Editor’s Note:Since the beginning of 2026, the consumption tax administration rules applicable to beer and baijiu have been adjusted in succession, while several listed alcoholic beverage companies have disclosed substantial back-tax payments. Against the backdrop of continued industry restructuring, the ongoing transformation of sales channels, and increasingly refined tax administration, tax risks facing alcoholic beverage companies are extending beyond individual taxes and isolated business activities to the entire course of their operations. Taking the 2026 changes to the consumption tax administration rules and the back-tax disclosures of listed companies as its starting point, this article draws on tax administration practices across different regions to examine the principal tax risks arising throughout the alcohol industry value chain and offers corresponding recommendations for tax compliance.

01 Emerging Trends in Tax Administration for the Alcohol Industry: Insights from Back-Tax Payments by Listed Alcoholic Beverage Companies

Since the beginning of 2026, tax-related matters involving alcoholic beverage companies have frequently drawn public attention. In June, a listed alcohol distribution company disclosed that two of its core subsidiaries had, following internal tax reviews, paid approximately RMB 127 million in back taxes and late-payment surcharges. In August, a listed baijiu producer disclosed additional payments of more than RMB 83 million in Consumption Tax, Value-Added Tax, Corporate Income Tax, other taxes and late-payment surcharges. Prior to these disclosures, other alcohol companies had also made substantial back-tax payments in connection with Consumption Tax issues arising from earlier periods. In recent years, the tax authorities have also publicized a number of tax evasion cases involving alcohol companies. Against the backdrop of mounting operating pressure in the industry and increasingly refined tax administration, both substantial back-tax payments by listed companies and the investigation of tax evasion cases underscore the growing importance of tax compliance in the management and operations of alcohol companies.

At the same time, the Consumption Tax administration rules for alcoholic beverages have continued to be refined. On April 1, the State Taxation Administration issued the Announcement on Issues Concerning the Levy of Consumption Tax on Beer (STA Announcement No. 8 of 2026), revising the rules for determining the applicable unit tax amount for beer sold through related sales entities. The Announcement provides that the higher of the producer’s ex-factory price and the related sales entity’s external selling price shall serve as the price benchmark for determining the applicable Consumption Tax unit amount. Beginning June 1, two new schedules were added to the Consumption Tax filing for baijiu: the Detailed Schedule for Calculation of Consumption Tax on Baijiu and the Information Reporting Form for Related Sales Entities of Baijiu Producers. Information including sales volume, ex-factory price, minimum taxable price, declared taxable price, and related sales entities is now collected by minimum sales unit. Although these changes do not alter the basic Consumption Tax regime for alcoholic beverages, they strengthen the linkage among producers’ ex-factory prices, the external selling prices of related sales entities, and Consumption Tax filings, thereby imposing higher requirements on product pricing and related-sales management.

These changes in tax administration are taking place against the broader backdrop of a deep adjustment in the alcohol industry and ongoing restructuring of distribution channels. In recent years, patterns of alcohol consumption have continued to evolve, while pricing systems, inventory destocking, and retail sell-through have come under varying degrees of pressure. Traditional distribution, direct sales, e-commerce, livestreaming, and instant retail channels are increasingly converging, prompting corresponding changes in sales models, pricing policies, and settlement arrangements. As a result, matters such as price adjustments, inventory changes, rebates and channel-related expenses increasingly affect revenue recognition and tax filings, requiring tax and accounting treatment to keep pace with evolving business models.

Against this backdrop, tax administration in the alcohol industry is increasingly relying on operational data for refined risk management. Publicly available tax administration practices across different regions show that production data, such as raw material inputs, water use, energy consumption, output and inventory, may be cross-checked against invoice, sales, fund-flow and tax filing data. Some local tax authorities have also identified anomalies through coordinated administration of Water Resources Tax and Consumption Tax, input-output analysis and enterprise risk registers. As cross-regional operations and sales models such as e-commerce and livestreaming continue to develop, tax risk analysis has further extended to related-party sales prices, platform orders, collection of sales proceeds and revenue recognition. As a result, the identification of tax risks in the alcohol industry is gradually expanding from individual tax filing data to the entire business process, including procurement, production and sales.

02 Key Tax Risks Across the Alcohol Industry Value Chain

The alcohol industry value chain generally extends from raw material procurement and production to product distribution and retail sales. While the basic business process is relatively straightforward, tax risks become more complex where production and sales are conducted by separate entities, multi-tier related-party sales and cross-regional operations are involved, and online and offline distribution channels operate in parallel. This complexity is further compounded by business models such as entrusted processing, customized alcoholic beverages and winery tourism. The same product may pass through multiple entities and distribution tiers in the course of production, pricing and sales, increasing the complexity of Consumption Tax pricing, revenue recognition and the tax treatment of related-party transactions.

(I) Raw Material Cultivation and Procurement: Risks Relating to Input VAT Deduction, Invoicing and Transaction Authenticity

Some alcoholic beverage companies procure grains, grapes and other agricultural products from external suppliers, while others operate their own cultivation bases or source raw materials from agricultural companies within the same corporate group. Different sources of raw materials may be subject to different rules governing VAT documentation and input VAT deductions. If the actual transaction structure is not properly identified—for example, where agricultural products are in fact purchased from an intermediary but an agricultural product purchase invoice is issued as though the products had been purchased directly from an agricultural producer—the supporting documentation for the input VAT deduction may be considered improper, potentially resulting in adjustments to input VAT deductions, payment of additional VAT and late-payment surcharges.

The authenticity of the underlying transaction is also particularly important where agricultural product purchase invoices are used. When purchasing directly from agricultural producers, an alcohol company should verify the seller’s identity and the actual supply of the products. Where purchases are made through cooperatives, trading companies or other intermediaries, the company should ensure that the invoicing entity corresponds to the actual transaction. Material inconsistencies between a supplier’s actual production capacity and the volume purchased, or between the recorded transaction and the actual flow of goods or funds, may trigger further scrutiny of the authenticity of the procurement. If fictitious purchases or false invoicing are established, the company may face adjustments to input VAT deductions and recovery of underpaid taxes, as well as administrative liability; where the conduct is suspected of constituting a criminal offense, criminal liability may also arise.

For alcohol companies subject to the assessment-based deduction method for input VAT on agricultural products, particular attention should also be paid to whether the applicable deduction standards correspond to actual production conditions. Different products or production processes may be subject to different deduction standards. If a company changes its production process or product mix but continues to apply the previous assessment basis, its input VAT deductions may be incorrectly calculated. In tax administration practice, there have been cases in which baijiu producers failed to adjust the applicable unit consumption standard for agricultural products after changing their production processes and were subsequently required to amend their tax filings and reverse excess input VAT previously deducted. Accordingly, data on raw material consumption and production output may also serve as important indicators for verifying whether the applicable deduction standards have been correctly applied.

(II) Production and Brewing: Risks Relating to Production Models, Water Resources Tax Filing and Production Output Verification

Alcoholic beverage companies may conduct the entire production process in-house, use purchased alcoholic liquids for further production, or engage third parties for entrusted processing. Different production models are subject to different Consumption Tax treatments. For example, the Consumption Tax treatment differs depending on whether a wine producer uses its self-produced taxable wine for the continuous production of other taxable consumer goods or for other purposes. The use of purchased or imported wine for further production may also involve the deduction of Consumption Tax previously paid, while entrusted processing is subject to the applicable rules on the collection and remittance of Consumption Tax by the processor. If a company fails to properly distinguish the source and use of alcoholic liquids, or if its production records are inconsistent with its actual processing activities, errors may arise in its Consumption Tax treatment and difficulties may also arise in verifying production output and inventory.

Water Resources Tax is another key tax issue at the production stage. Alcoholic beverage companies that extract water resources subject to Water Resources Tax may face additional tax liabilities and late-payment surcharges if they fail to file as required or if the reported volume differs from actual water extraction. At the same time, water consumption in baijiu production generally bears a certain relationship to the scale of actual production. Water-use data may therefore serve as a supplementary indicator for verifying reported production levels. In some regions, tax authorities have explored coordinated administration of Water Resources Tax and Consumption Tax, together with input-output analysis, to compare water-use data against production and sales information. A material mismatch between water consumption and reported output, or unexplained changes in production losses or inventory, may trigger further scrutiny of actual output, sales revenue and related tax filings. In addition, where alcohol companies engage in process improvements or new product development, they should appropriately distinguish R&D expenditures from routine production costs. Inaccurate allocation of such expenses may result in errors in claiming the R&D super-deduction for Corporate Income Tax purposes.

(III) Product Sales and Distribution: Risks of Consumption Tax Underpayment, Underreported Revenue and Transaction Characterization

1. Risks Relating to Related-Party Sales Pricing and Consumption Tax

For baijiu producers, the ex-factory price charged on sales of self-produced baijiu to related sales entities directly affects the taxable base for the ad valorem component of Consumption Tax. The existing minimum taxable price regime for baijiu specifically addresses circumstances in which related-party sales prices are significantly lower than the relevant benchmark. Following the further refinement of baijiu Consumption Tax filing requirements in 2026, product pricing and related-party sales information have been brought more directly into routine tax filing administration. If product prices or sales structures change but the Consumption Tax taxable price is not adjusted accordingly, the company may face a risk of Consumption Tax underpayment. For alcohol companies with a large number of products or frequent price changes, inadequate alignment between product names, specifications and the corresponding sales prices may also increase the risk of errors in determining the minimum taxable price and filing Consumption Tax returns.

In one publicly reported case, a baijiu producer sold self-produced baijiu to two related sales companies at prices that, for certain products, were significantly lower than the related sales entities’ external sales prices, with the lowest price amounting to only approximately 24% of the latter. The tax authority therefore reassessed the Consumption Tax taxable base in accordance with the relevant rules on the minimum taxable price for baijiu and increased the taxable base by more than RMB 3 million. The case illustrates that where a producer sells baijiu through related sales entities and its ex-factory price materially deviates from the related sales entities’ external sales prices, the minimum taxable price assessment rules may be triggered.

Multi-tier related-party sales structures can further complicate the determination of the appropriate taxable price. A listed company once disclosed that its baijiu subsidiary had previously used the selling price of its first-tier sales company as the basis for determining the Consumption Tax taxable price. Following an internal tax review, and in accordance with the rules applicable at the time, the subsidiary recalculated its Consumption Tax and related surcharges for the period from 2015 to 2018 using the selling price of its wholly owned terminal sales company, resulting in additional payments of approximately RMB 195 million. This case demonstrates that where a producer operates through multiple layers of sales entities, an inappropriate choice of pricing level or filing approach may result in substantial historical back-tax exposure.

The Consumption Tax treatment of beer follows a different mechanism. Beer is subject to Consumption Tax on a specific-per-unit basis. Although the sales price is not itself the taxable base, it determines whether the unit tax amount applicable to Category A or Category B beer applies. Following the implementation of STA Announcement No. 8 of 2026, where beer is sold through related sales entities, the higher of the producer’s ex-factory price and the related sales entity’s external sales price must be used as the price benchmark for determining the applicable Consumption Tax unit amount. Accordingly, where beer producers and sales entities are operated separately, relying solely on the producer’s ex-factory price may result in the incorrect application of the unit tax amount. This risk is particularly relevant where product prices are close to the threshold separating Category A and Category B beer, as changes in the relevant sales prices may directly affect the Consumption Tax filing.

2. Risks of Incorrect Revenue Recognition and Underreporting under Emerging Sales Channels

The development of e-commerce, livestreaming and instant retail has resulted in transaction information being dispersed across different platforms and business entities. The timing of revenue recognition and the point at which tax liabilities arise may also vary depending on the sales model. If a company relies solely on the invoice issuance date or the platform settlement date without considering the underlying transaction, it may incorrectly determine when its VAT liability arises or the period in which revenue should be recognized for Corporate Income Tax purposes. Online sales to individual consumers also create a greater risk of underreporting unbilled sales revenue. The fact that a consumer does not request an invoice does not affect the company’s obligation to recognize and report the relevant sales revenue in accordance with tax law. If a company reports only invoiced sales, or fails to fully record certain platform sales or other receipts in its accounting records, discrepancies may arise between reported revenue and actual sales. As the degree of linkage among platform transaction data, payment settlement data and tax filings continues to increase, such discrepancies may also become more readily identifiable as indicators of tax risk. Alcohol companies should also pay attention to taxable transactions outside ordinary product sales. For example, the sale of by-products or the use of self-produced alcoholic beverages for gifts or promotional purposes may give rise to tax consequences. Failure to apply the relevant tax rules may result in incomplete reporting of taxable sales or related tax liabilities.

3. Risks Relating to Transaction Characterization and Related-Party Transactions under Complex Business Arrangements

Multi-tier distribution, cross-regional operations and intra-group dealings are common in the alcohol industry. Arrangements involving rebates, price subsidies and marketing support should be characterized for tax purposes based on the substance of the underlying transactions. Whether a payment constitutes an adjustment to the sales price or consideration for a separate service may directly affect the VAT taxable amount, invoice issuance and Corporate Income Tax treatment. Inconsistencies among contractual arrangements, actual performance and tax and accounting treatment may therefore give rise to tax risks.

Emerging sales models may further complicate the determination of when tax liabilities arise and how the taxable base should be calculated. For example, under “sealed-jar liquor” arrangements, customers make payment in advance and withdraw the alcoholic beverages at a later date, with storage services provided in the interim. Such arrangements may involve the sale of alcoholic beverages, packaging and storage services. An incorrect determination of the time at which the tax liability arises, or a failure to properly distinguish the different elements of the transaction and the items to be included in the Consumption Tax taxable base, may result in inaccurate VAT or Consumption Tax filings. The tax treatment of such arrangements should therefore be determined by reference to the actual payment, delivery and services provided, rather than solely by the name of the business arrangement or its accounting treatment.

Where a corporate group operates through multiple tiers of sales entities, it is also necessary to distinguish between the determination of the taxable price for Consumption Tax purposes and transfer pricing for Corporate Income Tax purposes. The former focuses primarily on whether the Consumption Tax taxable base complies with the applicable rules, while the latter considers whether the allocation of profits among related entities is consistent with the functions performed and risks assumed by those entities. In cross-regional operations involving multi-tier related-party sales structures, arrangements that do not align with the actual functions performed by the relevant entities may give rise to transfer pricing adjustment risks for Corporate Income Tax purposes.

Alcohol companies that expand into cultural tourism, catering, accommodation or similar business activities should also appropriately distinguish revenue from alcoholic beverage sales from revenue derived from services. Different types of business activities may be subject to different VAT treatment, invoicing requirements and revenue recognition rules. Where different business activities are bundled or settled together without a reasonable allocation, incorrect tax treatment may result. Companies engaging in cross-border sales, overseas distribution or brand licensing should also assess, in light of the specific transaction structure, the application of rules relating to foreign-source income, transfer pricing and tax treaties.

(IV) Tax Filing: Risk of a Tax Evasion Determination Arising from False Filings Resulting in Tax Underpayments

Tax matters arising from an alcohol company’s procurement, production and sales activities must ultimately be reflected in its tax filings. Where tax underpayments result from misunderstandings of tax rules, errors in the applicable tax basis or computational mistakes, the company will generally be required to pay the outstanding tax together with late-payment surcharges. Where, however, a company acts with the intent to evade tax and causes a tax underpayment by concealing revenue, making false tax filings or using similar means, and the statutory elements of tax evasion are satisfied, the tax authorities may characterize the conduct as tax evasion and impose recovery of the underpaid tax, late-payment surcharges and administrative fines. In one publicly disclosed tax evasion case involving a baijiu company, the company’s recorded inventory and current-account balances continued to increase even as its business scale declined and it claimed to have ceased production. Its transportation expenses were also materially inconsistent with reported sales revenue. Following an on-site inventory inspection and review of the company’s accounting records, the tax authorities found that a substantial amount of inventory recorded in the books had in fact already been sold. The company had failed to recognize the corresponding sales revenue, continued to carry the goods as inventory and recorded part of the sales proceeds in current accounts. The tax authorities ultimately determined that the company had understated its sales revenue and imposed recovery of the relevant taxes, late-payment surcharges and administrative fines.

Another publicly disclosed case involved sales revenue kept outside the company’s normal accounting and tax reporting system. A baijiu producer fulfilled previously accepted orders using purchased base liquor and packaging materials, but the related sales proceeds were not received through the company’s corporate bank account. Instead, the funds were collected through the personal bank account of a relative of the company’s operator and were not included in the company’s tax filings, resulting in underpayment of Consumption Tax and other taxes. The tax authorities accordingly recovered the relevant taxes, imposed late-payment surcharges and levied administrative fines.

These cases illustrate that practices such as artificially retaining sold goods as inventory and concealing sales revenue may give rise to a finding of tax evasion and administrative penalties where they result in taxable revenue not being properly reported, cause tax underpayments and satisfy the statutory elements of tax evasion. Alcohol companies should therefore ensure that operating revenue and other taxable matters are reported completely and accurately, and assess the corresponding tax legal consequences in light of the specific conduct and underlying business facts.

03 Tax Compliance Recommendations for Alcohol Companies

Alcohol companies should move tax compliance considerations upstream into the stages of business decision-making and transaction implementation, and establish appropriate tax treatment requirements for procurement, production and sales based on their actual business models. Where related-party sales prices, sales entities or business models change, the corresponding accounting and tax filing approaches should be adjusted in a timely manner. In particular, following the further refinement of baijiu Consumption Tax filing requirements in 2026, baijiu producers should strengthen the alignment of product names, specifications, minimum sales units and relevant pricing information to reduce filing errors arising from product upgrades or price adjustments. For alcohol groups that operate separate entities for cultivation, production and sales, the business and accounting boundaries among those entities should also be clearly defined, while related-party transactions should be priced in accordance with the arm’s length principle and be consistent with the underlying business activities.

At the same time, alcohol companies should strengthen the linkage among business, financial and tax data, and regularly review key indicators such as input-output relationships, inventory, sales prices and revenue in light of their own operating characteristics, with any anomalies investigated in a timely manner. Historical tax issues, material transactions and matters involving uncertainty in the application of tax rules may be addressed through targeted reviews and professional analysis, with external professional advisers engaged where necessary. By embedding tax management into day-to-day business operations and data management, alcohol companies can improve the accuracy of their tax filings and reduce risks arising from inconsistencies between business treatment and tax reporting.