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Scrap Material Recycling Enterprises Facing Criminal Charges for False Invoicing - Key Points for Appeal to Potentially Secure a Reversal

In recent years, with the launch of the "Crackdown on Fraud and Forgery" special campaign by four ministries, criminal cases related to false invoicing in the scrap material industry have continued to surge. The number of cases is on the rise, and heavy sentences are frequently applied. According to the search results, in 2020, a total of 90 cases of enterprises engaging in harmful tax-related crimes were publicly disclosed on the China Judgment Online platform. Among them, cases involving the crime of falsely issuing value-added tax special invoices accounted for the overwhelming majority, reaching 87 cases. In these 90 cases, there were 66 cases in the first-instance procedure. Among them, 23 cases resulted in sentences of more than ten years of imprisonment, and one case even received a life sentence, with a heavy sentence application rate exceeding 36%. Cases where probation was applied amounted to 19, with a probation application rate of less than 29%. Constrained by the specific nature of the scrap material industry, the inability of individual suppliers at the source to issue value-added tax special invoices has become a significant factor hindering the development of the industry. This issue has led to a considerable number of related practices, such as affiliation and proxy invoicing. In practice, many defendants who are still deemed to have committed the crime of false invoicing and are subject to heavy sentences after the first and second-instance procedures raise objections to the judgment. Initiating an appeal becomes an important way for these defendants to safeguard their legal rights. In this article, lawyers from Hua Tax Law Firm, drawing on their practical experience in representing cases related to false invoicing in the scrap material industry, analyze key issues and practical points to consider during the appeal process, providing reference for relevant enterprises and individuals.

I. A Steel Company Accused of Criminal False Invoicing through Legitimate Proxy Invoicing - Key Points for Appeal

(I) Basic Case Facts

H Steel Company is a scrap steel recycling and processing enterprise, with the majority of its scrap steel supplied by individual retailers. From April 2017 to January 2018, in order to issue invoices for the scrap steel purchased by the company, H Steel Company, with the approval of its controlling person Mr. Kong, delegated Mr. Qin, a co-defendant, to coordinate with Mr. Meng (whose case has been concluded with a valid judgment). They decided to issue value-added tax special invoices to H Steel Company in the names of S Company, D Company, and X Company, controlled by Mr. Meng. The information on the invoices, such as product name, quantity, and amount, was based on the actual scrap steel business of H Steel Company. In the course of business, H Steel Company signed purchase and sale contracts with S Company, D Company, and X Company, created relevant documents such as invoices, and arranged for its finance personnel to transfer the purchase funds to the corporate bank accounts of S Company, D Company, and X Company. As H Steel Company had already paid the funds to individual retailers promptly upon receiving the scrap steel, S Company, D Company, and X Company, upon receiving the payment from H Steel Company, would transfer the pre-paid funds back to the personal account of H Steel Company's cashier, Mr. Cen. In October 2018, S Company, D Company, and X Company were investigated for suspected false invoicing of input invoices, leading to implications for H Steel Company. Mr. Kong, the legal representative of H Company, Mr. Qin, the finance manager, Mr. Wu, the business manager, and others were taken into compulsory measures. The judicial authorities accused H Company of accepting 370 false value-added tax special invoices from S Company, D Company, and X Company, with a total price and tax of over 58 million yuan and a tax amount of over 8 million yuan during the period from April 2017 to January 2018. After the case was uncovered, H Company fully paid back the deducted tax.

(II) Focus of the Case

1. Whether the business involved in H Company's case had genuine commodity transactions.
2. Whether Mr. Kong intentionally deceived the national value-added tax and whether H Company's invoicing and deduction behavior caused a loss of national value-added tax.

(III) Key Points for Appeal

(1) Genuine Scrap Steel Purchases by H Steel Company

According to the evidence in this case, all 370 value-added tax special invoices obtained by H Company from the upstream invoicing parties corresponded to genuine scrap steel purchase transactions. These transactions occurred during H Company's process of recycling and processing scrap steel and involved three main parties: the upstream invoicing parties (S Company, D Company, and X Company), H Company as the invoice recipient, and individual retailers as direct suppliers of scrap steel. In the course of operating the scrap steel trading business, H Company received raw materials from numerous individual suppliers. The upstream companies, including S Company, issued value-added tax special invoices based on the actual quantity of scrap steel purchased by H Company. These companies, acting as trading entities, did not directly participate in the transportation of scrap steel but used an instructed delivery method. Individual retailers delivered the scrap steel directly to H Company, bypassing unnecessary logistical steps, reducing costs in the transportation process, which is a rational choice for economic agents.

Additionally, to ensure the turnover of funds and retain the supply of scrap steel from individual retailers, H Company chose to prepay the funds when individual retailers delivered the goods. H Company settled directly with individual retailers through its corporate personal account and then, based on the supply situation from individual retailers, paid the full amount of scrap steel funds to the corporate accounts of S Company and other entities. After receiving the payment, S Company and others deducted the corresponding fees and returned the pre-paid funds to H Company's personal account through the personal account of their legal representative. The entire business process and fund transfer chain were clear and transparent, with funds not forming a closed loop and ultimately being paid to individual retailers. This confirms the fact that individual retailers supplied scrap steel to H Company. Based on this, the business involved in this case differs fundamentally from the "false invoicing without goods" behavior targeted in anti-fraud measures. "False invoicing without goods" involves establishing shell companies specifically for false invoicing, whereas in this case, H Company engaged in actual operations. Although the method by which H Company obtained ownership of the goods differed from conventional methods, it was a result of economic development and should not be denied as a transfer of ownership.

In false invoicing cases, determining the existence of genuine commodity transactions requires specific recognition based on the provisions of the Civil Code and should not be solely assessed from the perspective of tax law, as the regulatory domains of the two differ. In civil law, as long as the two parties sign a purchase and sale contract without invalidating reasons, following the principle of autonomous will in civil law, the contract should be considered valid. The specifics of how goods are transferred should not be limited to form. Considering factors such as cost, the use of certificates such as instructed delivery and the transfer of ownership rights have become common in the trade of bulk commodities. When dealing with false invoicing cases, the principles of market economic laws should be followed, and administrative power should not intervene in economic determinations.

(2) Lack of Subjective Intent of Mr. Kong for Tax Evasion and No Objective Implementation of False Invoicing Crimes

There has been ongoing controversy in judicial practice regarding whether the crime of false invoicing of value-added tax is a purposeful or behavioral crime. From the Opinion on How to Determine the Nature of Activities That Use the Name of a Related Company to Engage in Business Activities and Have the Related Company Falsify Value-Added Tax Special Invoices (Law Research [2015] No. 58) to the release of typical cases protecting the legitimate rights and interests of private entrepreneurs (Second Batch) by the Supreme People's Court in December 2018 and the release of the Opinion on Fully Leveraging Prosecutorial Functions to Serve and Guarantee the "Six Stabilities" and "Six Guarantees" by the Supreme People's Procuratorate in July 2020, this controversy has been basically settled. The two highest judicial authorities have clarified the constitutive elements of the crime of false invoicing of value-added tax. To establish the crime of false invoicing of value-added tax, it is necessary for the perpetrator to have the subjective intention and purpose of deceiving and deducting tax, as well as objectively causing a loss of value-added tax. In the past five years of judicial practice, this theory on the constitutive elements of the crime of false invoicing has been deeply implemented, as seen in various cases such as the acquittal of Chen in Heilongjiang Mulan on the charge of false invoicing ([2018] Hei 0127 Xing Chu 99) and the non-prosecution of Chen in Jilin Dongliao on the charge of false invoicing ([2016] Chuan 15 Xing 110), among others. The statutory maximum sentence for the crime of false invoicing of value-added tax is life imprisonment, which is a serious crime. Interpreting this crime as a behavioral crime, punishing anyone who issues false value-added tax special

 invoices and violates the order of managing value-added tax special invoices, contradicts the principle of proportionality between the offense and the penalty.

In this case, Mr. Kong agreed to obtain the invoices for legitimate purposes based on the occurrence of genuine purchase transactions and the assumption of actual procurement costs. The goal was to improve and standardize the company's accounting processes and obtain legally valid pre-tax deduction vouchers. It was not an intention to obtain invoices knowing there were no genuine transactions merely to deceive and deduct value-added tax. Therefore, in this case, Mr. Kong did not have the purpose of falsely invoicing to deceive tax.

Furthermore, the behavior of H Company in obtaining invoices and deducting tax did not cause a loss of national value-added tax. According to tax regulations, if the upstream company has declared and paid the value-added tax, the downstream company should have the right to deduct input tax. In this case, after deducting the corresponding input tax from the sales tax amount obtained, the upstream companies should declare and pay the value-added tax to the tax authorities. H Steel Company used the value-added tax special invoices obtained for normal input tax deduction, complying with the principles of value-added tax deduction. H Company's deduction behavior did not cause a loss of national value-added tax. The issue of false increase in input tax by upstream companies in the business involved in this case should be attributed to the responsibility of those companies, contingent on clarifying the facts of the case. It is not appropriate to deny the authenticity of H Company's business and deprive it of the right to normal input tax deduction due to the problems with input invoices from upstream companies. It is even more inappropriate to attribute a false invoicing crime to H Company under criminal law.

(3) If tax can be repaid before judgment, it may lead to non-prosecution or reduced punishment

According to the Summary of the National Symposium on Economic Crime Trial Work (2004) and the Notice on the Issuance of the Minutes of the Symposium on Difficult Issues in the Discussion of Economic Crime by the Second Criminal Division of the High People's Court of Zhejiang Province (Zhe High Court Criminal Division II [2005] No. 1), the calculation of the amount of national tax losses in the crime of false invoicing of value-added tax can generally be based on the time of the case, the time of filing, or the time of the end of the investigation. Because the statutory penalty for the crime of false invoicing of value-added tax is severe, the trial authorities should adopt a realistic attitude, starting from the principle favorable to the defendant. The cutoff time for calculating losses can be appropriately extended. Based on this, for cases where tax is fraudulently obtained and cannot be recovered before the court judgment, it should be considered as causing a loss to national interests. Tax fraud recovered before the court judgment should be deducted from the loss amount.

As mentioned earlier, the national tax loss in this case was caused by the false increase in input tax by upstream companies, and they should bear the corresponding responsibility. However, before the judgment was made, Mr. Kong had repaid the tax in four installments, giving up the input tax deduction rights that H Company should have enjoyed and recovering the national tax loss caused by the upstream invoicing parties. Therefore, in sentencing Mr. Kong, this amount should be deducted. As the case has entered the trial stage, it is appropriate to consider reducing the punishment for Mr. Kong.

(4) "Truthful Proxy Invoicing" by H Steel Company Complies with Tax Laws and Relevant Legal Provisions

"Truthful proxy invoicing" is a new phenomenon that has emerged in the course of business management with the development of the market economy. In the field of bulk commodity trade in scrap materials, individual suppliers are responsible for recycling scrap materials and selling them to companies specializing in scrap utilization. In the construction field, small construction teams formed by natural persons may purchase sand and gravel from individuals and face difficulties in obtaining value-added tax special invoices. Companies specializing in scrap utilization and construction companies require value-added tax special invoices for accounting. In this case, Mr. Kong purchased scrap steel from individual retailers but was unable to obtain invoices. At such times, if a third party issues value-added tax special invoices to the recipient in accordance with the actual quantity and amount of the transaction between the two parties, and the invoicing party truthfully declares the value-added tax, allowing the recipient to legally obtain the deduction rights, the entire value-added tax deduction chain remains intact. Obtaining value-added tax special invoices for input tax deduction does not cause an actual loss of national value-added tax. Therefore, the act of "truthful proxy invoicing" should not be equated simplistically with false invoicing, and this behavior should not be deemed as constituting the crime of false invoicing of value-added tax under criminal law.

In this case, based on the testimony of individual retailers, the process by which H Company obtained invoices should be essentially recognized as the establishment of a factual affiliation between individual retailers and three companies, including S Company. The upstream companies issued value-added tax special invoices to H Steel Company in their own names based on the actual quantity and amount of goods supplied. The recorded quantity and amount on the invoices were consistent with the actual situation, and there was no over-issuance, misissuance, or false invoicing. Therefore, the behavior of H Steel Company in obtaining invoices complies with the current tax law provisions regarding affiliation, and it does not constitute fraudulent invoicing under tax law, let alone criminal fraudulent invoicing. Taking a step further, even if H Company obtained the involved invoices through "truthful proxy invoicing," it should be handled by the tax authorities, and it should not be deemed as constituting a criminal act of false invoicing.

II. Case of Fictitious Invoicing by a Scrap Material Recycling Company

(I) Basic Case Facts

A certain scrap metal trading company (referred to as A Company), with Mr. A as its nominal general manager, is implicated in a case of fictitious issuance of invoices. Mr. A claims to be merely the nominal general manager and denies involvement in any operational activities of the company. From January to December 2009, A Company, based on purchase data provided by 24 downstream companies such as B and C, created documents such as weighbridge tickets, purchase receipts, acquisition vouchers, sales orders, and accounting vouchers. Subsequently, it issued value-added tax special invoices to several downstream companies, who then paid the corresponding amounts to A Company. A Company, in turn, transferred the payments to private bank accounts controlled by employees of companies like B and C. In 2020, the public security organs filed a case, determining that A Company engaged in fictitious issuance of 79 value-added tax special invoices, totaling approximately CNY 73 million in invoice amounts and CNY 12 million in taxes. In the first trial, Mr. A was sentenced to eleven years and six months in prison for the crime of fictitious issuance of value-added tax special invoices. The second trial upheld the original verdict. The case file is limited, primarily consisting of verbal evidence, with no involvement of relevant business transaction materials.

(II) Key Points of the Case

1. Did A Company engage in actual transactions of scrap metal with downstream companies like B and C?

2. How to determine whether Mr. A was actively involved in A Company's business operations and what responsibility he should bear?

3. Can individuals involved in the downstream companies' activities be separately prosecuted in this case?

(III) Points of Appeal

(1) Determination of Actual Transactions Should Be Based on Downstream Business Information

In cases of fictitious invoicing, the presence or absence of genuine goods transactions forms the factual basis for determining whether the involved entities committed fictitious invoicing. To establish this critical fact, it is essential to trace the trade chain's origin and confirm the existence of real goods transactions based on specific circumstances related to the flow of goods, funds, and invoices. In the recycling business of scrap materials, companies often refrain from participating in the transportation and warehousing of goods to save costs. Instead, they transfer ownership of goods through documentation, a common practice in bulk commodity trading. Therefore, when evaluating the crucial question of whether genuine goods transactions occurred in scrap material transactions, it is insufficient to merely examine whether there was physical transportation or warehousing of goods between the recycling company and the end user. The complete trade chain should be reconstructed, tracing whether the individual retailers sold goods, and the end-user received them, and assessing the goods buying and selling relationships at each stage of the trade chain.

In this case, determining whether A Company engaged in genuine scrap metal transactions requires an assessment based on downstream companies' purchase contracts, weighbridge tickets, and related information. Relying solely on A Company's invoicing activities to conclude that there were no real transactions is one-sided and disconnected. Given the specific nature of the scrap material industry, existing evidence does not rule out the possibility of a three-party trade chain involving individual retailers (affiliation), A Company, and end-user companies. The core of the scrap material recycling business lies with individual retailers, and the genuine supply of goods by individual retailers ensures the authenticity of scrap material transactions. The investigating authorities failed to conduct a comprehensive inquiry from the perspective of the entire trade chain, choosing instead to separate the trade chain and determine the absence of real goods based on the apparent lack of physical transportation or warehousing between A Company and companies like B and C. This approach lacks clarity on the facts.

(2) Accurate Differentiation of Legal Responsibilities for Entities in Fictitious Invoicing Cases

According to the case files, Mr. A is only the nominal general manager of A Company and does not participate in the company's business operations. He is responsible for coordinating the company's enjoyment of local government incentives and assisting in smooth investment promotion activities but does not hold real authority in the company and has not benefited from the fictitious invoicing activities. Thus, he is not accountable for the company's business activities. In the first trial, Mr. A was incorrectly identified as a key person involved in the fictitious business, held primarily responsible for the fictitious invoicing, and sentenced to more than ten years, which clearly contradicts the principle of proportionality between crime, responsibility, and punishment.

Additionally, concerning the inflated transaction volumes and deceptive actions of the end-user companies that led to the fictitious invoicing by A Company, according to the provisions of the State Administration of Taxation Announcement No. 39 of 2014, actions of obtaining invoices and issuing invoices by the same entity should be evaluated separately. Actions of issuing invoices and obtaining invoices by different entities should also be assessed independently. In cases where the invoicing party, based on trust, issues invoices truthfully based on information provided by the recipient but the recipient fabricates data, it should not be inferred that the invoicing party engaged in fictitious invoicing. Such an inference not only violates the objective facts of commercial activities but also causes confusion in social and economic activities, leading to a blanket application of criminal penalties.

(3) Combining Invoicing and Receiving Parties for a Comprehensive Investigation of Involved Transactions

This case involves multiple individuals responsible for the business, but the judicial authorities separately prosecuted relevant individuals from the receiving side and took measures such as bail pending trial or non-prosecution against them. Handling the individuals involved in the receiving side separately does not facilitate the judicial authorities in clarifying the facts of the case and making a fair judgment. Moreover, statements made by these individuals in separate cases, especially those unfavorable to Mr. A or contradicting their true intentions, cannot be cross-examined or questioned during the trial. This leads to an inability to confirm the authenticity and objectivity of these verbal statements in the courtroom. Relying on these doubtful statements, the court determined that Mr. A committed the crime of fictitious issuance of value-added tax special invoices, violating the principle of fairness.

Furthermore, according to Article 55 of the Criminal Procedure Law, all judgments in criminal cases should place a heavy emphasis on evidence and investigation, not readily relying on confessions. If there is only the defendant's confession without other evidence, the defendant cannot be deemed guilty and subject to punishment. As evident from the case details mentioned earlier, the case file is limited, and relevant business transaction materials are not included, casting doubt on the truthfulness of the entire business operation. In response to this, the investigating authorities should conduct a thorough investigation and gather evidence throughout the entire business chain. If the quantities and amounts stated in A Company's contracts, weighbridge tickets, etc., correspond to the actual transaction circumstances and the quantities and amounts on the invoices, the determination that Mr. A engaged in fictitious invoicing cannot be sustained. If there are issues with the proper use of invoices in A Company's implicated scrap metal procurement business, the relevant provisions of the "Invoice Management Measures" and other regulations should be used for evaluation and handling. Resorting to criminal justice power without proper grounds could lead to an unwarranted expansion of criminal prosecution in economic activities.

III. Summary of Appeal Procedures for Scrap Material Fictitious Invoicing Cases


In accordance with Article 252 of the Criminal Procedure Law, parties, their legal representatives, and close relatives can appeal to the People's Court or the People's Procuratorate against judgments or rulings that have taken legal effect, but this does not suspend the execution of judgments or rulings.

In the case of fictitious invoicing involving scrap materials, the parties, their legal representatives, and close relatives can directly file an appeal or appoint a lawyer to do so.

(II)Targets of Appeal

According to Article 252 of the Criminal Procedure Law, appeals can be made to the People's Court or the People's Procuratorate.

When appealing to the court for the first time, the appeal must be filed with the court that made the effective judgment. If the first appeal is rejected, the second appeal must be made to the higher-level court. After the second appeal is rejected, a third appeal can be made to the higher-level court, but the conditions for the third appeal are stringent, requiring significant differences in reasons from the previous two appeals. The Supreme Court only accepts appeals in cases that have been reviewed or retried by the high-level People's Court. Cases where retrial or review has been rejected by the Supreme People's Court cannot be appealed by the parties forever.

When appealing to the procuratorate, different entities are responsible for different situations:

Appealing to the grassroots People's Procuratorate: Appeals against criminal judgments or rulings that have taken legal effect by the grassroots People's Court.

Appealing to the People's Procuratorate above the county level: Appeals against criminal judgments or rulings that have taken legal effect by the intermediate or higher-level People's Court; appeals against original decisions, judgments, or rulings that have been reviewed or retried by the next-level People's Procuratorate.

When necessary, the superior People's Procuratorate can transfer criminal appeal cases under its jurisdiction to the lower-level People's Procuratorate or directly handle criminal appeal cases under the jurisdiction of the lower-level People's Procuratorate.

In cases of fictitious invoicing involving scrap materials, if the parties and legal representatives are dissatisfied with the effective judgment, they can file an appeal to the court or procuratorate according to the above provisions.

(III)Appeal Period

According to the "Opinions on Standardizing the Filing of Retrial Cases by the Supreme People's Court (Trial)," Article 10 states:

1. During the execution of the sentence, an appeal can be filed at any time, and the court must accept it.

2. If filed within two years after the completion of the sentence, the court must accept it.

3. If filed more than two years after the completion of the sentence, the court may accept it under certain conditions:

   (1) May declare the innocence of the original defendant;
   (2) The original defendant applied for an appeal within two years after the completion of the sentence, which was not accepted by the People's Court;
   (3) It involves difficult, complicated, or significant cases.

There is no mandatory deadline for filing an appeal to the procuratorate.

Therefore, if the parties and legal representatives of a scrap material fictitious invoicing case are dissatisfied with the effective judgment, the latest appeal should be filed within two years after the completion of the sentence when appealing to the court.

(IV) Conditions for Appeal

According to Article 253 of the Criminal Procedure Law, if there is new evidence proving that the facts determined by the original judgment or ruling are indeed incorrect and may affect the conviction or sentencing, the court shall retry the case.

Based on this, the most likely condition to initiate the appeal process is to provide new evidence. According to the Criminal Procedure Law, appeals based on proving the incorrectness of the facts determined by the original judgment or ruling with new evidence must be accompanied by relevant evidence materials. If applying for the People's Court to investigate and collect evidence, relevant clues or materials should be provided. In the case of scrap material fictitious invoicing, new evidence may include proof of the authenticity of the entire business chain transaction and evidence of fund utilization. Examples of such evidence include purchase and sale contracts between upstream and downstream companies, weighbridge tickets for goods provided by individual retailers, affiliation agreements, and relevant verbal evidence. Companies should take note to collect these materials when filing an appeal.

IV. Summary

The scrap material recycling business has its own characteristics and is influenced by the background of tax policies. Due to inherent deficiencies such as insufficient input tax deduction, recycling enterprises and end-user enterprises in the scrap material industry inevitably face issues of irregular operations and non-compliance with tax regulations. These problems, exacerbated by changes in tax law and the tax management environment, have become widespread in the scrap industry, constraining the overall development of businesses in the sector.

In judicial practice, handling cases of fictitious invoicing in the scrap material industry requires an examination of the industry's unique and typical features. Judgment should be made based on special provisions in tax laws regarding scrap material recycling and affiliated business operations. Actions that comply with tax regulations and should not be considered as fictitious should not be evaluated from a criminal law perspective. Even if a criminal law perspective is applied, the analysis should focus on the elements of the crime of fictitious issuance of value-added tax (VAT) special invoices. For actual operating enterprises lacking intentional acts of fictitious issuance of VAT special invoices, without the purpose of evading national VAT and no resulting loss of national VAT revenue, the criteria for constituting the crime of fictitious issuance of VAT special invoices are not met. As a result, such cases should not be classified under this criminal offense.

As economic development accelerates and new business models emerge, many traditional industries, including scrap material recycling, are adopting new and more complex business models to maximize operational profits. Contradictions arise as personnel managing these businesses have practical needs for business operations and expansion, while possessing limited legal and tax knowledge. This has led to various scenarios such as issuing invoices on behalf of others, issuing multiple invoices, and fictitious invoicing. The judicial authorities' understanding of industry specificity and tax expertise may not be thorough enough, leading to a mismatch in addressing fictitious invoicing crimes. When fictitious invoicing cases occur, personnel within enterprises, based on a naive understanding that real goods transactions have taken place, may believe that the business in question does not constitute a fictitious invoicing crime. The judicial authorities, on the other hand, may struggle to determine the certainty of new business models in the changing landscape of enterprise operations. Consequently, even after going through the trial process, many parties may still have objections to the verdicts, resorting to appeals to express their opinions. Given the inherent difficulties in criminal case appeals and the industry's specificity and tax law complexity, the appeal process may face challenges in starting or rectifying judicial errors promptly. In response, personnel involved in the case should ensure the existence of genuine goods transactions, communicate with professionals possessing knowledge in tax and criminal law, clarify the certainty of the business in question, and safeguard the legitimate rights and interests of those involved by assuming corresponding legal responsibilities.

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