The software industry is one of the industries that China has vigorously pursued the development of, and through the implementation of tax incentives to promote the industry to maintain high quality and stable development. However, in recent years, the cases of software enterprises' false invoicing, fraudulent export tax rebates and tax evasion have erupted one after another, which triggered the concern of all sectors of the society about the tax-related problems of the industry. The technological attributes of software products have put a veil of mystery over them, making it more difficult for tax authorities to carry out audits. Therefore, this year, the State Administration of Taxation will include software enterprises in the focus of the fight, and joint investigations by multiple departments. In view of this, this paper reveals the irregular business model of software enterprises through three hot cases in the software industry, and analyzes the compliance construction of software enterprises, in order to provide suggestions for promoting the healthy development of the software industry.

I. Frequent cases of software enterprises' false openings become the focus of tax supervision

(I) State Administration of Taxation (SAT): focus on cracking down on software enterprises' false openings

On May 26, 2023, the State Administration of Taxation (SAT) held a regular press conference. Huang Yun, director of the General Office of the General Administration of Taxation, said in response to a reporter's question that the tax department will continue to focus on high-risk key industries, key areas in accordance with the law and resolutely crack down on all kinds of tax evasion and fraud violations. On the same day, the State Administration of Taxation also exposed seven typical cases of tax-related violations, involving fraudulent export tax refunds or tax refunds, not in accordance with the law to deal with personal tax reimbursement, pharmaceuticals, software enterprises, false invoicing, illegal tax intermediaries, as well as gas stations maliciously tampered with the gas tax-control equipment tax evasion and other illegal cases. It shows that the tax authorities attach importance to the tax-related problems in the software industry, as well as their firm determination and consistent attitude to continue to crack down on the tax-related violations in a strict and speedy manner.

(II) Software industry has become the focus of tax inspection in various regions.

In January 2023, the Jiangxi Provincial Tax Bureau issued the "State Administration of Taxation, Jiangxi Provincial Tax Bureau on the issuance of random sampling key audit object directory database notice", a total of 400 enterprises into the directory database, of which 66 software enterprises, accounting for more than 15%. Guizhou, Hubei and other places have released the focus of the audit object is not lacking in the figure of software enterprises, visible software industry has become the focus of the regional tax audit.

(III) Software enterprises have many tax-related cases such as false invoicing and tax evasion.

Through the websites such as Judgement and Judicial Instruments Network and Beida Fabo, the tax-related criminal judgements of software enterprises are summarized, and there are 78 tax-related criminal cases of software enterprises in the past three years, with 16 cases for the crime of fraudulently obtaining export tax refunds and tax deduction invoices, 20 cases for the crime of fraudulent invoicing and 48 cases for the crime of fraudulently issuing VAT special invoices.

In addition, in May this year, the General Administration of Taxation announced the tax case notification showed that the tax department of Hainan Province, in accordance with the law, investigated and dealt with a case of false invoicing of VAT by a software enterprise, the company in the absence of real transactions, the external false invoicing of 105 VAT invoices, at the same time, the company is suspected of evading the recovery of tax arrears of 8,256,800 yuan, and at present the case has been referred to the public security organs in accordance with the law to investigate the criminal responsibility. The relevant person in charge of the Inspection Bureau of Hainan Provincial Taxation Bureau said that it will further play the role of joint combating mechanism of taxation, public security, procuratorate, customs, People's Bank of China, foreign exchange management and other departments, focus on the illegal and criminal behaviors of gang-type and trans-regional false invoicing and always keep high pressure, and create a more standardized and fairer tax environment actively.

II. Practical Case: Analysis of Tax-Related Criminal Acts in Software Industry

(I) False VAT invoices by utilizing the tax incentives of instant tax rebate

Brief description of the case: in 2018, Yao Mou and Tian Mou jointly set up Wipu Company, the company's main business is the technical research and development, production and sales of electronic products, enjoying the national "instant tax refund" and local tax preferential policies. After the establishment, the two men used the electronic chips processed by Weipu Company to pretend to be high-tech products, falsely issued VAT invoices to downstream enterprises, and then applied for software products "instant tax refund" and local rebates, cheating the national tax.

As verified by the tax authorities, from July 2018 to June 2019, Wipro accepted 53 false VAT invoices from other companies in the name of false high-tech research and development funding, with a total of 5 million yuan in price and tax; it took the form of fabricating false production and sales behaviors to fraudulently enjoy the national tax "instant levy and refund" preferential policy, and adopted the "low tax" and "local rebate" policies to cheat state tax. Preferential policies, the use of "low-value high open" approach to a large number of companies issued 711 VAT invoices that do not match the actual business situation, the total value of the price and tax of more than 70 million yuan, resulting in a loss of more than 10 million yuan of state taxes.

In October 2018, Zhu set up Milo Company under Yao's instructions, and used the company account and his own account to help the two men to carry out the flow of funds back and forth, resulting in a false flow of funds to avoid investigation and punishment, totaling about 100 million yuan, and the flow of funds was as follows: the company subject to the invoice → Wipo Company → Milo Company → Zhu Mou → company subject to the invoice. Zhu Mou involved in the crime of false opening during the false opening of Vipu company caused national tax loss of more than 3 million yuan. In the end, the court found that Yao Mou, Tian Mou and Zhu Mou all constituted the crime of false VAT invoicing with huge amount.

Tax case analysis: This case is a typical case of using double-soft identification to cheat national tax, the so-called double-soft identification refers to the identification of software enterprises and software products, according to the "Ministry of Finance, State Administration of Taxation on the notice of value-added tax policy on software products" (Cai Shui [2011] No. 100), Article 1 of the regulations, VAT general taxpayers to sell their self-developed and produced software products, according to the 17% tax rate (now 13%) after the collection of VAT, the general taxpayers to sell their self-developed and produced software products, at the rate of 17% tax (now 13%). After collecting VAT at a rate of 17% (now 13%), the general VAT payer shall implement the policy of immediate refund for the portion of the actual VAT burden exceeding 3%. Meanwhile, according to the Notice on Several Policies to Promote the High-Quality Development of Integrated Circuit Industry and Software Industry in the New Period (Guo Fa [2020] No. 8), software enterprises are entitled to two exemptions and three halves of enterprise tax incentives.

Due to the scientific and technological attributes of software products, false invoicing is naturally hidden, and it is difficult for non-professionals to accurately recognize the "authenticity" of the products, and the state's criteria for recognizing software enterprises are relatively loose, which leads to the temptation of some unscrupulous elements in the huge profits of the use of software enterprises in the false opening of VAT invoices to defraud the state of taxes, but in the current situation, it is not possible for the software companies to use the software enterprises in the false invoicing of VAT. However, under the current state of affairs of multi-departmental joint investigation and focusing on combating the software industry, the tax authorities can accurately lock the software enterprises with abnormal invoicing and carry out tax audit on them, and the risk of false invoicing of the software enterprises and their downstream invoiced parties rises.

(II) Software enterprises cheat tax preferences before cheating export tax rebates.

Brief description of the case: Luo Mou, Li Mou and others set up software enterprises in areas with tax incentives, purchased chips and other raw materials without actual functions from upstream companies at extremely low prices, processed them into the so-called "attitude stabilization controllers", and at the same time, purchased "soil moisture sensors" without actual functions at extremely low prices. At the same time at a very low price to buy no real function of the "soil moisture sensor", sold to the associated midstream production enterprises, and issued special VAT invoices with the name of software, so as to apply to the local tax authorities for software products VAT that is to be refunded, and fraudulent local tax concessions. Subsequently, Luo and others forged false export order contracts, entrusted foreign trade companies with real export business, falsely exported "attitude stabilization controllers" and "soil moisture sensors" and issued false VAT invoices, and then made false declarations of export tax rebates to the tax authorities, thus cheating local tax concessions. The export tax refund was fraudulently declared to the tax department, and the export tax refund was more than 40 million yuan.

Kong Mou actually operates a foreign trade company involved in the case, in the case of knowing Luo Mou and others to implement fraudulent export tax rebates, still through its foreign trade company, to help Luo Mou false export of software products without actual function, and in the country with the illegal exchange of foreign exchange in renminbi, and then through the overseas company in the form of payment for goods to pay remittances, to create false funds to go, to the state tax authorities to declare for export tax refunds. In just three months, Kong helped Luo and others to cheat export tax rebates of more than 1.83 million yuan.

Ningbo city tax authorities to start the audit, the case involves 54 enterprises in 14 provinces and cities across the country, the amount involved in 2.7 billion yuan, only Ningbo involved in the amount of more than 300 million yuan, tax refunds of more than 40 million yuan. The court made a judgment on the main involved persons, Luo Mou, Li Mou and Kong Mou, all three were sentenced to the crime of fraudulent export tax rebate, and Li Mou was also sentenced to the crime of false VAT invoices, and was sentenced to 13 years, 10 years and 10 months, and 3 years, and punished with a fine of 36 million yuan, 6.57 million yuan, and 950,000 yuan.

Tax case analysis: In recent years, China has vigorously promoted the development of the software industry and achieved considerable results. According to the disclosure of the "2022 Software and Information Technology Service Industry Statistical Bulletin" published by the Ministry of Industry and Information Technology, "In 2022, the operation of China's software industry has been steadily improving, with the revenue of the software business jumping up to the ten trillion yuan step, profitability remaining stable, and the software business exports maintained growth. Software product revenue amounted to 265.83 billion yuan, up 9.9% year-on-year, the growth rate fell by 2.4 percentage points compared with the same period of the previous year, accounting for 24.6% of the proportion of industry-wide revenue." Among them, the tax incentives for double-soft recognition play an important role in the development of enterprises.

The enterprise involved in this case, by setting up a chain of false invoicing, first utilized the policy of instant tax refund and regional tax incentives for software enterprises to fraudulently issue VAT invoices to downstream enterprises to cheat the national tax, and then cheated the export tax rebate by falsely declaring the export trade of software enterprises. As the copyright declaration of software products in China adopts the filing system, enterprises can obtain software product certification through agents, and China's export tax rebates for software products are mainly based on the audit of software product certification, resulting in a lower threshold for the criminals, and then through the underground money changers and enterprises offshore accounts for foreign exchange operations can be completed by the whole set of fraudulent export tax rebate process.

At present, China's tax authorities in order to prevent the occurrence of such crimes, and actively carry out cooperation with the relevant departments, the software enterprises to carry out testing of relevant products, and strengthen the supervision of foreign exchange, increase the crackdown on the underground money changers. At the same time, the software enterprises' fraudulent tax fraud is included in the key targets to prevent the occurrence of similar cases on multiple levels. In addition, this case also reveals the tax risk of downstream foreign trade enterprises, in addition to Kong's foreign trade enterprises, there are a number of foreign trade enterprises involved in this case, and even two foreign trade enterprises are unknowingly involved in this case, the main reason for this is that gullible acquaintances and "high-tech products" and other names, did not verify the authenticity of the agency business.

(III) False invoicing of R&D expenses for false declaration, tax reimbursement and fine of more than 300 million dollars.

Brief description of the case:  company A's main business is the development and sale of software products, and it has obtained the recognition of software company. from august 2019 to december 2020, company A accepted 390 ordinary VAT invoices issued by others without any real transaction, and took advantage of the enterprise income tax reduction and exemption policy and the preferential policy of VAT over tax liability of software production enterprises, and used the fraudulent opening of R&D By means of false invoices of R&D expenses, Company A listed the taxable cost of EIT and made false tax declaration, resulting in underpayment of VAT by more than RMB 30 million and EIT by more than RMB 120 million. The tax authority determined that Company A violated the provisions of Article 63 of the Tax Collection and Administration Law, constituting tax evasion, and recovered the corresponding tax and late payment fees and imposed a fine of double the amount, totaling more than 300 million yuan.

Tax case analysis: China alleviates the operating costs of software enterprises through the form of additional deduction for R&D expenses. According to the Announcement of the Ministry of Finance and the State Administration of Taxation on Further Improving the Policy of Adding Deduction for R&D Expenses before Taxation (No. 7 of 2023), "The actual R&D expenses incurred by an enterprise in carrying out R&D activities, which are not formed into an intangible asset to be included in the current period's profit and loss, shall be deducted from the actual R&D expenses from the date of the enterprise's commencement of R&D activities, on the basis of actual deduction, from January 1, 2023 onwards, it will be further deducted in accordance with 100% of the actual amount incurred before tax; if it forms intangible assets, from January 1, 2023 onwards, it will be amortized in accordance with 200% of the cost of intangible assets before tax." At the same time, China's software enterprise identification standards for R & D costs in the revenue of the proportion of the existence of restrictions, so some enterprises or in order to meet the software enterprise identification standards, or in order to use R & D costs plus deductions to cheat the national tax, false acceptance of others issued R & D costs invoices, false listing of enterprise taxable costs.

Enterprises should be reminded that, at present, the judicial practice in some regions determines that the crime of false invoicing of ordinary VAT invoices is a behavioral crime, i.e., the criminals implement the behavior of false invoicing to reach a certain amount and constitute a crime without the need to cause the loss of national tax, so for software enterprises and their upstream invoicing parties, the criminal risk of the corresponding violations is extremely high.

III. Software Industry Tax Compliance Suggestions 

(I) Improve the tax compliance system of software enterprises and establish a compliance management organization

Under the current situation of vigorously combating tax-related problems in the software industry, the latent problems in the past business process of enterprises will be reflected in the eyes of the tax authorities, therefore, it is urgent to promote the compliance system of software enterprises, and the persons in charge of software enterprises should take the initiative to curb the tax-related illegal behaviors of enterprises and strengthen the management of enterprise rules and regulations. It is recommended that enterprises establish corresponding tax compliance system according to their own business model. In addition, software enterprises should establish a compliance management organization according to their own scale. Small-scale software enterprises should be led by the actual controller and senior management, while large-scale enterprises should be more detailed and establish a specialized organization according to the principles of departmental division, so as to effectively supervise the various taxes and policies and regularly carry out tax health inspections.

(II) Carry out the integration of "industry, finance, law and tax" to prevent tax risks.
As mentioned before, there are two major causes of false billing in the software industry: vigorous tax incentives and the difficulty in supervising the scientific and technological attributes of software products. With regard to the preferential tax policies, the state and various regions are carrying out the cleanup of illegal financial rebates, and enterprises set up in "tax depressions" and parks may be subject to inspection by the tax authorities and be implicated in the corresponding tax violations; with regard to the difficulty in supervising the scientific and technological attributes of software products, the tax authorities are now working together with the relevant departments to carry out the corresponding review in order to puncture the mysterious veil of software enterprises, and the relevant departments have been working closely with the relevant departments to prevent the risk of fraud. In view of the difficulty in supervising the scientific and technological attributes of software products, the tax authorities are now working together with relevant departments to carry out corresponding reviews to pierce the veil of mystery of software enterprises, and the relevant violations will be revealed.

Therefore, it is suggested that software enterprises should re-examine their business model from four levels of business, finance, law and tax, ensure the authenticity and relevance of the transactions from business, establish a financial file system and a book checking system from finance, and carry out a compliance check of the four streams of the enterprise from the level of law and tax, so as to achieve the goal of "business, finance, law and tax" and "business, finance, law and tax". To realize the integration of "business, finance, law and tax" and to prevent tax-related risks of enterprises.

(III) Consult tax professionals to deal with tax-related risks.

Software enterprise tax-related issues exposed for a relatively short period of time, until this year, the tax authorities will be included in the key audit ranks, so the corresponding response of enterprises is not perfect, many enterprises do not pay attention to the tax self-inspection and the tax authorities audit, until the administrative or even criminal stage before hiring lawyers for relief. For enterprises, tax consulting can effectively block the tax risk in the operation stage; after the case enters into the audit program, hiring a lawyer to deal with the case in time can effectively prevent the further expansion of tax-related risks.