practice, in the case of a company in Inner Mongolia obtaining false VAT invoices, a company in Inner Mongolia accepted transportation services provided by individual drivers but obtained VAT invoices from a third party logistics company. The tax authorities determined that the obtaining of false invoices by a company in Inner Mongolia could not be deducted before tax. A company in Inner Mongolia provided the tax authorities with a part of the receiving enterprise's check list with the name of the driver and the running water of the bank's payment of the driver's salary, and the tax authorities determined that the above materials could prove the authenticity of the expenditure, which could be deducted before tax. In this case, the tax authorities presumed that a de facto contractual relationship had been established between a company in Inner Mongolia and the driver by the receiving enterprise's checklist with the driver's name and the bank's stream of payment of the driver's salary.

Therefore, the scope of the relevant business activities of the contract or agreement should not be limited to the written form of the contract, the core of this article is to prove the authenticity of the business, as long as the evidence in the case can prove that the business really happened, and the real seller has a clear point of view for the oral contract, the fact that the contract should be considered.

(iii) the use of non-cash payment vouchers are limited to the scope of payment vouchers directly from the buyer to the seller?

After the State Administration of Taxation (SAT) issued Circular No. 28, He Bing of the Income Tax Department of the SAT published an article entitled “Analysis of the Basic Concepts of <Methods for Administering Vouchers for Deduction of Pre-Enterprise Income Tax>” in China Taxation, which explains the “payment vouchers paid in a non-cash manner” as "in the case of the other party's legal entity In the case that the legal subject of the other party has disappeared or is in the state of ‘stagnation’, the authenticity of the payment made in cash will not be verified, for this reason, the Measures have made restrictive provisions on the mode of payment". Accordingly, Circular 28 mainly restricts the method of cash payment. For non-cash payment, no matter whether the purchaser pays the funds directly to the seller or the purchaser pays the funds to a third party first and then the third party transfers the funds to the seller, and no matter whether the third party constitutes a shell enterprise or not, as long as it can provide the complete payment vouchers, the requirements of Circular 28 are complied with. Therefore, the scope of payment vouchers paid in a non-cash manner should not be limited to vouchers for payments made directly from the purchaser to the seller.

3. Does the information provided by enterprise A comply with article 14 of Proclamation 28?

As for the present case, the author believes that the information provided by Enterprise A fully complies with the provisions of Article 14 of Circular No. 28, specifically:

First, Enterprise A was unable to contact the next level of agent and objectively could not obtain a replacement or exchange invoice, which is in line with the provisions of Article 14(1) of Circular No. 28.

Secondly, Enterprise A was able to provide evidence to prove that the sales of Drug A were good, corroborating that the next level of agent implemented the promotion service, while the next level of agent collected the promotion service fee paid by Enterprise A through Enterprise B. It can be concluded that there was a de facto contractual relationship between Enterprise A and the next level of agent in compliance with the provisions of Paragraph 2 of Article 14 of the Announcement No. 28.

Thirdly, enterprise A paid the promotion service fee to enterprise B by bank transfer, and enterprise B paid the next-level agent by bank transfer, in which neither of them paid in cash, in accordance with the provisions of article 14, paragraph 3, of Proclamation No. 28.

4. Conclusion 

In recent years, the number of cases in which enterprises are required to make tax adjustments for obtaining false invoices has been increasing. For tax authorities, they should not rigidly understand and apply the provisions of Article 14 of Circular No. 28 to unduly restrict the taxpayers' right of pre-tax deduction, but should fully protect the legitimate rights and interests of taxpayers in the application of the law. For enterprises, before the transaction, due diligence should be done to avoid the situation that the invoicing party and the selling party are not the same; during the transaction, cash payment should be eliminated; after the transaction, if there is a dispute over the understanding of Article 14 of Circular 28, they should respond cautiously, search for the legislative intent, communicate with the tax authorities positively, make statements in accordance with the law, and seek legal remedies and professional support from tax lawyers in a timely manner. professional support from tax lawyers.