Editor's Note: Recently, the Supreme People's Court (SPC) released eight typical cases of criminally punishing crimes endangering tax collection and administration, aiming to unify judicial standards and clarify the boundaries of legal application through judicial samples. Among them, the judgment result and key points of Case 1, the tax evasion case involving Guo and Liu, have triggered extensive discussions in practice on issues such as the understanding of the scope of tax liability, the distinction and necessity of subjective intent between tax evasion and tax fraud, and the application of the administrative pre-procedure. This article intends to explore the aforementioned issues in combination with the case.

I. Typical Case of the Supreme People's Court: The Tax Evasion Case Involving Guo and Liu

(i)Basic Facts of the Case

From February to December 2018, Suo Company, registered and established by Guo and Liu, obtained special VAT invoices from multiple companies including a trading company in Luzhou, Sichuan, for tax deduction without actual transactions, involving a tax amount of over 23 million yuan. In 2018, Suo Company declared output tax of over 52 million yuan and input tax deduction of over 50.25 million yuan. In September 2022, Guo and Liu were arrested respectively. During the first-instance trial, Liu's family compensated 200,000 yuan on his behalf.

The first-instance court held that Guo and Liu, without actual transactions, instructed other companies to issue false special VAT invoices for Suo Company to deduct tax, constituting the crime of falsely issuing special VAT invoices. Guo refused to accept the judgment and appealed. The second-instance court held that if a taxpayer with tax liability commits a crime by falsely increasing input tax for deduction to underpay tax within the scope of their tax liability, even if the means of false issuance and deduction is adopted, the subjective intent is still to avoid or underpay tax. In accordance with the principle of unifying subjectivity and objectivity, such conduct should be convicted of tax evasion. Therefore, the second-instance court reversed the judgment and convicted Guo and Liu of tax evasion.

(ii)Background of the Case

According to public information, Suo Company is a renewable resources enterprise. The renewable resources industry has particular characteristics: the source of waste recycling is mostly individual households and small-scale traders, making it difficult for recycling enterprises to obtain VAT input invoices. Moreover, against the background at that time, recycling enterprises could barely enjoy any tax preferential policies and had to pay VAT in full when selling their products. This led to a situation where recycling enterprises had output tax but no input tax, resulting in a heavy VAT burden. Faced with such a tax dilemma, many recycling enterprises reduced their VAT burden by obtaining special VAT invoices from third parties, and this case is a typical example of tax-related crimes in the industry.

From the perspective of regulatory trends: In August 2018, four ministries and commissions including the State Taxation Administration jointly launched a special campaign against false invoicing; in October 2021, six ministries and commissions jointly issued the Guiding Opinions on Doing a Good Job in the Regular Crackdown on Illegal and Criminal Activities of False Invoicing and Tax Fraud, requiring local authorities to maintain a high-pressure stance against false invoicing; in July 2023, the SPC joined the regular crackdown on "three types of fraud" (false enterprises, false invoices, and false declarations). Against this backdrop of severe crackdown on false invoicing, most judicial organs tended to adopt a "one-size-fits-all" approach in determining false invoicing cases, taking only the act of false invoicing as the basis for conviction without considering the industry background of the entity enterprise, nor the subjective intent of obtaining false invoices and whether the deduction caused the loss of VAT revenue.

In March last year, the judicial interpretation issued by the Supreme People's Court and the Supreme People's Procuratorate (hereinafter referred to as the "Two Highs") clarified that those who have no intent to defraud tax and do not cause the loss of tax due to deduction do not constitute the crime of false invoicing. This provided a clear legal basis for the defense of entity enterprises such as Suo Company that they do not constitute the crime of false invoicing. At the same time, the judicial interpretation of the Two Highs also clarified that if other crimes are constituted, criminal liability shall be pursued in accordance with the law for such other crimes. In April of the same year, the SPC issued a document further clarifying the relationship between false invoicing and other crimes, especially responding to whether the act of deducting tax through false invoicing constitutes tax evasion or false invoicing. The SPC held that the key distinction between the crime of false invoicing and tax evasion lies in the subjective intent: whether it is based on the intent to defraud national tax revenue or the intent to evade tax liability. If a taxpayer, within the scope of their tax liability, falsely increases input tax for deduction to underpay tax, even if the means of false issuance and deduction is adopted, the subjective intent is still to avoid or underpay tax. In accordance with the principle of unifying subjectivity and objectivity, such conduct should be convicted of tax evasion. The judgment in this case is fully consistent with the viewpoint of the SPC, providing guidance for the judicial practice to distinguish between false invoicing and tax evasion.

(iii)Three Major Issues Triggered by the Case

However, once the judgment was made, it triggered extensive discussions in the practical circle, including: how to understand the concept of "scope of tax liability"; whether it is appropriate and necessary to distinguish the intent between tax evasion and tax fraud in false invoicing cases; and how to apply the administrative pre-procedure to cases that have been investigated, prosecuted or even tried as false invoicing. This article intends to analyze these issues and attempt to interpret the practical application significance of the new judicial interpretation.

II. Legal Analysis of the Three Major Issues

(i)How to Understand the Scope of Tax Liability?

VAT is a turnover tax levied on the added value generated in the links of goods production, circulation and service provision. In theory, the tax base of VAT should be the added value generated in the process of goods circulation and service provision (taking goods as an example below), that is, the part of value newly created by enterprises in the production and operation process, including wages, interest, rent, profits and other value-added items. The VAT amount is the added value multiplied by the corresponding tax rate. However, due to the difficulty in data acquisition and actual accounting of this taxation method, few countries adopt it in practice. Instead, they either adopt the method of unified taxation at the final sales link or calculate the VAT amount by means similar to the independent accounting of price and tax and chain deduction of special VAT invoices, and China belongs to the latter.

According to Article 1 of the Interim Regulations on VAT: "Units and individuals engaged in the sale of goods, processing, repair and replacement services, sales of services, intangible assets, real estate, and importation of goods within the territory of the People's Republic of China are taxpayers of VAT." Article 8: "The input tax shall be the VAT paid or borne by the taxpayer on the purchase of goods, services, intangible assets, or real estate. The following input tax shall be allowed to be deducted from the output tax: (1) The VAT indicated on the special VAT invoices obtained from the sellers." Article 4: "The tax payable shall be the balance after deducting the current input tax from the current output tax. The formula for calculating the tax payable is: Tax payable = Current output tax - Current input tax." Based on this, when an enterprise conducts sales of goods, it generates tax liability, shall confirm and declare the output tax, and at the same time deduct the tax amount indicated on the special VAT invoices obtained for the purchase of raw materials, etc., and pay the tax amount of the difference to the state. Through this method, taxpayers at each link pay tax to the state on the part of value added realized by themselves. Combined with the interpretation of the SPC, the author believes that the "scope of tax liability" refers to the tax amount that an enterprise shall pay on the value added of goods realized, which is the actual tax liability that the taxpayer shall bear and the tax that the state shall collect. If a taxpayer reduces their actual tax liability by means of false invoicing, it is essentially underpaying tax, resulting in the state failing to collect the tax that should be collected.

Although the "scope of tax liability" can be simply understood as the tax payable, it is different from the calculation of tax payable in tax law. In the field of VAT, for general taxpayers, the tax payable is usually determined on a monthly basis. However, in the criminal law field, the statistical period of tax payable has its own scope. Article 4 of the judicial interpretation of the Two Highs on tax-related crimes stipulates: "The tax payable refers to the tax amount that should be paid in accordance with the provisions of tax laws and administrative regulations within the year in which the taxable act occurs." The author believes that the statistical cycle of the "scope of tax liability" should be consistent with that in the criminal law field. To avoid conflicts with tax law concepts, the SPC did not directly adopt the concept of tax payable.

In this case, the amount of the scope of tax liability of Suo Company is the tax amount that should be paid on the value added generated by the purchase and sale of goods. Suo Company generated output tax of 52 million yuan from the actual sale of goods, obtained input tax of 27.25 million yuan indicated on invoices from the actual purchase of goods, and the scope of tax liability was 24.75 million yuan (52 million yuan - 27.25 million yuan). The tax amount of invoices obtained by Suo Company from third-party companies was 23 million yuan, which did not exceed the scope of tax liability. Obtaining false invoices for tax deduction within this scope of tax liability, resulting in underpayment of tax, is essentially an act of evading tax liability and underpaying tax.

(ii)How to Distinguish the Subjective Intent Between Tax Evasion and Tax Fraud and Is There a Need for Such Distinction?

In accordance with the principle of unifying subjectivity and objectivity, if an actor does not have the criminal intent of a certain crime, even if they commit the objective act of the crime and cause the criminal result of the crime, they do not constitute the crime. For example, if an actor stabs someone with a knife and causes the death of the other person, it is necessary to further determine the intent based on which the actor committed the act. If the actor committed the act with the intent to kill, they shall be convicted of intentional homicide; if the actor committed the act with the intent to harm, they shall be convicted of intentional injury (resulting in death); if the actor has no intent to kill or harm, they may be convicted of other crimes such as involuntary manslaughter or even not constitute a crime. The same applies to crimes endangering tax collection and administration. If the subjective intent of the actor is not distinguished, the specific circumstances of the case are not considered, and all acts of false invoicing are convicted of the crime of falsely issuing special VAT invoices and the actor is subject to severe criminal punishment, it is obviously inconsistent with the contemporary criminal law concept. The author believes that the viewpoint in the article of the Supreme People's Procuratorate that "the false deduction of input tax in tax evasion refers to the false deduction of input tax by means other than falsely issuing special VAT invoices" is essentially still a logical thinking of convicting based on acts without considering the intent of the actor.

Since the state introduced the VAT refund policy for remaining input tax, the distinction between tax evasion and tax fraud has emerged in the field of false invoicing, and the need for distinguishing between them has also arisen. For those who falsely issue input invoices, falsely increase the remaining input tax, and then apply for tax refund, their acts are deceptive, involving false business and false invoicing, and misleading the tax authorities. They have the subjective intent to illegally occupy national property, and the result is the loss of national tax that has been put into the treasury. Therefore, it is essentially a fraud of national VAT property, a tax fraud act, and should be subject to criminal punishment with reference to fraud, which is the object regulated by the crime of false invoicing. For those who have actual sales business and bear VAT liability, and reduce their own tax liability by falsely issuing input invoices to falsely increase input tax deduction, it is essentially evading national tax debt, should be subject to criminal punishment with reference to malicious debt evasion crimes, and is the object regulated by the crime of tax evasion.

The author believes that in this case, Suo Company had actual sales business and should bear VAT liability. The tax amount indicated on the false invoices obtained did not exceed the scope of tax liability, and it was essentially an act of tax evasion. Therefore, in false invoicing cases, it is very necessary to refine the distinction between the subjective intent of the actor in falsely issuing invoices: whether it is to evade tax payment or defraud tax deduction, so as to accurately implement the principles of unifying subjectivity and objectivity and suiting punishment to crime.

(iii)How to Apply the Administrative Pre-procedure?

According to Article 3 of the judicial interpretation of the Two Highs on tax-related crimes, if a taxpayer commits an act of tax evasion, and before the public security organ files a case, after the tax authority issues a recovery notice in accordance with the law, the taxpayer pays the full amount of tax, late payment fees and all fines within the prescribed time limit, criminal liability shall not be pursued. This provision establishes the requirement of the administrative pre-procedure for the crime of tax evasion. However, in practice, there is doubt about how to apply the administrative pre-procedure to cases where the public security organ has filed a case for the crime of false invoicing but later finds that it meets the constitutive elements of the crime of tax evasion. The author believes that in such cases, judicial organs should take responsibility, apply the reverse connection procedure between administrative law and criminal law in accordance with the law, return the case to the tax authority for handling, and the tax authority shall recover the tax, impose late payment fees and fines for the involved act. If the involved subject fails to pay the tax, late payment fees and fines in accordance with the provisions, criminal liability for the crime of tax evasion shall be pursued in accordance with the law.

In this case, Guo and Liu were arrested in September 2022, and the second-instance judgment should have been made after April 2024. During the nearly two-year period, if the tax authority transferred the case to the public security organ for investigation, the tax authority should have determined the nature within the prescribed time limit. In accordance with Article 35 of the Measures for the Administration of Invoices, the tax authority should have identified the false invoices obtained by Suo Company as false invoicing. In accordance with Article 63 of the Law on the Administration of Tax Collection and Article 1 of the Circular of the State Taxation Administration on Issues Concerning the Handling of Taxpayers Obtaining Falsely Issued Special VAT Invoices (Guoshui Fa [1997] No. 134), the tax authority should have identified the act of Suo Company using falsely obtained invoices to deduct tax and list costs resulting in underpayment of tax as tax evasion, and issued tax documents. If the public security organ directly filed a case for investigation, it should also have transferred the case clues to the tax authority, and the tax authority should have handled it within the prescribed time limit. If Suo Company failed to pay the tax, late payment fees and fines within the prescribed time limit, criminal liability for tax evasion could be pursued against Guo and Liu; if the tax, late payment fees and fines were paid within the prescribed time limit, criminal liability for tax evasion should not be pursued against Guo and Liu. Although it is not disclosed in this case whether the case was returned to the tax authority for handling during the second-instance trial, from the timeline and the connection mechanism between administrative law and criminal law of the tax authority and the public security organ, Suo Company should not have paid the full amount of tax, late payment fees and fines within the legal time limit, so the judicial organ pursued the legal liability of Guo and Liu for tax evasion.

III.Conclusion

In the past, the crime of falsely issuing special VAT invoices was once interpreted as a special type of tax evasion, which is inconsistent with the basic principle of suiting punishment to crime. Because whether tax evasion is committed by concealing income, falsely increasing costs, etc., by falsely issuing input invoices, or by defrauding export tax rebates, the essence is to evade tax liability, and there is no substantial difference in social harm. It cannot be considered that the social harm of tax evasion by means of false invoicing is higher than that of general tax evasion. The new judicial interpretation and cases clarify that falsely issuing input invoices may have different social harms, and it is necessary to distinguish whether the essence is tax evasion or tax fraud. If it is tax evasion, it should be handled as the crime of tax evasion; if it is tax fraud, it can be handled as the crime of false invoicing. Limiting the crime of false invoicing to the scope of tax fraud is consistent with the criminal liability of up to life imprisonment for the crime of false invoicing, which can be said to clarify the original legislative intent.

On the other hand, the progress of legislation is also inseparable from the development of the times. The clarification of the original legislative intent of the crime of false invoicing is of course in line with the general background of protecting the development of private enterprises in the new era, and its significance is no less than the criminal compliance implemented in the past. Both aim to give private enterprises an opportunity to be acquitted, but the difference is that criminal compliance is an innovative system. On the basis of acknowledging the enterprise's crime, it gives the enterprise an opportunity to rectify. This system design of eliminating liability through post-event rectification has a great impact on the basic principles of criminal law, thus causing extensive controversy. The new judicial interpretation is a legislative interpretation of the relationship between the crime of false invoicing and the crime of tax evasion. This interpretation is based on the framework of criminal law. Although it breaks through the past understanding of the constitution of the crime of false invoicing, its interpretation conforms to the social and economic development and the basic legal principles of crimes endangering tax collection and administration, and its conclusion is undoubtedly correct and appropriate.

The author believes that the reasoning of the judgment in the tax evasion case involving Guo and Liu is not a simple change of conviction, but establishes three core rules for distinguishing between tax evasion and false invoicing: determining the scope of tax liability by subtracting the input tax indicated on the real invoices obtained from the purchase of goods from the real output tax generated from the sale of goods, with the year as the calculation cycle, so as to avoid expanding the scope of criminal crackdown; distinguishing tax evasion from tax fraud based on subjective intent, practicing the principle of unifying subjectivity and objectivity; determining the application.