Editor's Note: On 9 February 2024, the State Council proposed to "initially build a waste recycling system by 2025"; on 7 March 2024, the "Action Plan for Promoting Large-scale Equipment Renewal and Consumer Goods Trade-in" was released, ushering in new development opportunities for the renewable resources industry. However, with the implementation of the new policy of "reverse invoicing" and the outbreak of the financial refund issue, the renewable resources industry has also ushered in new challenges. China Tax will launch a series of articles on tax compliance in the renewable resources industry. Based on the business model of the renewable resources industry, this series will analyse the tax risks of the key nodes in the upstream and downstream chains in the light of the new tax policies in the industry in recent years, so as to help taxpayers to clarify the direction of business adjustment and tax compliance. As the first part of the series of tax compliance in the renewable resources industry, this article will analyse the business models of "retailer - recycling", "recycling - recycling", "recycling - purchasing/selling/producing", and "recycling - production". This article will summarise the typical tax risks in the "retailer-recycling", "recycling-recycling", "recycling-recycling", "recycling-recycling", and "purchasing/selling/production" segments, providing reference for enterprises to identify their own tax risks.

I. The "retailer-recycling" segment

(i) Tax risk points under the traditional model

For a long time, there has been a problem of missing invoices at source in the renewable resources industry, mainly due to the fact that the source of waste production does not carry invoices for sales, which leads to the lack of input invoices for recycling enterprises, making it difficult to deduct value-added tax (VAT) and enterprise income tax (EIT) before deduction, and in this regard, the recycling enterprises may take a third party to open invoices on behalf of the enterprises or apply the mode of local financial rebate to reduce their own tax liabilities. A number of cases of false invoicing involving the above mode have broken out in practice. As the purchaser, the recipient enterprise faces the risk of criminal liability in addition to the administrative responsibility of paying back taxes and late payment fees in the case. Based on the different authenticity of goods, trade patterns and business processes in individual cases, there are differences in the handling of the cases, and the determination of offences such as false invoicing of VAT, illegal purchase of VAT invoices and tax evasion are also different.

At present, based on the reality of supply by retailers, enterprises usually solve the problem of source invoices by means of invoicing on behalf of retailers when carrying out recycling business. However, the restriction that the sales of small-scale taxpayers do not exceed 5 million and the reality of the huge supply of retailers form a contradiction, and in practice, there is a way to deal with the splitting of the business, in which case the retailer may be identified as tax evasion and bear administrative treatment and penalties, and may be suspected of criminal risk if the circumstances are serious. For recycling enterprises, they also face the risk that the invoices they obtain cannot be used for VAT deduction or that they may be found to have committed tax evasion, or even face criminal liability.

These are the major tax-related issues in the traditional business model of the recycling industry. In order to help enterprises in the recycling industry to alleviate the invoicing difficulties, the State Administration of Taxation (SAT) has issued Announcement on Matters Relating to the "Reverse Invoicing" of Resource Recycling Enterprises to Sellers of End-of-Life Products to Natural Persons (SAT Announcement No. 5 of 2024) to alleviate the problem of insufficient invoices in the recycling business with the system design of "reverse invoicing". The system design of "reverse invoicing" alleviates the problem of insufficient invoices in the recycling business. Recycling enterprises should fully familiarise themselves with and grasp the tax risk points in their business operations when applying the new policy.

(ii) Tax risk points of the new model after the landing of "reverse invoicing"

Since 29 April 2024, the "reverse invoicing" policy has been officially implemented - where a natural person seller of end-of-life products sells end-of-life products to a resource recycling enterprise, the eligible resource recycling enterprise can issue an invoice to the seller. This means that in the case of a natural person selling end-of-life products to a recycling enterprise, the recycling enterprise can invoice itself in order to offset VAT input tax and make pre-tax deduction for enterprise income tax. In contrast, after reverse invoicing, the recycling enterprise needs to fulfil the obligation of escrow - the recycling enterprise should escrow the VAT, personal income tax and other taxes for the seller, and if it fails to pay the escrowed taxes and fees according to the specified period, the competent tax authority will suspend its "reverse invoicing" qualification and recover the taxes and fees according to the regulations. If the tax is not paid by the specified deadline, the competent tax authorities will suspend the qualification of "reverse invoicing" and recover the unpaid or underpaid tax and late payment fees according to the regulations. Recycling enterprises may face heavy economic losses. At the same time, as the new policy does not specify the treatment of recycling enterprises after the suspension of their qualification for "reverse invoicing", and it is not clear whether, when and how the qualification can be reinstated, recycling enterprises may not be able to carry out the entire reverse invoicing business due to non-payment of tax and fees in accordance with the provisions of the law.

It should be noted that the new policy clarifies the natural person seller of end-of-life products sales of end-of-life products reverse invoicing, where the natural person does not include individual entrepreneurs, and the current practice, many recycling business vendors are generally individual entrepreneurs, the application of reverse invoicing policy also involves the main body of the supplier to adjust the problem. In addition, similar to the traditional model, "reverse invoicing" there is a limit of 5 million - if a natural person sales of end-of-life products for 12 consecutive months "reverse invoicing" cumulative sales of more than 5 million yuan, the recycling business may not be reused. If a natural person's cumulative sales of end-of-life products exceeds 5 million yuan in 12 consecutive months, the recycling company is not allowed to "reverse invoice" him. How to deal with the situation where a natural person's sales of end-of-life products exceeds 5 million yuan is also an issue that recycling companies need to address.

II. "Recycling - Waste" segment

(i) Tax risk points for recycling enterprises

As mentioned earlier, recycling enterprises have long faced the problem of missing input invoices, in respect of which they have mainly solved the problem of high tax burden caused by missing input invoices by enjoying local fiscal rebates. This year, a number of places have started to recover financial incentives or subsidies from previous years, which has posed new challenges to the business model of relying on financial rebates in the recycling business of the renewable resources industry.

When an enterprise is required to recover the financial incentives or subsidies it has obtained, the following three situations usually exist: (1) the financial incentives or subsidies lack a legal basis or the laws or regulations on which they are based have changed, and the enterprise is ordered to return the money it has obtained; (2) the enterprise declares and obtains the financial incentives or subsidies truthfully, but later discovers that it does not satisfy the specific qualifications and conditions, and the administrative organ requires the enterprise to return the financial incentives or (iii) the enterprise has agreed with the administrative organ on the liability for breach of contract at the time of obtaining the financial incentives or subsidies, and the enterprise triggers the liability for breach of contract afterwards, and is ordered to return the financial incentives or subsidies obtained and bear the liability for compensation. In the case of (a), recycling enterprises should pay particular attention to tax-linked government subsidies and incentives, as tax-linked government subsidies and incentives may be deemed invalid as specific tax incentives granted by the local government.

Since 2024, the state has repeatedly stressed the need to rectify and clean up illegal investment policies, which has forced recycling companies to pay attention to the investment agreements they signed with the government and their future development models. 18 January, the State Administration of Taxation (SAT) stated that it would seriously investigate and deal with tax-related issues related to illegal investment promotion; 13 June, the State Council promulgated the Regulations on Fair Competition Review, which explicitly stipulates that localities shall not grant tax incentives, selective and differential financial incentives or subsidies to specific operators without a legal or regulatory basis or without the approval of the State Council, and the Regulations came into force on 1 August. when drafting policies and measures, shall not grant tax preferences and selective and differentiated financial incentives or subsidies to specific operators in the absence of a legal or regulatory basis or without the approval of the State Council, which came into force on 1 August; on 18 July, the Third Plenary Session of the Twentieth Central Committee of the Communist Party of China (CPC) passed the Decision of the Central Committee of the Communist Party of China on Further Deepening Reforms in a Comprehensive Way and Promoting Chinese-Style Modernisation, which proposes to "Cleaning up and abolishing various regulations and practices that impede the national unified market and fair competition. Standardise local regulations and systems for attracting investment, and strictly prohibit the act of granting policy concessions in violation of the law". Localities have also enacted a series of policies to clean up inappropriate tax incentives and financial rebates, such as the Notice on Further Deepening the Implementation Plan for the Reform of the Subprovincial Fiscal System issued by the General Office of the People's Government of Jiangxi Province (Ganfuguanfa [2024] No. 1), and the Regulations on Optimising the Business Environment in Zhejiang Province issued by the Fourteenth People's Congress of Zhejiang Province.

In addition to the risks mentioned above, recycling enterprises shall pay taxes within the time limit in accordance with the provisions of the law when obtaining financial incentives or subsidies, or else they will also face the risk of having their taxes recovered, and the risk of being found guilty of tax evasion and being subject to administrative penalties if they are subject to any of the four circumstances set out in article 63 of the Law on the Administration of Taxation Levies. The exception is that if the financial incentives or subsidies obtained by the enterprise meet the following three conditions, the enterprise can treat them as non-taxable income for enterprise income tax purposes: (1) the enterprise can provide the fund allocation documents stipulating the special purpose of the funds; (2) the financial department or other government departments allocating the funds have special fund management methods or specific management requirements for the funds; (3) the enterprise accounts separately for the funds as well as the expenditures incurred with the funds; and (4) the enterprise has the right to use the funds for the specific purpose of the enterprise income tax. (c) the enterprise accounts for the funds and the expenditures incurred with the funds separately. If the above conditions are not met, the financial subsidy income received by the enterprise from the government department shall be included in the total income and calculated for the payment of enterprise income tax.

(ii) Tax risk points for waste-to-energy enterprises

In practice, if a recycling enterprise is involved in a case due to false invoicing, the relevant false invoicing clues will be sent to the competent tax authorities or judicial authorities of the invoiced party's scrap enterprise. At this time, the party receiving the invoice may be implicated in the false invoicing of the recycling enterprise and face the administrative or criminal risk of false invoicing. In addition, some scrap enterprises directly dock with retailers to supply, under this model, scrap enterprises are equivalent to replacing the position of recycling enterprises in the whole industrial chain, assuming the role of recycling + scrapping, and also assuming the aforementioned "retailer-recycling" link and the risks faced by recycling enterprises in the link, also facing the same dilemma. At the same time, they also bear the same risks and face the same dilemma as the "retailer-recycling" link and the recycling enterprises in this link.

III. "Waste - purchase and sale/production" chain

On the one hand, VAT is special in its interlocking taxation chain, and the tax-related risks, especially the risk of fraudulent invoicing, will be transmitted through the upstream and downstream chains to the recycling and more back-end trading enterprises, production enterprises, etc., which will bring losses to the enterprises, and even cause cross-industry impacts. For example, a considerable portion of the raw materials of the non-ferrous metal industry come from recycled non-ferrous metals, and fraudulent invoicing from the upper reaches of the chain will also have an impact on the industry. On the other hand, for waste enterprises, they also face the problem of the application conditions of the immediate refund, because from the recycled raw materials to marketable products still need to go through a complex production and processing process, and in this process, there may be differences in the understanding of the links and circumstances of the application of the immediate refund between the tax enterprises. Then some recycling enterprises may choose to split their business in order to fully apply the IFR policy and reduce their tax burden.

IV. Conclusion

In this paper, the links of the recycling industry are divided into three links, namely, "retailer-recovery", "recycling-recycling" and "recycling-recycling/production". Purchase and sale/production", and analyse the tax risk of each subject in each link one by one, but in fact, "one hair affects the whole body", the risk of any link does not exist in isolation, and the risk of one link will affect other links, and the risk of one subject will also affect other subjects, especially the back-end of the recycling industry, which is the most important. The risk of one link will affect other links, and the risk of one subject will also affect other subjects, especially the risk faced by the back-end recycling enterprises. Therefore, the relevant subjects in the renewable resources industry should realise that it is especially important to accurately identify the tax risks, not only their own risks, but also the risks of other relevant subjects, so as to take measures to prevent and cope with them in an all-round way. In addition, the renewable resources industry itself is a huge industry, involving a large number of categories, and each category has its own uniqueness, so in the subsequent articles we will subdivide the categories of the renewable resources industry, dismantle the different business models under different categories, in order to accurately analyse the tax risks of each link and subject, and to help enterprises adjust their business models in a timely manner, so as to maximise economic benefits while enhancing tax compliance. Maximise economic benefits.