In tax enforcement and judicial practice, the deduction of land value-added tax costs and expenses focuses on the two key points of "deduction vouchers" and "actual occurrence". Compared with the authenticity, legality and relevance requirements of "substance over form" for pre-tax deduction of enterprise income tax, the caliber of deduction of land value-added tax costs and expenses is narrow. In this paper, we will compare the requirements, scope and consequences of deduction of land value-added tax costs and expenses with those of deduction before enterprise income tax from the perspective of deduction vouchers, and reveal the risk of land value-added tax settlement and its solution if no deduction vouchers have been obtained or the deduction vouchers are not in compliance with the current system conditions.

I. Case

(I) Case 1: Reduction of deduction items without obtaining deduction vouchers

From October 2018 to December 2022, tax authority H audited the liquidation information submitted by Company B's "convalescent center" project and found that the project's "amount paid for obtaining land use rights", "preliminary construction costs" and "construction and installation costs" were not supported by legally valid payment certificates, and that the "infrastructure costs" and "construction and installation costs" were not supported by legal and valid payment certificates. The project's "amount paid for acquiring land use rights", "preliminary stage", "construction and installation costs" and "construction and installation costs" were not supported by legal and valid payment certificates, and the invoices for "infrastructure costs" and "development overhead" were not in compliance with the law. The invoices for "infrastructure fee" and "development indirect cost" were not in compliance, so the corresponding land cost and real estate development cost were increased by 84.25 million RMB, and it was determined that Company B should pay land value-added tax of 41.05 million RMB.

(II) Case 2: Failure to obtain invoices in accordance with regulations shall not be deducted before EIT.

Basic facts of the case

During the period of 2007-2014, Company Y signed the Loan Contract to natural persons Zhang, Company A and Company C. Later, after the audit by Accounting Firm D, Company Y should pay the interest on the loan to Zhang, Company A and Company C totaling RMB 29.06 million during the period of 2014-2015, according to which, Company Y deducted the above interest expenses before tax. in August 2016, the Inspection Bureau of the Municipal Taxation Bureau carried out tax After the inspection, Company Y was required to provide legal and valid certificates for the payment of interest on borrowings.Company Y considered that the audit report should be the legal deduction certificate and did not issue or exchange invoices.In August 2017, the Municipal Taxation Bureau Audit Bureau made a Tax Treatment Decision, which considered that only invoices were legal deduction certificates, and that the interest on borrowings accrued by Company Y was accounted for as financial expenses, all of which had not been obtained legal and valid certificates, and required Company Y to pay the enterprise income tax of 5,530,000 RMB. Company Y was required to pay 5.53 million yuan of enterprise income tax.

Court Opinion

Legal and valid documents are the basis for pre-tax deduction of costs and expenses. Due to the different management norms applicable to the accounting items of enterprise accounts and enterprise income tax deduction items, "legal and valid vouchers" is used as the common name in some laws and normative documents, but the tax authorities have the right to refine the judgment of "legal and valid vouchers" according to their professional experience on the specific deduction items. However, in terms of specific deduction items, the tax authorities have the right to judge the "legal and valid vouchers" according to their professional experience. As far as the present case is concerned, the disputed interest expenses belong to the VAT taxable items, and according to the provisions of the aforementioned article, the Appellant has the obligation to obtain invoices from the payee when paying the interest payments. It was not improper for the appellee Municipal Tax Inspection Bureau to require Company Y to account for the taxable items with invoices as the deduction vouchers. the audit report provided by Company Y was only an internal document of the auditor it commissioned to audit and account for the situation of the loan interest expenses, and there was a lack of regulatory basis for Company Y to use it only as the pre-tax deduction voucher.

(III) Case 3: Obtaining False Invoices Based on Real Business, Pre-tax Deduction Granted for Enterprise Income Tax Purposes

Basic facts of the case

In 2011, Company S purchased 5,000 tons of coal from Company W. The payment was settled by bank remittance, and Company S obtained 23 VAT invoices issued by Company W and declared tax deduction. The purchased coal had been sold in full and the corresponding costs had been carried forward. in February 2014, the above 23 invoices were recognized as false VAT invoices by Inspection Bureau X. Accordingly, Inspection Bureau E made a Decision on Tax Treatment, requesting to adjust upward the taxable income of Company S for 2011 by RMB2,270,000, to pay back the EIT by RMB570,000, and to add late payment fees in accordance with the law.

Court Opinion

The Enterprise Income Tax Law and other regulations stipulate that no pre-tax deduction shall be made for invoices or vouchers obtained in violation of the law, but they do not exclude the use of other legal and valid vouchers as pre-tax deduction vouchers. In the administration of EIT, invoice is only one of the evidences to prove whether the cost is incurred or not, but it is not the only evidence.E Audit Bureau has confirmed in the processing decision that Company S has obtained the falsely issued VAT invoices in good faith, for which, the tax law explicitly stipulates that it shall not be used as the VAT legally valid deduction vouchers to offset its input tax amount. However, the costs incurred by the enterprises corresponding to the 23 VAT invoices, in the absence of a determination made by the Inspection Bureau, whether they can be expensed before EIT, the tax law has no prohibitive provisions, in which case the legal basis for the Inspection Bureau to require S Company to pay EIT and to impose late payment fees is insufficient, and the determination of the facts is unclear.

(IV) Summary

According to the provisions of the current tax law and the above cases or judgments, the deduction of the amount of land value-added tax deduction items must be provided with legal and valid certificates, otherwise no deduction will be made, and the deduction certificates must meet the requirements of legality and compliance in substance and form. In terms of EIT, it is controversial whether the deduction vouchers such as non-compliant invoices can be deducted before tax: some believe that the invoices must be obtained as deduction vouchers for the VAT taxable items; some believe that the invoices obtained in good faith can be expensed before tax under the premise that the costs are in line with the authenticity, legitimacy and relevance. It can be seen that the requirements of land value-added tax on deduction vouchers are somewhat different from those of enterprise income tax.

II. Differences between land value-added tax (VAT) deduction vouchers and enterprise income tax (EIT)

(I) Requirements on deduction vouchers for calculating the amount of deduction items for land value-added tax (VAT)

From the perspective of land value-added tax clearing requirements, legal and valid vouchers mean that their acquisition, types of tickets and filling contents are in compliance with land value-added tax policies, etc. The requirements for deduction vouchers are not only an important deduction policy, but also the basic basis for auditing deduction items. According to the current land value-added tax policy, the amount of deduction items shall be deducted in accordance with the law during liquidation under the following two conditions:

Providing legal and valid vouchers

According to Article 4(1) of the Circular of the State Administration of Taxation on Relevant Issues Concerning the Administration of Land Value-added Tax Clearance for Real Estate Development Enterprises (Guoshuifa [2006] No. 187) and Article 7(3) of the Rules for the Implementation of Provisional Regulations for Land Value-added Tax, in land value-added tax clearance, the amount paid for the acquisition of the land use right, the cost of real estate development, the costs and expenses of real estate development and the taxes related to the transfer of the real estate For interest expenses in finance costs, in addition to the provision of compliant bills, the conditions of being able to provide proofs from financial institutions, being able to calculate the apportionment according to the real estate project, and the interest rate not exceeding the interest rate of the same type of loans of the same period from commercial banks shall also be met, or else they shall not be deducted according to facts and can only be deducted in the amount paid for the land use right and the amount paid for the transfer of real estate. Otherwise, it cannot be deducted, but can only be deducted within 10% of the sum of "the amount paid for the acquisition of land use rights" and "real estate development costs".

As to what constitutes "legally valid vouchers", specific provisions have been made in various places, such as Hainan, Hubei, Guangxi, Shandong and so on. Usually, in addition to invoices, in some specific cases, taxpayers can also rely on the deed tax payment certificate, financial bills, overseas units or individuals as a legally valid receipt of documents. In some places, such as Guangxi, the scope of "legally valid documents" also includes court judgments, rulings, mediation letters, as well as arbitration awards and notarized debt instruments.

Actual occurrence

According to the requirements of the "Land Value-added Tax Settlement Management Procedures" for the liquidation audit, the costs and expenses summarized in the amount of deductions must be actually incurred.

(II) Requirements for pre-tax deduction for EIT

Under the EIT Law, pre-tax deduction vouchers refer to all kinds of vouchers that can prove that the reasonable expenditures related to the acquisition of income have actually occurred and are deducted before tax, including external vouchers such as invoices and internal vouchers such as original accounting vouchers. The principles of authenticity, legality and relevance are followed in the management.

According to Article 8 of the Enterprise Income Tax Law, reasonable expenditures actually incurred by an enterprise in connection with the acquisition of income, including costs, expenses, taxes, losses and other expenditures, are allowed to be deducted when calculating taxable income. In other words, expenses can be deducted before tax if they fulfill the three principles of authenticity, legality and relevance. After the promulgation of the Measures for Administration of Vouchers for Pre-tax Deduction of Enterprise Income Tax, the standard of pre-tax deduction has been further improved. If an enterprise has not obtained invoices or other external vouchers for the expenditures that should have been incurred in real life, or has obtained non-compliant invoices or other external vouchers, the enterprise should ask the other party to make up for or replace the invoices or other external vouchers that comply with the regulations. No pre-tax deduction shall be made on the basis of other information that can confirm the authenticity of the expenditure.

However, in the tax administration and judicial practice, for the existence of real transaction basis, with other information that can prove that the enterprise expenditure is real, the enterprise to obtain the non-compliance invoice, but also be able to other deduction vouchers for pre-tax deduction, so as to be exempt from being adjusted income tax.

(III) Difference between the two tax types regarding deduction vouchers

According to the above provisions, the real estate development enterprise land value-added tax and enterprise income tax cost deduction for expenses are required to comply with the principle of authenticity, legality and relevance, but there are differences in the specific requirements for deduction.

Narrow scope of "lawful and valid certificates" for land value-added tax

Combined with the provisions of Article 4(1) of Guo Shui Fa [2006] No. 187 and the regulations of various places, when real estate development enterprises carry out enterprise land value-added tax clearance, the confirmation of the amount of deduction items relies entirely on the invoices, tax-paid certificates, financial bills and other external certificates, and no deduction can be made if the certificates are missing. In contrast, the deduction of costs and expenses for enterprise income tax can also be deducted before tax through original accounting documents such as bookkeeping vouchers, and the scope is relatively loose.

Deduction of land value-added tax cost and expense is not applicable to the accrual system.

Article 9 of the Regulations for the Implementation of the Enterprise Income Tax Law specifies that the calculation of taxable income of enterprises is based on the principle of accrual basis, and the recognition of income and expenses is not based on the transfer of whether or not the income and expenses are received or paid in the current period. However, this principle has not yet been clarified in the relevant provisions on land value-added tax, and the corresponding expenditures are required to be "actually incurred", which is often grasped in practice in accordance with "actual payment", resulting in a large number of expenditures, such as withholding expenses and compensation for demolition and relocation not yet incurred, not being deductible for the taxpayers' rights and interests, and the taxpayers are not entitled to deductions for their interests. As a result, a large number of expenditures, such as withholding expenses and compensation for demolition and relocation, which have not yet been paid, are not deductible in land value-added tax, which has a significant impact on the realization of taxpayers' rights and interests. For example, according to a "Land VAT Clearance Audit Opinion" issued by a tax office of a tax bureau in Beijing, the real estate development enterprise involved in the case was required to pay more than 1 billion RMB in land VAT due to the fact that there were 620 million RMB of unaccounted expenses in the demolition and relocation costs of the project, which were not permitted to be counted as a deduction item. As a matter of fact, due to the two major prerequisites for the deduction of land value-added tax, i.e. obtaining "legal and valid certificates" and "actual expenditure", the degree of deduction of costs and expenses is even more stringent than that of the "cash-based system", i.e. the "realizable system". The degree of cost and expense deduction is more strict than the "cash basis".

The consequences of missing or non-compliant deduction vouchers

As mentioned above, if you do not obtain the deduction vouchers or the deduction vouchers are not in compliance, you should make up for or exchange the deduction vouchers in compliance with the regulations in accordance with the EIT, or make pre-tax deduction with other information that can prove that the expenditures are in compliance with the triple nature. However, in respect of land value-added tax, according to the provisions of Article 4 (1) and (2) of Guo Shui Fa [2006] No. 187, the lack of deduction vouchers or non-compliance will directly lead to the consequences that the corresponding costs and expenses shall not be deducted or deducted in accordance with the approved method, which is not conducive to the protection of the rights and interests of taxpayers.

(IV) Summary

The project construction of a real estate development enterprise is characterized by large scale, high initial investment and long cycle, and there often exist a large number of accounts that should be expended but have not yet been expended in its books. In the land value-added tax settlement, the enterprise may still have outstanding liabilities and unsettled accounts payable, and may also have operations that have not yet obtained corresponding bills. However, no special provisions allow deduction of withholding expenses for land VAT, and there is no system design for retroactive deduction after liquidation, which undoubtedly increases the burden of enterprises. On the contrary, in EIT, taxpayers are allowed to deduct the expenses "reasonably accrued and inevitably occurred" in the current pre-tax period, which only affects the time of the relevant money payment, and will not affect the overall assets and liabilities of the taxpayers, and will not increase the difficulty of the supervision of the tax authorities or reduce the efficiency of the levy and administration. Moreover, obtaining deduction certificates such as invoices is a regulatory requirement for tax collection and management and does not belong to the tax elements for determining the tax obligations of taxpayers, and denying the real incidence of costs and expenses of taxpayers based on the procedural defects of deduction certificates is also contrary to the principle of substantive taxation. Therefore, the land value-added tax collection and management should be modeled on the "accrual system", allowing taxpayers to deduct costs and expenses that are "reasonably accrued and inevitably incurred", so that the reasonable rights and interests of taxpayers can be maintained as far as possible while the national tax revenue is not lost.

III. Risks of land value-added tax settlement where the deduction vouchers are not yet available or are not in compliance and the resolution

(I) Risks of land value-added tax settlement where deduction certificates have not been obtained or are not in compliance with the law

According to the relevant provisions of land value-added tax, if the deduction vouchers have not been obtained in accordance with the law or the obtained deduction vouchers are not in compliance with the law at the time of liquidation, there are significant tax-related risks.

No deduction for accruals not actually paid

If a real estate development enterprise prepares expenses in accordance with accounting standards and includes them in the amount of land value-added tax deduction items, it will lay a hidden danger for land value-added tax liquidation. If, by the time the project meets the conditions for liquidation, the accrued expenses have not yet been realized, or no deduction vouchers, such as compliant invoices, have been obtained, the amount of the deduction items will be adjusted downward. In addition, if the enterprise fails to properly retain and declare relevant contracts and other business information, or if the management of contracts, goods, payments and other materials is chaotic, resulting in the expenditure vouchers not being able to be verified, it will also give rise to the above risks.

Costs and expenses actually incurred shall not be included in the amount of deductible items

If a real estate development enterprise has not obtained invoices and other deduction vouchers for the costs and expenses incurred during the land value-added tax settlement, it may increase the amount of the corresponding deduction items due to failure to meet the deduction conditions. Even if the deduction is recognized in accordance with the approved method, it may be far away from the actual deduction, which makes the amount of deduction items of the enterprise to be adjusted downward, and ultimately increases the actual tax burden borne by the enterprise.

Huge tax reimbursement hides the risk of tax evasion

If the tax authorities have made a liquidation audit conclusion, confirming the liquidation of real estate development enterprises should pay a huge amount of back taxes, resulting in a surge in the land value-added tax burden of enterprises. If the enterprise also has fraudulent, hidden means of false declaration and other circumstances, it may also be characterized as tax evasion, not only need to impose late payment fees on a daily basis, but also may face fines. Enterprises that are unable to pay back taxes and late fees may even be held criminally liable for tax evasion.

(II) Deduction of land value-added tax settlement risks related to vouchers

Strengthen the management of business information and obtain relevant deduction vouchers in a timely manner.

Real estate development enterprises engaged in the development and construction of real estate projects shall obtain invoices for each deduction item and properly retain the deduction item vouchers. On this basis, the enterprise should focus on auditing the subject of invoices, product name, amount, quantity and other information with the actual situation, to ensure that the deduction vouchers are compliant. Due to the long development cycle of real estate projects, there are many links such as planning, construction, pre-sale, etc., from the beginning of the development and construction to meet the liquidation conditions are often several years apart, enterprises should pay attention to the custody of the business information, to avoid mismanagement of bills and vouchers, resulting in the liquidation of the audit in the reduction of expenditures.

Strengthen communication with tax authorities to prevent further expansion of risks

After the enterprise meets the liquidation conditions, it should accurately account for the amount of sales revenue and deductions, and accurately collect and apportion the costs and expenses in accordance with the liquidation requirements. In order to start the liquidation procedure in time and smoothly promote it, enterprises can hire tax professionals to provide tax-related services to avoid tax disputes caused by improper tax treatment. For those who have already been subject to audit measures by the tax authorities, enterprises should seize the opportunity to communicate with the tax authorities, actively exercise their rights of statement and defense, and appropriately resolve the tax-related disputes, so as to avoid further expansion of the economic and reputational losses.