Editor's Note: In practice, some construction enterprises have their previously obtained invoices identified as abnormal vouchers because the upstream construction contractors have escaped or lost contact. Consequently, they receive handling and penalty decisions from the tax inspection bureau, facing obligations to pay back taxes, late payment fees, and being characterized as having evaded taxes. Combining current tax policies and practical operations, this article sorts out the response measures for enterprises and provides tax compliance guidance.

01 Escaped Construction Contractor Leading to Abnormal Invoices Triggering Tax Inspection on Construction Enterprises

The procurement of materials and project subcontracting in the construction industry often involve multi-level cooperative entities. Due to the chain-based collection and management nature of Value-Added Tax (VAT), tax violations by upstream invoice issuers can easily be transmitted to downstream invoice recipients. Once upstream enterprises have issues such as failure to declare tax in compliance, escape, or loss of contact, downstream construction enterprises are likely to be included in the scope of tax inspection. Recently, the author received a consultation: several years ago, a construction enterprise purchased a batch of construction materials from a cooperative construction contractor, and the contractor issued special VAT invoices as agreed. Now, because the construction contractor has escaped and lost contact, the batch of invoices issued by it has been identified by the tax authority as abnormal VAT deduction vouchers. The inspection bureau has issued a handling decision and a penalty decision to the construction enterprise, determining that the enterprise has evaded taxes, and requiring it to pay back VAT, corporate income tax, late payment fees, and a fine. How should the enterprise respond to such a situation?

Before sorting out the response path, it is first necessary to clarify the relevant concepts. According to the Announcement of the State Taxation Administration on Issues Concerning the Determination and Handling of Special VAT Invoices Issued by Escaped/Lost Contact Enterprises (Announcement No. 76 of 2016), an escaped/lost contact enterprise refers to an enterprise that fails to fulfill its tax obligations and is out of the supervision of the tax authority. In accordance with the relevant provisions on tax registration management, if the tax authority, through on-site investigations, telephone inquiries, verification of tax-related matters handling, and other collection and management methods, still cannot find the enterprise and its relevant personnel, or although it can contact the enterprise's agent for bookkeeping and tax declaration, etc., these personnel are unaware of the enterprise's situation and cannot contact the actual controller of the enterprise, the enterprise may be determined as an escaped/lost contact enterprise. The Announcement of the State Taxation Administration on Issues Concerning the Management of Abnormal VAT Deduction Vouchers and Other Related Matters (Announcement No. 38 of 2019) further clarifies the handling rules for abnormal vouchers. Special VAT invoices that fall under the circumstances specified in Item (1) of Article 2 of Announcement No. 76 of 2016 shall be included in the scope of abnormal vouchers. For those for which VAT input tax has not been declared for deduction, deduction shall be temporarily not allowed. For those for which VAT input tax has been declared for deduction, unless otherwise specified, the input tax shall be transferred out in all cases.

Returning to the aforementioned case of the construction enterprise, is the handling and penalty decision made by the tax authority in line with legal provisions, and how should the enterprise defend itself?

02 Three Defense Dimensions for Construction Enterprises Facing Abnormal Invoices

In response to the handling and penalty decisions of the tax authority, enterprises can defend themselves from three dimensions: VAT deduction, corporate income tax deduction, and determination of tax evasion. The following will analyze each dimension one by one.

At the VAT level, it is not the case that once the tax authority identifies a voucher as abnormal, the input tax must be transferred out; instead, handling should be differentiated based on the authenticity of the transaction. If the invoice-receiving enterprise has objections to the abnormal vouchers identified by the tax authority, it shall submit a verification application to the competent tax authority and provide materials proving the authenticity of the business, such as contracts for purchasing goods, bank vouchers for corporate payments, goods transportation documents, acceptance certificates, and weighing slips. The tax authority shall conduct verification after receiving the application. If there is no doubt and the provisions on VAT input tax deduction are met, a notice shall be issued to allow the taxpayer to continue the deduction. Therefore, for the aforementioned construction enterprise, it is necessary to sort out the evidence of business authenticity, such as collecting the project contract signed with the construction unit, construction logs, and supervision records to prove that the project corresponding to the materials actually exists; organizing the attendance records of construction personnel and the ledger of material receipt and issuance to prove that the materials were actually received and used by the project team; and retaining material acceptance certificates and inventory in-out records to prove that the materials have been warehoused and used in project construction.

At the corporate income tax level, the deduction vouchers for corporate income tax are based on the Measures for the Management of Pre-tax Deduction Vouchers for Corporate Income Tax (Announcement No. 28 of 2018 of the State Taxation Administration). According to this document, the pre-tax deduction vouchers obtained by enterprises must comply with the principles of authenticity, legality, and relevance. It should be noted that the concept of VAT "abnormal vouchers" cannot be directly applied to the provisions on corporate income tax deduction vouchers. Different tax types should be judged based on their respective applicable documents, and a one-size-fits-all approach is not acceptable. Even if the abnormal vouchers cannot be removed, Announcement No. 28 of 2018 also entitles taxpayers to use external vouchers other than invoices for deduction. That is, if the taxpayer cannot reissue or replace invoices or other external vouchers due to special reasons such as the counterparty's deregistration, cancellation, lawful revocation of business license, or being identified as an abnormal household by the tax authority, the taxpayer may claim pre-tax deduction based on supporting materials proving the inability to reissue or replace invoices or other external vouchers (including documents such as industrial and commercial deregistration, institutional cancellation, inclusion in abnormal business households, and bankruptcy announcements), contracts or agreements for relevant business activities, payment vouchers made through non-cash methods, supporting materials for goods transportation, internal vouchers for goods warehousing and delivery, enterprise accounting records, and other materials proving the authenticity of expenditures.

At the level of determining tax evasion, Paragraph 1 of Article 63 of the Tax Collection and Administration Law stipulates: "A taxpayer who forges, alters, conceals, or arbitrarily destroys account books or accounting vouchers, or overstates expenses or omits or understates incomes in account books, or refuses to declare tax after being notified by the tax authority to do so, or makes false tax declarations, thereby failing to pay or underpaying the amount of taxes payable, shall be guilty of tax evasion." Based on this, tax evasion must meet the subject element, fault element, act element, and consequence element simultaneously. In practice, the fault element is the one that causes the most disputes. Both the provisions of Article 63 of the Tax Collection and Administration Law and the official replies of the State Taxation Administration (Tax General Letter [2016] No. 274, Tax General Letter [2013] No. 196) imply that the subjective intent of the taxpayer is a necessary condition for constituting tax evasion. Therefore, if the taxpayer has no subjective intent to evade taxes, the tax authority cannot determine that the taxpayer has evaded taxes. If, when obtaining the abnormal invoices, the construction enterprise has conducted a reasonable review of the construction contractor's qualifications, could not have foreseen the subsequent escape or loss of contact of the contractor, and had no subjective intent to use the invoices despite knowing they were abnormal, and the enterprise has no tax evasion acts such as false tax declarations and has not caused the consequence of failing to pay or underpaying taxes, then the inspection bureau's determination of tax evasion on the ground of abnormal invoices is based on unclear facts and insufficient evidence, and shall not be established in accordance with the law.

03 Three Practical Key Points for Enterprises in Applying for Administrative Reconsideration

If the construction enterprise can collect and prepare evidence materials regarding the authenticity of the business, what should it do next for legal remedy? In response to the handling decision and penalty decision of the inspection bureau, it is recommended to apply for reconsideration simultaneously, and the following key points should be noted in practice:

First, it is necessary to promptly pay the taxes and late payment fees in accordance with the handling decision or provide a tax guarantee; otherwise, the reconsideration procedure cannot be initiated. The Tax Collection and Administration Law stipulates: "When a taxpayer, withholding agent, or tax guarantee person has a dispute with the tax authority over tax payment, they must first pay or remit the taxes and late payment fees in accordance with the tax decision made by the tax authority or provide a corresponding guarantee, and then may apply for administrative reconsideration in accordance with the law." Therefore, for tax disputes, the taxpayer needs to first remit the taxes and late payment fees or provide a guarantee before initiating the remedy procedure. However, when applying for reconsideration of a tax penalty decision, there is no need to pay the fine in advance, and the reconsideration application can be submitted directly.

Second, grasp the time limit for submitting the reconsideration application to avoid losing the right due to delay. According to regulations, the taxpayer shall submit an administrative reconsideration application to the reconsideration authority within 60 days from the date of receipt of the tax handling decision or tax penalty decision. If the application is submitted after the deadline, the reconsideration authority will not accept it. Therefore, after receiving the documents, the construction enterprise should verify the date immediately, entrust professional tax lawyers to intervene as soon as possible, sort out the evidence in a timely manner, and submit the application to avoid missing the opportunity for legal remedy due to overdue submission.

Third, fully exercise the rights in the reconsideration procedure to safeguard its legitimate rights and interests. On the one hand, the enterprise should actively submit evidence related to the authenticity of the business and form a complete evidence chain to support its claims. On the other hand, the enterprise may apply to review and copy the evidence materials used by the inspection bureau to make the specific administrative act, including inspection work papers and evidence collection records, so as to verify their legality and relevance. In addition, according to Article 33 of the Regulations on the Implementation of the Administrative Reconsideration Law, for major and complex cases, if the applicant requests it or the administrative reconsideration institution deems it necessary, the case may be heard in the form of a hearing.

04 Conclusion

The core logic for responding to the risk of abnormal invoices lies in business logic, which is ultimately reflected in the authenticity of the business and the completeness of business evidence. After receiving a risk alert, the top priority for an enterprise is to verify whether the business itself is authentic and whether the existing evidence chain can fully prove the occurrence of the business. If an enterprise is facing tax inspection, it is recommended to engage professional forces such as tax lawyers to reduce the enterprise's financial losses through legal remedy procedures and effectively avoid secondary harms such as damage to the enterprise's credit standing. From the perspective of long-term tax compliance, it is recommended that enterprises improve the invoice clauses in procurement contracts, clarify the content and methods of holding the seller liable for tax losses suffered by the buyer due to non-compliant invoices, and subsequently recover relevant losses from the seller through legal channels such as litigation. Against the background of the state strengthening tax supervision, enterprises should not only handle short-term risks properly but also establish long-term compliance mechanisms to protect their legitimate rights and interests while maintaining the integrity of the VAT chain and national tax security.