When public security authorities directly initiate investigations into tax-related cases, can tax authorities still impose penalties?

Regarding tax-related criminal cases directly investigated by public security authorities where judicial organs have yet to render final dispositions, can tax authorities issue administrative penalty decisions? This issue has been subject to differing interpretations in practice. Drawing on a real-world case, this article explores the core principles of legal application and coordination between administrative and criminal enforcement, aiming to provide guidance for handling similar cases.

I. Case Introduction

(i) Basic Case Details

In January 2024, Wang reported Company A to the public security authorities for issuing fraudulent special VAT invoices. In April of the same year, the public security authorities decided to initiate an investigation into Company A's fraudulent issuance of special VAT invoices. In June, the public security authorities transferred the case clues to the tax authorities. In August, the tax authorities issued a Notice of Tax Penalty to Company A, proposing a fine of RMB 500,000 for its fraudulent invoicing activities pursuant to Article 35 of the Administrative Measures for Invoices. Pursuant to Article 63 of the Tax Collection and Administration Law and Article 1 of the State Taxation Administration Notice on Handling Issues Related to Taxpayers Obtaining Fraudulently Issued Special VAT Invoices (Guoshuifa [1997] No. 134), Company A’s actions of deducting input tax credits and falsely listing costs through fraudulent invoicing were deemed tax evasion. A proposed penalty of 8 million yuan—equivalent to 0.5 times the underpaid tax amount—was imposed. Pursuant to Article 29 of the Administrative Penalty Law, which states that “where a single violation breaches multiple legal provisions and warrants fines, the penalty shall be imposed according to the provision prescribing the higher fine amount,” it is proposed to impose a fine of RMB 8 million on Company A.

(ii) Perspectives of Tax Authorities and Enterprises

Company A contends that pursuant to Article 1(3) of the Opinions on Strengthening the Coordination Between Administrative Law Enforcement and Criminal Justice (Central Office Document [2011] No. 8, hereinafter referred to as Document No. 8), “Where an administrative law enforcement agency has not issued an administrative penalty decision, it shall, in principle, decide whether to impose an administrative penalty only after the public security organ has decided not to file a case or has withdrawn the case, the People's Procuratorate has made a decision not to prosecute, or the People's Court has rendered a not-guilty verdict or exempted the party from criminal punishment.” Article 2 of the Supreme People's Court's Reply on Whether Tax Authorities May Impose Administrative Penalties for Tax Evasion Based on the Same Facts Against the Same Party After Judicial Authorities Have Filed a Case for Investigation for the Crime of Issuing False Special VAT Invoices but Before a Criminal Judgment Is Issued (Supreme People's Court Document No. 1 [2008], hereinafter referred to as Document No. 1) states: “After discovering suspected criminal conduct and transferring the case to public security organs for criminal investigation, tax authorities shall no longer impose administrative penalties other than conduct penalties and admonitions for the same illegal act.” Accordingly, since Company A's suspected fraudulent invoicing case is first being handled by judicial authorities and no final disposition has been made regarding the illegal or criminal conduct, tax authorities should lawfully refrain from imposing administrative penalties for the time being. They should await the final disposition by judicial authorities before deciding whether to impose penalties. The tax authorities' current intent to impose administrative penalties on Company A constitutes procedural impropriety, and the relevant notice should be revoked in accordance with the law.

The tax authorities contend that Company A's circumstances do not meet the above requirements.

Pursuant to Article 1(3) of Document No. 8, “When administrative law enforcement agencies transfer suspected criminal cases to public security organs, they shall transfer all case materials... If an administrative penalty decision has already been issued by the administrative law enforcement agency at the time of transfer, a copy of the administrative penalty decision shall be concurrently sent to the public security organ and the people's procuratorate.” According to Article 3 of the Regulations on the Transfer of Suspected Criminal Cases by Administrative Law Enforcement Agencies (hereinafter referred to as the “Regulations”), “When administrative law enforcement agencies discover during the lawful investigation and handling of violations that the amount involved in the violation, the circumstances of the violation, the consequences caused by the violation, etc., are suspected of constituting a crime and require criminal liability to be pursued according to law, they must transfer the case to the public security organs in accordance with these Regulations.” Article 6 states, "When administrative law enforcement agencies transfer suspected criminal cases to public security organs, they shall attach the following materials: (1) A transfer notice for the suspected criminal case; (2) An investigation report on the circumstances of the suspected criminal case." Accordingly, if the tax authority were to transfer this case to the public security organ before imposing an administrative penalty, it would indeed violate statutory procedures. However, in this case, the tax authority has not yet prepared documents such as an investigation report on the circumstances of the suspected criminal case and has not transferred Company A's tax violation case to the public security organ. Therefore, issuing a proposed penalty decision prior to transfer complies with legal requirements and is procedurally lawful.

II. Legal Analysis of This Case

(i) The Provisions and Document No. 8 Cannot Be Directly Applied to This Case

First, it is necessary to clarify the legislative purpose and legal applicability of the Provisions and Document No. 8. According to Article 1 of the Provisions, “These Provisions are formulated to ensure that administrative law enforcement agencies promptly transfer cases suspected of criminal activity to public security organs for the lawful punishment of crimes disrupting the socialist market economic order...” It is evident that the legislative purpose of these Provisions is to regulate the coordination process between administrative law enforcement and criminal justice, ensuring that cases involving suspected crimes are promptly transferred from administrative agencies to public security organs for punishment through criminal procedures in accordance with the law, while simultaneously preventing issues such as “failure to transfer cases” or “difficulty in transferring cases.”

Second, Article 3 of the Regulations clearly defines the sole statutory prerequisite for administrative agencies to transfer cases: administrative law enforcement agencies must transfer cases to public security organs only when, in the course of lawfully investigating and handling violations, they discover that the violation is suspected of constituting a crime and requires criminal liability to be pursued. If public security organs have already directly initiated a case based on the same illegal facts, it signifies that the case has entered the criminal investigation process due to suspected criminal activity, thereby eliminating the statutory trigger for administrative transfer. Accordingly, the prerequisite for applying the Provisions is that public security organs have not yet initiated a case. If public security organs initiate investigation of an illegal case prior to the enforcement agency due to reasons such as third-party reports or assignments from higher authorities, the Provisions do not apply. Document No. 8 and the Provisions share a common origin, building upon the Provisions to address practical coordination challenges by refining procedures and strengthening oversight. Together, they establish the institutional framework for administrative-criminal coordination concerning “administrative organs transferring cases to public security organs.”

Therefore, the author believes that in this case, the public security organ initiated the investigation and subsequently transferred the case to the tax organ. It was not a situation where the tax organ first discovered the violation during its enforcement activities and then transferred it to the public security organ. Consequently, this case does not meet the prerequisite conditions stipulated in the Regulations and Document No. 8, and the provisions of the two laws cannot be directly applied. Both Company A and the tax organ's direct invocation of the two laws is inappropriate.

(ii) Pursuant to the principle of criminal priority, no administrative penalty should be imposed at this stage of the case.

In fact, the Provisions and Document No. 8 establish a fundamental principle of handling: “Criminal proceedings take precedence over administrative proceedings.” This means that once a suspected criminal case enters judicial proceedings, administrative enforcement procedures should yield to criminal judicial procedures. Enforcement agencies should respect the findings of judicial proceedings, refrain from imposing administrative penalties where none have been issued, and await the conclusion of criminal proceedings before deciding whether to impose penalties. This prevents inconsistent determinations between administrative and criminal authorities, avoids duplicate evaluations and excessive punishment for the same violation, and prevents administrative power from encroaching upon judicial authority.

This principle is effectively affirmed by Document No. 1. According to Article 2 of Document No. 1, “Upon discovering suspected criminal activity and transferring the case to public security authorities for criminal investigation, tax authorities shall no longer impose administrative penalties other than behavioral penalties or admonitions for the same violation.” The core focus of this provision is that once a tax-related violation enters criminal investigation, tax authorities may not impose fines for the same violation. In other words, once a tax case enters criminal judicial proceedings, tax authorities should temporarily refrain from imposing penalties, regardless of whether the case was transferred by the tax authorities to public security organs. If the party's actions do not constitute a crime, public security organs should return the case to the tax authorities, which may then pursue the party's administrative liability in accordance with the law.

This interpretation is further corroborated by judicial practice. In the case of Dalian Xinnuo Yi Trading Co., Ltd. v. Dalian Economic and Technological Development Zone Tax Bureau concerning administrative penalties, the Liaoning Provincial High Court held that whether the tax authority transferred the case to public security authorities after initiating an investigation or public security authorities transferred case clues to the tax authority after initiating an investigation, the key issue in both cases was identical: the tax authority imposed an administrative penalty of a fine for the same illegal act while the public security authorities were already conducting an investigation. This violated Article 2 of Document No. 1 and constituted procedural illegality.

In this case, the public security authorities had already initiated an investigation into Company A's illegal issuance of invoices, clearly indicating the case had entered criminal judicial proceedings. The tax authorities should have decided whether to impose administrative penalties only after the People's Procuratorate made a decision not to prosecute, or after the People's Court rendered a not-guilty verdict or exempted the party from criminal punishment, rather than imposing penalties at this stage.

(iii) Based on the principle of no double jeopardy, no penalty should be imposed at this stage

Pursuant to Article 35(2) of the Administrative Penalty Law, “Where an illegal act constitutes a crime... and the administrative organ has not yet imposed a fine on the party concerned, no fine shall be imposed.” Article 2 of Document No. 1 stipulates that “after the tax authority discovers suspected criminal activity and transfers it to the public security organ for criminal investigation... where the criminal defendant is found guilty of a tax-related crime and subjected to personal and property penalties, the tax authority shall not impose an administrative penalty of a fine.”

These provisions essentially prohibit double punishment for the same illegal act. That is, the same type of penalty cannot be imposed twice for the same violation. Furthermore, based on the principle of criminal priority, if a court has already imposed a fine on an individual for an illegal act, an additional fine should not be imposed. In this case, since Company A's suspected fraudulent invoicing case has entered judicial proceedings and awaits the judicial authorities' disposition, questions regarding whether Company A and the involved personnel constitute a crime, whether the judicial authorities will impose criminal penalties, and the amount of any fines, all require awaiting the judicial adjudication. If the tax authorities impose an administrative penalty of a fine on Company A at this stage, it would result in duplicate evaluation of the same illegal act, violating the principle of no double jeopardy.

III. Conclusion

As the process of tax legalization continues to deepen, the law enforcement capabilities of tax officials steadily improve, and the protection of taxpayers' legitimate rights and interests becomes increasingly comprehensive and thorough. When handling such cases, tax authorities generally accurately grasp the core legal principles. For tax-related illegal or criminal cases directly filed by public security organs, they temporarily refrain from imposing administrative penalties on taxpayers, instead awaiting the final outcome of judicial proceedings before deciding whether to impose penalties. For instance, in the case involving a Dalian-based company obtaining fraudulent invoices, the First Audit Bureau of the Dalian Municipal Taxation Bureau determined that the company's practice of claiming input tax credits and deducting costs using fraudulent invoices from Shenyang-based companies constituted tax evasion. Simultaneously, as the company was directly investigated by public security authorities for suspected fraudulent invoice issuance—a case now in judicial proceedings—the tax bureau has temporarily withheld administrative penalties. Such cases are numerous. This provides taxpayers with clear guidance: on one hand, they should actively communicate with tax authorities, proactively explain the progress of criminal investigations and the legal reasoning applied, and strive to gain the tax authorities' recognition. On the other hand, if the tax authorities insist on imposing penalties, taxpayers have the right to seek legal remedies to effectively protect their legitimate rights and interests.