Editors Note: According to the law, in general, the statute of limitations for penalties imposed by tax authorities for tax violations does not exceed five years; the period for collection of overdue taxes and late fees also does not exceed five years. However, for cases involving tax evasion, fraud, resistance, or arrears, the collection period can be indefinite. For enterprises that obtain fictitious invoices, different administrative determinations correspond to different periods for collection and penalties. In practice, due to ongoing disputes over how to define the starting and ending points of the collection and penalty periods, as well as how to determine the continuity or ongoing nature of the violation, this article will provide a brief analysis of whether enterprises obtaining fictitious invoices can defend themselves regarding the collection and penalty periods, and how they should defend themselves.

I. Case introduction: how to recover and punish the acquisition of false invoices more than five years in practice

(1) Brief description of the case

Case 1: It cannot be proved that the receiving enterprise has the intention of tax evasion and accepting false invoices, so it will not be pursued

In December 2 023, the tax authority of City G found that a shoe company had received a total of 1 2 special invoices from a leather company on May 15, July 21, and August 20,2015, with a total amount of 970,178.80 yuan. These were confirmed by the tax authority of City X to be fictitious invoices. Based on this, the tax authority of City G determined that the 1 2 fictitious invoices obtained by the shoe company could not be used for input tax credit. However, since there was no evidence showing that the shoe company had intentional tax evasion or acceptance of fictitious invoices, a five-year period for recovery was applied. As the recovery period has expired, no additional taxes totaling 184,722.04 yuan will be levied.

Case 2: If the enterprise receiving the invoice obtains a falsely issued invoice, it constitutes tax evasion, and the part exceeding five years shall be recovered but no penalty shall be imposed

In December 2 024, the tax authorities of City X discovered that a technology company had obtained 2,140 special invoices from a chemical company between August 2018 and April 2019, constituting tax evasion; and obtained 272 special invoices from an import-export company through fund circulation between June 2 016 and December 2 017, also constituting false invoicing and tax evasion. Based on this, the tax authorities decided to recover from the technology company the following amounts: 805,717.78 yuan in unpaid VAT, 40,285.90 yuan in urban maintenance and construction tax, 24,171.54 yuan in education surcharge, 16,114.37 yuan in local education surcharge, 661,451.06 yuan in corporate income tax, and 161,389.19 yuan in individual income tax. For the 2,140 special invoices obtained from the chemical company, the tax authorities imposed a fine of 0.5 times the amount, totaling 186,834.89 yuan; for the 272 special invoices obtained from the import-export company, as they were not discovered within five years, no administrative penalties were imposed by the tax authorities.

Case 3: The enterprise receiving the invoice constitutes false invoicing and tax evasion. The tax is recovered but no punishment is imposed, and the false invoicing is transferred to the public security

In June 2024, the tax authorities of City C discovered that a certain science and trade company had obtained a total of 2 5 fictitious special invoices from January 1, 2014, to December 31,2015, with a combined value and tax amounting to 2,884,000.00 yuan. This resulted in a total underpayment of 1,073,976.23 yuan in taxes. The company was found guilty of issuing fictitious invoices and tax evasion, and was ordered to pay an additional 419,042.72 yuan in value-added tax, 29,332.98 yuan in urban maintenance and construction tax, 12,571.27 yuan in education surcharge, and 8,380.87 yuan in local education surcharge. Due to the fact that the companys tax evasion exceeded the five-year penalty statute of limitations, the tax authorities decided not to impose penalties and instead referred the case of the fictitious invoicing to the police for handling.

(2) Case summary

From the above case, it is evident that the characterization of enterprises obtaining fictitious invoices differs at the tax law level, leading to differences in the tax recovery period and the statute of limitations for administrative penalties. For tax matters that do not meet the conditions for recovery or penalty, the involved enterprise has the right to argue around the recovery period and the statute of limitations for penalties during the response process. It is particularly important to note that, in the process of argumentation, apart from clarifying the types of periods corresponding to different characterizations, the following key elements should be emphasized: first, the statutory calculation rules for the start and end points of the recovery period and the statute of limitations for penalties; second, whether the involved behavior constitutes a "continuous state" or a "continuing state" and other special circumstances.

Second, the qualitative difference of obtaining false invoices corresponds to different tax recovery periods and penalty retroactive periods

(1) Period of recovery and period of retroactive punishment

The Tax Collection and Administration Law categorizes the circumstances for the collection period into three main types: First, if a company fails to pay or underpays taxes due to the responsibility of the tax authority, the tax authority may require the company to make up the payment within three years without imposing late fees; Second, if a company fails to pay or underpays taxes due to calculation errors or other mistakes, the tax authority may collect taxes and late fees within three years, with special cases allowing the collection period to extend to five years; Third, for cases involving tax evasion, resistance, or fraud, the tax authority can pursue taxes and late fees indefinitely. In other words, only situations involving tax evasion, fraud, or resistance can be subject to indefinite collection, while other cases have a collection period not exceeding five years. Additionally, according to the State Administration of Taxations Reply on Issues Concerning the Collection Period for Arrears (Guo Shui Han [2005] No.813), for arrears that taxpayers have declared or that the tax authority has investigated, the tax authority may also pursue taxes indefinitely, but this scenario is not discussed in this article. Regarding the penalty retroactive period, according to the Tax Collection and Administration Law, if the tax authority does not find any violations of tax laws or administrative regulations that warrant administrative penalties within five years, no further penalties will be imposed.

(2) the period of recovery and the period of retroactive corresponding to different qualitative characteristics of obtaining false invoices

For enterprises that obtain false invoices, tax authorities will comprehensively judge whether the enterprises are illegal and the nature of the violation according to whether the business is real, the subjective state of the enterprises, and whether the tax loss is caused, so as to determine whether to recover the tax and punish them.

First of all, if the business corresponding to the invoice obtained by the enterprise is real and the invoice is legal and compliant, then according to the Announcement of the State Administration of Taxation on Issues related to VAT Special Invoices issued by taxpayers (Announcement No.39 of 2014 of the State Administration of Taxation), the invoice obtained by the enterprise can be normally deducted, and this situation does not involve recovery and punishment.

Secondly, if a company meets the four conditions for good faith acquisition of fictitious invoices [the invoicing party and the recipient party have a genuine transaction; the seller uses a special invoice issued by their province (autonomous region, municipality directly under the Central Government, or planned cities); all details on the invoice, including the name of the seller, seal, quantity of goods, amount, and tax, match the actual situation; there is no evidence that the buyer knew the special invoice provided by the seller was obtained through illegal means], then it must transfer input VAT but will not be charged late payment penalties. In this case, a five-year collection period applies, but no penalties are involved.

Secondly, if a company fails to meet the four conditions for good faith acquisition but does not intentionally accept fictitious invoices or have the subjective intent to evade taxes, according to Article 9 of the Provisional Regulations on Value-Added Tax and the Announcement of the State Administration of Taxation on Issues Concerning the Collection and Payment of Tax Arrears for Fictitious Value-Added Invoice Issuance (Announcement No.33 of 2012 of the State Administration of Taxation) and other provisions, the company must reverse input VAT and pay late fees, with a five-year period for recovery.

Finally, if a company is indeed found to have engaged in the fictitious invoicing as stipulated in Article 21 of the Invoice Management Measures, it will be classified as fictitious invoicing and fined. If the act constitutes a crime of fictitious invoicing, the case will be referred to the police for handling. However, if the company uses fictitious invoicing as a means to avoid or underpay taxes, it will be classified as tax evasion, requiring the payment of back taxes, late fees, and fines ranging from 0.5 to 5 times the amount of unpaid or underpaid taxes. The period for recovering taxes due to tax evasion is indefinite, but no penalty will be imposed if the issue remains undiscovered for more than five years. It should be noted that if a company does not have the intent to evade taxes, even if it is found to have engaged in fictitious invoicing, the five-year period for recovery applies instead of an indefinite period, and the penalty retroactive period is also five years.

Third, when making a defense around the period of recovery and the period of penalty retroactive, we should pay attention to three key points

(1) The starting point of the collection period: the starting point of the collection period varies according to the collection and management methods of different types of taxes

According to Article 83 of the Detailed Rules for the Implementation of the Tax Collection and Administration Law and Article 7 of the Notice on Several Specific Issues Concerning the Implementation of the Tax Collection and Administration Law of the Peoples Republic of China and Its Detailed Rules for the Implementation (Guo Shui Fa [2003] No.47), the starting point for the tax recovery period is based on the "date when taxes due but unpaid or underpaid should have been paid." Due to differences in the declaration and payment mechanisms for different types of taxes, the determination of this point must take into account the specific characteristics of each tax type. For value-added tax, under normal circumstances, if a taxpayers tax period is one month or one quarter, they should file their tax return within 15 days after the end of the period. Therefore, the start of the tax recovery period would be the day following the expiration of the tax filing period. For corporate income tax, since a combined prepayment and final settlement method is used, the start of the tax recovery period should be calculated from the day after the final settlement period ends (i.e., June 1st of the following year).

(2) The starting point of the penalty retroactive period: how to determine the continuous or continuing state of the illegal act?

Regarding the starting point of the penalty retroactive period, according to the provisions of the Administrative Punishment Law, it is generally calculated from the date when the illegal act occurred. However, if the illegal act has a continuous or ongoing nature, it should be calculated from the end of the illegal act. The tax law does not clearly define what constitutes continuous illegality, leading to many disputes in practice. As recently discussed in a case: In 2024, the inspection department of a citys tax bureau conducted a tax audit on Company A, discovering that from 2 016 to 2023, Company A continuously engaged in the illegal act of accepting falsely issued invoices for cost allocation, resulting in underpayment of corporate income tax. The tax authority determined that Company As actions constituted tax evasion and proposed to handle and penalize it as such. In this case, there was disagreement among the tax authorities regarding the penalty retroactive period—whether the case could be considered as a continuous state of illegal acts, and whether the part exceeding the five-year retroactive period should also be punished as tax evasion. We believe that this case should not be deemed as a continuous illegal act, and the part exceeding five years should not be penalized. On one hand, based on the specifics of this case, the company obtained falsely issued invoices for cost allocation to evade taxes from 2 016 to 2023, with separate annual income tax settlements each year, which constitutes multiple independent illegal acts rather than a single continuous illegal act; on the other handOn the one hand, from the perspective of the purpose of setting up the penalty retroactive period, tax authorities should discover the illegal acts of enterprises within an appropriate time and exercise public power reasonably to avoid the heavy economic burden borne by enterprises due to the long penalty retroactive period.

(3) The end point of the collection period and the retroactive period of punishment: how to define the time point of "discovery"?

Regarding the determination of the end point for the collection period, although the current "Detailed Rules for the Implementation of the Tax Collection and Administration Law" clarifies the starting rule but does not specify the termination criteria, in practice, it refers to the penalty retroactive period, using the time point when the tax authority discovers as the endpoint. The "Interpretation of the Tax Collection and Administration Law" and the State Taxation Administration Letter No.813 of 2005 also adopt this view, meaning that if the tax authority "discovered" that a taxpayer has unpaid or underpaid taxes, it stops calculating the collection period and determines whether the corresponding tax amount has exceeded the collection period based on this time point. However, there is a legislative gap regarding the definition of the "discovery time point." Generally, the tax authority uses the date when the "Tax Inspection Notice" is issued or the date when the "Tax Audit Case Filing Approval Form" is issued as the end time for the tax collection period. Courts have adopted various standards for judgment, including the time of initiating an investigation (or audit), the issuance of a tax inspection notice, and the delivery of the tax inspection notice. We recommend that enterprises, when involved in cases, carefully assess whether the inspection or audit period specified in relevant tax documents has already exceeded the collection period. If it has, they should promptly communicate with the tax authority to clarify the "discovery" time point.

4. Summary

In general, for tax violations, the penalty statute of limitations for tax authorities does not exceed five years; for taxes and late payment penalties, the collection period for tax authorities does not exceed five years. However, if a company engages in tax evasion, fraud, resistance, or arrears, the tax authority can pursue collection indefinitely. For companies that obtain fictitious invoices, if they commit tax evasion, the tax authority can pursue collection indefinitely, but the penalty statute of limitations does not exceed five years. If a company only commits to fictitious invoicing under Article 21 of the Invoice Management Law without committing tax evasion, the tax authoritys pursuit of tax payments is subject to a five-year collection period, and the penalty statute of limitations also does not exceed five years. We remind you that when a company is involved in an incident, besides defending the authenticity of its business and administrative characterization at the substantive level, it should also pay attention to the application of the collection period and penalty statute of limitations in the case. For any amount exceeding the collection period and penalty statute of limitations, timely communication with the tax authority is necessary to avoid significant economic losses and protect your own legal rights and interests.