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Purchase and transportation of goods through a large number of self-employed persons, IPO of a proposed listed company terminated

Supplier verification has always been a key verification program of the regulatory bodies of enterprises to be listed, after a number of enterprises to be listed have been terminated due to supplier issues, and recently a company to be listed was questioned and eventually terminated due to the existence of a large number of individual entrepreneurs in the supplier, and the existence of the relevant subject of the "flash setup and flash sales". So, how should the proposed listed company deal with the relevant input risks involved in supplier verification? This article combines the content of the company's response to the supplier compliance points to elaborate.

I. Case: individual suppliers "flash set up flash sales", the Shenzhen Stock Exchange issued a letter of inquiry

(I) accept the inquiry

Company T is mainly engaged in the research and development, production and sales of feed additive products, with the continuous maturation of product technology, it has become a major domestic manufacturer in the relevant feed additive industry and has applied to the Shenzhen Stock Exchange for listing, due to the existence of a large number of individual businessmen in the purchasers of the enterprise, and the transactions with the individual households with a huge amount of money, and thus received the Shenzhen Stock Exchange's inquiries, requiring the enterprise to fully explain the following Issues:

The reasonableness of the existence of a large number of individual industrial and commercial households among suppliers;

explain the flow of goods, invoices and funds related to the procurement with individual household suppliers;

At the same time for the existence of self-employed suppliers "flash set up flash sales" problem to explain.

(II) Response of enterprises to be listed

The main reason for the existence of a number of individual businessmen in the supplier is that the investor of the distributor has set up a non-corporate business entity to enjoy the tax preferences for small-scale taxpayers.

The company will individual business suppliers in accordance with the same real controller consolidation mode of management, related to the flow of goods, invoices, capital flow and corporate suppliers using the same management:

After signing the procurement contract with the individual industrial and commercial suppliers, the company will make arrangements according to the delivery time agreed in the contract. Whether the individual industrial and commercial suppliers deliver the goods or the company picks up the goods, they will be attached with the same consignor's delivery note as the other party to the contract as an attachment to the settlement documents;

At the time of settlement, the Company confirms with the contractual counterparty the purchase/transportation quantities, purchase/transportation unit prices and settlement amounts for a certain period of time based on the raw materials warehousing and laboratory tests, and the contractual counterparty issues the corresponding invoices;

The Company pays the purchase price to the account opened in the name of the contractual counterparty on a regular basis in accordance with the contract.

Some of the individual business suppliers are the investors of the corporate suppliers as well as their relatives to enjoy the tax incentives for small-scale taxpayers and invest in the business entities established outside the corporate entities. Due to the personal reasons of the registered business operator who is no longer engaged in the relevant business, and the business entity exceeds the recognized limit of small-scale taxpayers, etc., the business department will choose to cancel, so there is a situation of "flash setup and flash sale" of individual suppliers.

(III) Results of inquiry

 According to the issuance announcement, Company T has terminated its listing.

The author notes that in recent years, with the continuous implementation of the tax law, the governance of corporate tax compliance has been strengthened in all aspects, and many companies have interrupted their IPO process due to tax issues. Accordingly, the author briefly describes how to prevent input risks and strengthen corporate tax compliance as follows:

II. Business compliance: adhere to the real goods transactions, the procurement of goods through individual households should be strengthened audit

(I) The objective reality of "many, small, scattered and weak" exists in some industries, and caution should be exercised in conducting business.

For coal, mining, logistics and transportation industries, due to the specificity of the industries themselves, there are a large number of individual businessmen and other individuals engaged in the relevant business, while some enterprises will trade or provide services to the outside world as small-scale taxpayers through the establishment of individual businessmen. For purchasers, they lack certain bargaining power, and in order to enhance market competitiveness, it is a more appropriate program to choose individual industrial and commercial enterprises with lower purchase price as the supplier of goods.

In fact, the national policy in recent years has encouraged the development of self-employed, and not only issued the Regulations on Promoting the Development of Individual Business Enterprises, but also implemented relevant tax incentives, such as the Announcement on the Policy of Reducing and Exempting Value-added Tax for VAT Small-Scale Taxpayers (Notice of the Ministry of Finance and the State Administration of Taxation No.19 of 2023), which stipulates that: "For small-scale taxpayers who are subject to a 3% levy on their sales income, a 1% levy is applied to their sales income. sales revenue, the VAT shall be levied at a reduced rate of 1%; prepaid VAT items subject to a 3% pre-collection rate shall be subject to a reduced pre-collection rate of 1%." All are motivated by the need to support the development of small and micro enterprises and individual entrepreneurs. 

Therefore, enterprises should elaborate on the actual situation and special features of the industry when being questioned or audited by the tax authorities to prove that the relevant business is carried out in accordance with the industry practice and in line with the commercial logic, and to strengthen the audit of business authenticity in order to guard against some of the risks of input items.

(II) Retention of transportation documents to prove the existence of real goods transactions

For the bulk commodity trade, the cost burden of transportation is heavy, so enterprises usually take instructions to complete the transfer of ownership of the goods, such as delivery, the source enterprise directly transported the goods to the actual use of the enterprise, but because the two sides are not the contracting party, there may be identified as "separation of votes and goods" risk. Therefore, enterprises should ensure that the issuing party and the signing party of the contract with the signing party of the goods to maintain consistency, and keep the goods weighing sheet (such as the enterprise through a third-party warehouse for the transfer of goods should be kept in the transfer of goods, and select a certain degree of recognition of the warehouse). At the same time, the transportation invoice is also a strong evidence of the existence of real goods transactions of bulk commodities, enterprises should be properly stored.

It is necessary to draw attention to the authenticity and legality of the transport invoice itself is also worthy of attention, the main force of bulk commodity road transport for individual drivers, due to the individual driver can not issue transport invoices to the trading enterprise, resulting in the lack of trade enterprises, unable to account for the trade enterprise input, and therefore to take the way to rely on a third party from the opening of the transport invoice, the mode itself is not necessarily recognized by the tax authorities, need to be through the contract or situation description and other ways to carry out the relevant risks. The mode itself is not necessarily recognized by the tax authorities, and relevant risks should be prevented by means of contractual agreements or statements of circumstances.

III. The risk of ex post facto response: enterprises have exhausted the obligation to review, can isolate the relevant invoice risk

Enterprises should strengthen the control and audit of business authenticity in the process of business development. However, due to the specificity of some industries, resulting in the specificity of the business model, such as the emergence of a large number of individual entrepreneurs into the item, dependency and other situations, or suppliers due to the false enhancement of the item or other tax-related violations, resulting in the sales invoices were found to have the suspicion of false invoicing, the enterprise should actively hire professionals, combing business information, to the tax authorities, the exchange to explain the application of the law, and at the same time, can be through civil law to recover losses. The enterprise should actively hire professionals to sort out the information of the enterprise and explain the applicable law to the tax authorities and the exchange, and at the same time, it can recover the loss through civil means.

(I) Article 39 of 2014 stipulates that if the three streams are consistent, it is not false invoicing and the inputs can be deducted.

Article 21 of the Measures for the Administration of Invoices stipulates: "Invoices shall be issued in accordance with the prescribed time limit, order, columns, and all joints shall be issued truthfully at one time, and paper invoices shall be stamped with an invoice special seal. Any unit or individual shall not have the following false invoicing behavior: (a) for others, for their own invoices that do not correspond to the actual business situation; (b) let others for their own invoices that do not correspond to the actual business situation; (c) introduce others to issue invoices that do not correspond to the actual business situation." The aforesaid provisions have clarified the three types of administratively false VAT invoices, but the relevant provisions are more general, and in practice, there are deviations in the understanding and application by tax authorities in different regions. The Announcement of the State Administration of Taxation on Relevant Issues Concerning Taxpayers' External Issuance of Special VAT Invoices (Announcement No. 39 of 2014 of the State Administration of Taxation) further clarifies the relevant provisions: "Taxpayers evading tax by inflating VAT input tax amount, but the external issuance of special VAT invoices does not fall into the category of external fraudulent VAT invoices if the external issuance of special VAT invoices is in line with the following circumstances at the same time: i. The taxpayer has sold goods or provided VAT taxable services or taxable services to the taxpayer of the invoicee; 2. The taxpayer has collected the payment for the goods sold, taxable services or taxable services provided from the taxpayer of the invoicee, or has obtained the vouchers for the payment of the sales; 3. The contents of the VAT invoice issued by the taxpayer to the taxpayer of the invoicee in accordance with the regulations are consistent with the goods sold, taxable services or taxable services provided, and the contents are consistent with the taxable services or taxable goods sold, taxable services or taxable services provided. (c) The contents of the special VAT invoice issued by the taxpayer to the taxpayer of the invoicee in accordance with the regulations are consistent with the goods sold, taxable labor or taxable services provided, and the special VAT invoice is legally obtained by the taxpayer and issued in its own name. The VAT special invoices obtained by the taxpayers of the invoiced party in compliance with the above circumstances can be used as VAT deduction vouchers to offset the input tax amount." It can be seen that, for the purchase and sale business in line with the "four streams of consistency", it does not belong to false invoicing, and the invoiced party can carry out input tax deduction by virtue of the corresponding invoices.

(II) No. 187 of 2000 stipulates that if the purchaser "obtains in good faith" the falsely issued VAT special invoice, only the input VAT will be paid back.

The Circular of the State Administration of Taxation on the Handling of Issues Concerning Fraudulently Obtained VAT Special Invoices by Taxpayers (Guo Shui Fa [2000] No. 187, hereinafter referred to as "Document No. 187") stipulates that: "There is a real transaction between the purchaser and the seller, and the seller uses the invoices issued by the province where he or she is located (autonomous regions, municipalities directly under the central government and municipalities under the central government), Municipalities and municipalities directly under the Central Government and cities with separate plans), the name of the seller, the seal, the number of goods, the amount and the amount of tax and all the contents of the special invoice with the actual, and there is no evidence to show that the purchaser knows that the sales of special invoices provided by the seller is obtained by unlawful means, the purchaser will not be punished by tax evasion or fraudulent export tax refunds. However, the input tax shall not be offset or the export or tax refund shall not be made in accordance with the relevant regulations; the input tax already offset or the export tax refund obtained by the purchaser shall be recovered in accordance with the law." If the purchaser can provide relevant evidence of the existence of real goods transactions between him and the seller, and the content recorded in the VAT invoice he obtained is consistent with the quantity of goods transported and the payment for the goods, it does not constitute the crime of false VAT invoicing.

Paragraph 2 of Circular No. 187 stipulates: "If the purchaser can obtain legal and valid special invoices issued by the anti-counterfeit tax-control system from the seller again, or obtain legal and valid special invoices issued manually and obtain evidence that the tax authorities in the place where the seller is located have investigated or are investigating or handling the behavior of the seller's fraudulent special invoices in accordance with law, the tax authorities in the place where the purchaser is located shall grant offsetting of input tax according to law. grant credit for input tax or export tax refund." The party to whom the invoice is issued may request the invoicing party to reissue a legal and valid invoice for deduction if the invoiced party in good faith obtains the falsely issued VAT invoice; if it is impossible to obtain a valid invoice again, the invoiced party shall only make up for the corresponding VAT input tax and shall not bear the administrative and criminal responsibility of false invoicing.

(III) If the invoiced party bears losses due to the invoicing party, the invoiced party shall have the right to recover the losses through civil remedy procedures.

If the VAT invoice issued by the invoicing party is recognized as false invoicing due to the reason of false enhancement of the invoicing party, which in turn leads to the invoiced party being required by the tax authorities to pay the corresponding tax or suffer other losses, the invoiced party may claim compensation from the invoicing party through civil litigation.

In the case of Tianmou Company v. Maomou Company, the plaintiff Tianmou Company claimed that the company purchased a batch of rebar from Maomou Company due to the need of project construction. Both parties paid the purchase price, delivered the goods and issued VAT invoices by Maomou Company in accordance with the contract. After the fulfillment of the contract, Tianmou held the VAT invoice and declared it to the tax authorities for tax deduction. Later, the tax authorities notified Tianmou Company that the invoices used for tax deduction were all fraudulently issued and could not be deducted, and no input tax was transferred out, therefore, Tianmou Company was required to pay 400,000 yuan of back taxes. Tianmou Company thought that the behavior of Maomou Company's false invoicing led to its own tax loss, so it sued Maomou Company to the court, requesting the court to order Maomou Company to compensate for the tax loss. After hearing the case, the court considered that there was a legal and valid contractual relationship between Tiantai and Maoyuan, and after TIMO paid the contractual amount, the VAT invoice issued by Maomou was recognized by the tax authorities as false invoicing, which resulted in TIMO being unable to make deduction. According to the relevant legal provisions, the seller in the trade of goods should issue true and effective VAT invoices, Maomou company false VAT invoices has constituted a breach of contract, and should compensate for the resulting loss of Tianmou company. Therefore, the court of the day a company requires Maomou company to bear the tax loss of 400,000 yuan due to back taxes generated by the litigation request shall be supported in accordance with the law.

V. Tax Compliance: Tax risk may become a roadblock for IPO, enterprises should emphasize business compliance

(I) Enterprises facing three-year reverse check for IPO, and it is recommended to carry out tax health check regularly

Paragraph 2 of Article 13 of the Administrative Measures for the Registration of Initial Public Offerings (China Securities Regulatory Commission Decree No. 205, hereinafter referred to as "Decree No. 205") stipulates that: "Within the last three years, the issuer and its controlling shareholders and actual controllers did not embezzle, bribe or misappropriate property or undermine the socialist economy, misappropriation of property or criminal offenses against the socialist market economic order, and there is no fraudulent issuance, major information disclosure violation or other major violations of law in the areas of national security, public security, ecological security, production security and public health and safety." The "Letter on the Reply to Proposal No. 03245 (Commerce and Trade Regulation No. 138) of the Fifth Session of the 13th National Committee of the Chinese People's Political Consultative Conference" clarifies the scope of "major violations of the law", i.e. "I. Simplify the connotation of major violations of the law, and clarify the criteria for judgment. In response to the problem of unclear understanding of material violations by market participants, I will issue relevant rules in June 2020 to clarify the definition of material violations and simplify the connotation of material violations to facilitate verification and grasp by issuers and intermediaries." The "relevant rules issued in June 2020" referred to in the reply refers to the "Answers to Certain Questions on Initial Public Offering", which stipulates that: "2) A violation of the law that is subject to an administrative penalty of a fine or more may not be deemed to be a material violation if one of the following circumstances applies and the intermediary agency has issued a clear conclusion of verification violation: ① violation is significantly minor, the amount of fine is small; ② the basis of the relevant penalties did not find that the behavior is serious; ③ authority to prove that the behavior is not a major violation. However, the above circumstances do not apply if the violation leads to serious environmental pollution, major injuries or deaths, or adverse social impact and is subject to an administrative penalty of a fine or more."

Combined with the above and the recently disclosed IPO cases, it can be seen that the impact of tax administrative penalties on the application for IPO is very obvious. Enterprises should conduct a comprehensive and systematic analysis of past and future tax matters, comprehensively collect the tax-related information of the enterprise, including the enterprise's historical legacy of tax information and the tax-related matters of the future development of the enterprise, follow the principle of prudence, and build up a more complete tax risk The enterprise can also introduce a third-party organization to regularly review the tax-related information of the enterprise. At the same time, the enterprise can introduce a third-party organization to regularly check the health of tax-related matters, and systematically analyze the key problems, solution measures and how to control future risks.

(II) Establishing a complete supplier review mechanism and contract retention mechanism

Vendor verification mechanism is not only conducive to understanding the real situation of the issuer's transactions, but also very favorable to understanding the sustainability of the issuer's business, and therefore has always been a very important part of the regulatory bodies and intermediaries of enterprises to be listed. For enterprises, it is of utmost importance to establish and implement an effective supplier management system, which can strictly review the suppliers' qualifications, business scope, enterprise scale, business qualifications, shareholding structure, historical performance, risk matters, etc., by means of clarifying the criteria for selecting suppliers and the approval process, and strictly control the suppliers to become suppliers, such as individuals, unincorporated entities such as individuals, or subjects with a previous record of administrative violations or other major violations of the law and breach of trust; at the same time, it is also important to establish a verification mechanism for the issuers to be listed. We also strictly control individuals, individuals and other unincorporated entities, entities with a history of administrative violations or other major violations of trust, etc., from becoming suppliers; at the same time, we have established a supplier file management system to keep track of suppliers.

In addition, to ensure the "four streams of consistency" is an extremely important part of preventing tax risks, therefore, enterprises should establish and improve the system of auditing and tracing of transaction information, and set up a special retention procedure for information such as delivery vouchers, receipt vouchers, remittance vouchers and other information for fulfilling the contractual obligations, as well as business information such as information notes and weighing slips.

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