Editor’s Note: In the chain-based collection and administration system of value-added tax (VAT), the right to deduct input VAT is one of the most fundamental tax rights of buyer enterprises. In practice, however, some seller enterprises fail to fulfill their tax declaration obligations after issuing special VAT invoices and subsequently flee and become untraceable. The invoices they issued are classified as abnormal VAT deduction vouchers by tax authorities, forcing buyer enterprises to transfer out the input VAT they have lawfully deducted and suffer corresponding tax losses. This paper takes the case of (2019) Zhejiang 01 Civil Final Appeal No. 6876 as an entry point for analysis, so as to provide practical references for enterprises trapped in similar dilemmas.

01 Case Introduction

In the case of (2019) Zhejiang 01 Civil Final Appeal No. 6876, in June 2016, Hangzhou Company A and Ningxia Company B concluded a Sales Contract via email exchange, followed by mutual signing, stamping, scanning and returning of the contract documents. The contract stipulated that Company B would supply 85 pieces of equipment across 11 categories to Company A, with a total contract price of more than 2.26 million yuan (tax-inclusive). The seller was obligated to issue special VAT invoices at the 17% tax rate for the equivalent amount to the buyer. After the contract was signed, Company B delivered the goods as agreed, which were inspected and accepted upon signature by the designated consignee. In August 2016, Company B issued 23 special VAT invoices to Company A, with a total invoiced amount (tax included) of more than 2.26 million yuan and a tax amount of 320,000 yuan. After receiving the invoices, Company A lawfully declared and deducted the tax amount as input VAT, and paid 90% of the total contract price (approximately 2.04 million yuan) in the same month as agreed.

However, in August 2018, the Binjiang District Taxation Bureau of Hangzhou, State Taxation Administration, issued a Tax Matters Notice to Company A, informing it that the aforementioned invoices had been listed as abnormal VAT deduction vouchers by the competent tax authority of Company B. The reason was that Company B was identified as a fleeing (untraceable) enterprise in June 2018 and had failed to declare taxes. On this basis, the tax authority required Company A to make a full transfer-out of the 320,000 yuan input VAT that had been declared and deducted. Company A immediately filed a civil lawsuit, claiming that Company B should compensate it for the tax loss of 320,000 yuan.

The court of first instance dismissed the claim on the grounds of insufficient probative force of evidence. The core reason for the first-instance judgment was that the Sales Contract submitted by Company A was only a copy, and the court could not confirm the existence of a sales contract relationship between the two parties, hence the claim lacked factual and legal basis.

During the second-instance proceedings, Company A supplemented three categories of evidence: the original copies of the 23 invoices issued by Company B, bank payment vouchers, and correspondence emails restoring the contract conclusion process. The court demonstrated the entire process of email transmission, mutual stamping, scanning and return in court, and held that this method of conclusion constituted "other forms" as prescribed in the Contract Law, and the contract was legally established and effective. Combined with the high consistency between the invoice information and the contract contents, as well as the mutual corroboration between the payment vouchers and the contract payment terms, the court of second instance affirmed the genuine existence of the sales contract relationship and ruled that Company B shall compensate Company A for the tax loss of 320,000 yuan.

02 Issuing Special VAT Invoices Eligible for Lawful Deduction Is a Statutory Obligation of the Seller

The core of the legal determination in this case lies in defining the scope of the seller’s obligations regarding special VAT invoices. The court of second instance clearly expounded the seller’s invoice obligations in the judgment, stating that "In a sales contract, issuing genuine, valid and legally deductible special VAT invoices to the buyer is a statutory obligation of the seller." Attention shall be paid to the three qualifying adjectives in this statement: genuine, valid, and legally deductible. This is not a formal obligation but an outcome-based obligation: the seller shall not only complete the act of issuing invoices but also ensure that the buyer can actually enjoy the tax right of input VAT deduction.

This determination has a profound basis in tax law. From the institutional logic of VAT, the core function of special VAT invoices is precisely to serve as deduction vouchers. Article 12 of the Regulations on the Implementation of the Value-Added Tax Law explicitly provides that "Input VAT deductible by a taxpayer from its output VAT on the strength of VAT deduction vouchers shall include: (1) VAT amount specified on the special VAT invoices obtained from the seller; ..." The prerequisite for this institutional arrangement is that the issuer shall lawfully declare taxes for the transactions corresponding to the issued invoices, so as to maintain the integrity of the VAT chain. In other words, the chain logic of VAT inherently embeds the tax payment obligation of the invoice issuer. If the issuer fails to declare taxes, the VAT chain is broken, and the deductive right of the recipient cannot be guaranteed naturally.

For this reason, when Company B fled and refused to declare taxes after issuing invoices, its issued invoices had legally lost their qualification as valid deduction vouchers under tax law. Pursuant to the Announcement of the State Taxation Administration on Matters Concerning the Administration of Abnormal Value-Added Tax Deduction Vouchers (State Taxation Administration Announcement [2019] No. 38), where a fleeing enterprise has specific circumstances during its existence, the special VAT invoices issued for the corresponding tax periods shall be classified as abnormal VAT deduction vouchers. Where a general VAT taxpayer obtains special VAT invoices listed as abnormal vouchers, if it has not declared deduction, such deduction shall be temporarily disallowed; if it has already declared deduction, the input VAT shall be transferred out in full unless otherwise stipulated. Therefore, the tax authority’s classification of the invoices involved as abnormal vouchers and requirement for the buyer to transfer out the input VAT is merely an administrative manifestation of this legal consequence.

From the perspective of contractual obligations, the contract in this case explicitly stipulates that the payment is tax-inclusive, and the buyer makes payment after obtaining invoices, which inherently implies the contractual purpose that the invoices shall be lawful and valid. The realization of the contractual purpose requires that invoices exist not only formally but also effectively in substance. Company B issued invoices but caused the invoices to lose their deductive function due to its own faults. From the perspective of contract performance, the obligation was not substantially fulfilled, constituting a breach of contract.

03 A Seller That Breaches the Contract and Causes the Buyer to Be Unable to Deduct Input VAT Shall Bear Liability for Compensation to the Buyer

Having clarified the nature of the seller’s obligations, the next question is the source of the buyer’s right to claim compensation. The buyer’s right to claim compensation in this case derives from the civil law remedy for damages for breach of contract. Article 577 of the Civil Code stipulates that if a party fails to perform its contractual obligations or its performance does not conform to the agreement, it shall bear liabilities for breach of contract such as continuing performance, taking remedial measures, or compensating for losses.

In this case, Company B failed to perform its contractual obligation of issuing genuine, valid and deductible special VAT invoices. Its breach of contract directly caused Company A to have to transfer out the deducted input VAT, resulting in substantial additional tax expenditure losses. There is a direct causal relationship between such losses and Company B’s breach of contract. Had Company B lawfully declared taxes, the invoices involved would not have been identified as abnormal vouchers, and Company A’s deductive right would not have been infringed.

It is particularly noted that the loss herein is not an abstract tax risk but a specific and quantifiable property loss. When Company A paid the contract price, the price already included tax (tax-inclusive pricing), and it was entitled to expect such tax to be economically recovered through input VAT deduction. The breach of contract by Company B frustrated this expectation, leaving Company A to bear additional tax that it should not have ultimately borne. The amount of loss is clear and fully meets the constituent elements of damages for breach of contract.

This also involves an important legal logic: as the invoice issuer, Company B is both the counterparty to the contract and a VAT taxpayer. Its act of evading tax obligations shall be subject to recovery by tax authorities under tax law, and shall also bear liability for damages to the buyer under civil law. The two liabilities are parallel and operate within their respective legal frameworks. From this perspective, the judgment in this case not only protects the individual rights and interests of Company A but also clarifies that acts of shifting one’s tax evasion risks and costs to the abiding party through breach of contract are not protected by law.

04 Practical Implications of the Case

The two-instance proceedings of this case, in addition to establishing the two rules of the seller’s statutory invoice obligations and the buyer’s right to claim compensation, also provide implications for recipient enterprises in terms of litigation evidence, tax response and daily risk prevention and control.

At the litigation level, the integrity of the evidence chain largely determines the success or failure of rights protection. The fundamental reason for the defeat in the first instance was insufficient evidence: only a copy of the contract was available, so the court could not confirm the contractual relationship, and other claims naturally could not be supported. The reversal in the second instance relied on the combination of three categories of evidence: correspondence emails, original invoices and payment vouchers. The contract conclusion process was restored by emails, the delivery of goods was corroborated by invoices, and the payment nodes were supported by bank records. Every link was documented, proving the authenticity of the transaction. This process also reveals a noteworthy approach: the Tax Matters Notice and Verification Letter issued by the tax authority turned out to be favorable evidence for the buyer in this case. They objectively proved that the seller had issued the invoices involved and failed to declare taxes, indirectly corroborating the existence of a genuine transaction relationship and confirming the objective occurrence of losses. Extracting civil litigation evidence from tax administrative documents is an important method worthy of reference in similar cases.

At the tax level, verification applications should be initiated prior to civil litigation. Before preparing a lawsuit, whether the buyer has exhausted all tax-level responses is an unavoidable issue. When the seller flees and becomes untraceable and its properties are difficult to seize, even if a civil lawsuit is won, the possibility of actual recovery of losses is greatly reduced. In contrast, tax remedies should not be overlooked either. Pursuant to the Operating Rules for the Handling of Abnormal Value-Added Tax Deduction Vouchers (for Trial Implementation), after receiving a notice of abnormal vouchers, an enterprise shall file a verification application with the competent tax authority within 20 working days (10 working days for Grade A tax credit taxpayers) and submit materials proving the authenticity of the transaction simultaneously. For genuine transactions, the tax authority may restore the input VAT deduction right upon verification, which serves as the first line of defense to avoid losses. If the verification application fails to resolve the issue, the enterprise may then initiate civil litigation. The two procedures are parallel and can corroborate each other.

At the risk prevention level, ex ante institutional arrangements are superior to ex post rights relief. In terms of contracts, enterprises are advised to add special invoice clauses to procurement contracts, explicitly stipulating that: (1) The seller shall issue genuine, lawful and legally deductible special VAT invoices to the buyer within the agreed time limit; (2) If the buyer is unable to normally deduct the input VAT that has been or should be deducted or is required to transfer out such input VAT due to the seller’s own reasons (including but not limited to failure to declare taxes, being identified as a fleeing and untraceable enterprise, or invoices being recognized as abnormal vouchers by tax authorities), the seller shall fully compensate the buyer for the tax losses and pay interest on funds occupied from the date of loss occurrence to the date of actual compensation. In terms of invoice receipt, enterprises should develop the habit of checking invoices immediately upon receipt, conducting real-time verification of received special invoices through the Integrated VAT Invoice Service Platform, and maintaining necessary vigilance against suppliers with abnormal operations or low tax credit ratings. In terms of evidence preservation, enterprises should establish a systematic archive of transaction documents. Contracts (including electronic contracts and email correspondence records), original invoices, payment vouchers, acceptance documents and goods transport documents form the basic evidence chain proving the sales relationship and the causal relationship of losses. Enterprises are recommended to establish a systematic document filing mechanism with a clear retention period to avoid passive rights protection due to the loss of documents.