"two votes system" is fully implemented, the field of traditional medicine over the ticket model collapsed, and then produced a CSO, CSP and other new industry organizations to join the pharmaceutical purchasing and marketing links. In fact, the pharmaceutical industry with gold sales, the phenomenon of commercial bribery does not change, drug companies, false openings, tax evasion is difficult to effectively curb the tax side of the pharmaceutical industry, to a certain extent, the strict supervision of the field of corruption in the field of tax issues continue to promote the hidden, mutation, escalation. As listed companies have the obligation to disclose their financial and operational status, the abnormal cost and expense of listed pharmaceutical companies are more easily monitored, and the problem of false billing and tax evasion is a risk that is of common concern to the exchanges and the tax authorities. At present, the pharmaceutical field of corruption has been focused on remediation, listed companies must pay more attention to the real business, tax compliance, to avoid tax-related risks further implicated in the IPO halted or delisted from the market.

I. Anti-corruption in the pharmaceutical field maintains high pressure, listed pharmaceutical enterprises with high tax-related risks

(I) Anti-Corruption in the Pharmaceutical Field Escalates Again, Many Listed Pharmaceutical Enterprises Speak Out

In the circulation of drugs, prescription drugs must flow to the hospital, through the doctor issued a prescription in order to realize the sale, therefore, the field of medicine is often the "disaster area" of commercial bribery. Since July this year, the National Health Commission, together with the Ministry of Education, the Ministry of Public Security and other ten departments jointly held a video conference, deployed to carry out a period of one year of the national pharmaceutical field of corruption focused on rectification work. At the end of the month, in order to carry out in-depth systematic governance of the entire field, chain and coverage of the pharmaceutical industry, and to focus on investigating and dealing with a number of cases of corruption in the pharmaceutical field, and to realize the inevitable requirement of purifying the ecology of the pharmaceutical industry, the State Supervisory Committee of the Central Commission for Discipline Inspection (CCDI) convened a mobilization meeting to further deploy disciplinary inspection and supervision organs to cooperate in carrying out the centralized rectification of the national anti-corruption problems in the field of pharmaceuticals with an attitude and high-pressure means, with the purpose of zero tolerance The aim is to crack down on corruption in the pharmaceutical field with a "zero tolerance" attitude and high-pressure measures. As the anti-corruption storm in the pharmaceutical industry unfolded, the pharmaceutical section of the stock price fell in response, causing considerable pressure on listed companies. A number of pharmaceutical companies have voiced their commitment and determination to corporate compliance, anti-corruption has a relatively small impact on the company, and some also put forward the medical anti-corruption for standardizing the order of the industry and promoting the long-term development of the industry's beautiful vision.

(II) Concerns over high selling expenses of listed pharmaceutical enterprises

In May this year, the National Health and Health Commission and 14 other departments jointly issued the "2023 Work Points for Correcting Unconscionable Practices in the Field of Pharmaceutical Purchase and Sales and in Medical Services", emphasizing the key rectification of the purchase and sale of pharmaceutical products with gold sales, multiple forms of transfer of benefits, and illegal offline purchases.

According to the data, the pharmaceutical and biological industry is the most expensive in absolute terms among the 31 Shenwang Tier 1 industries, with a cumulative sales expense of $1.55 trillion over the five-year period from 2018 to 2022, nearly double that of the second-place communications industry. As a result, selling expenses have also become a focus of attention for exchanges. Especially for pharmaceutical companies at the IPO stage, sales expenses and the past tax risks associated with them can easily cause companies to falter in their IPOs. For example, the Exchange requires intermediaries to focus on the legal compliance of various promotional activities of pharmaceutical companies, the authenticity and completeness of the expenses involved in the activities, the effectiveness of the internal control system related to the activities, and the related relationship between the purchasing and selling parties and the fairness of the transactions, etc. Through the issuance of letters of inquiry and other means, pharmaceutical companies are forced to build a compliant system. On the contrary, due to the SFC to identify Beit Pharmaceuticals business promotion fees and other vouchers anomalies, and for part of the promotional activities are not really carried out as well as save a large number of promotional service provider seal scanned copies of the reasons and other issues can not provide a reasonable explanation for the termination of its IPO. And this is not an exception, the pharmaceutical industry sales costs abnormalities and commercial bribery involved with each other, Chongqing St. Huaxi Pharmaceuticals, Nanjing Sheng and Pharmaceuticals, etc. Listed on the veto, have a close relationship with this.

(III) more than one place to announce the focus of the audit object, a number of listed pharmaceutical enterprises are listed

In January of this year, the State Administration of Taxation, Jiangxi Provincial Tax Bureau announced its tax audit random sampling key audit object directory library, a large number of medical device companies, pharmacies and hospitals included, at the same time, Jiangzhong Pharmaceuticals, Qingfeng Pharmaceuticals, Renhe (Group), and other well-known pharmaceutical companies are listed.

By coincidence, in May this year, the Guizhou Provincial Tax Bureau of the State Administration of Taxation issued a public announcement that three enterprises were randomly selected for random sampling from the key inspection targets in the province, which in turn included two well-known pharmaceutical companies, Guizhou Yibai Pharmaceutical Co.

(IV) a number of listed pharmaceutical enterprises to disclose the risk of false opening

1. shutaishen biopharmaceutical disclosure, due to the existence of the company to obtain fraudulent VAT invoices and have been in the sales costs to be charged, and invoicing unit no business transactions and the relevant invoicing unit has not issued invoices to the company, invoices and invoicing unit issued invoices do not match the amount of issues such as tax and late payment fees of 16,538,900 yuan.

2. Jinbo Bio received invoices falsely issued by business promoters and deducted before tax by tax treatment, and was asked by the Exchange whether the invoices of promotion fee and conference fee in each period of the reporting period had tax risk or potential tax risk. Another example is Jiangsu Zhiyuan Pharmaceutical in the prospectus explains that its subsidiaries outside the reporting period due to the acceptance of 43 VAT invoices falsely issued by 10 units, resulting in underpayment of corporate income tax, resulting in treatment and penalties in the reporting period.

3. According to a criminal judgment on the crime of false invoicing, 11 companies set up by the defendants, without actual business dealings, issued a cumulative total of 740 ordinary VAT invoices to 44 pharmaceutical companies nationwide at a total price and tax amount of RMB 59.77 million, and charged a handling fee of 6% of the total price and tax amount. One of the invoiced pharmaceutical companies include Krede, but it is not mentioned in its prospectus.

4. Yide Medical released an announcement that some of the input invoices obtained by it and its wholly-owned subsidiaries in the business operation in 2017 and 2018 may be suspected of the case of false VAT invoices, and the former executives of the company were taken criminal compulsory measures by the public security for suspected of this case (they have been released from bail and awaiting trial), and explained that the incident may have an adverse impact on the company. It can be seen that as the legal representative and actual controller, most of them can hardly escape personal responsibility.

II. After the "two-ticket system", the tax risk of listed pharmaceutical enterprises is in a high-frequency mode

On January 24, 2017, the State Council issued the "Several Opinions on Further Reforming and Improving the Policy on the Production, Circulation and Use of Pharmaceuticals" (State Council [2017] No. 13), and the "two-ticket system" for the purchase and sale of pharmaceuticals was fully implemented. With the drug distribution channels are strictly controlled, the traditional function of the company disintegrated, but the pharmaceutical companies face kickbacks, rent-seeking problem still exists, from the ticket link layers of price increases to wash out the "cost of goods sold" "commercial bribery" pressure centralized conduction to the pharmaceutical company, Distributors, not only "low" to "high" transition, the pharmaceutical industry has also rapidly spawned a variety of emerging forms of organizations, through off-the-books operations or false invoicing and other acts to extract funds, tax-related risks are extremely high.

(I) Charging and extracting funds through false invoicing with the help of CSO and CSP companies

1. Pharmaceutical purchasing and selling modes participated by new industry organizations

(1) CSO mode

In order to promote and sell medicines to grassroots drug retailers and medical institutions across the country, pharmaceutical companies and distributors sign sales outsourcing agreements with CSO companies, which carry out business in the name of the commissioning party with the aim of identifying and facilitating transaction opportunities. Since the CSO does not have direct contact with the transportation and storage of medicines, the CSO's participation does not violate the mandatory requirements of the "two-invoice system", and the actual sales contract of medicines is still signed by the commissioning party and the purchasing party.

(2) CSP mode

Compared with CSO, CSP mainly provide "intangible" services such as pharmaceutical consulting, conference services, transportation, etc., which are more likely to become tools for false invoicing violations and crimes. Most CSPs are set up for the purpose of issuing false invoices to distributors and extracting funds for commercial bribery, and some of them are directly related to the distributors' investors. In the absence of necessary supporting materials for activities such as academic conferences, the authenticity of the business cannot be claimed solely on the basis of contracts and invoices, which not only affects the company's response to tax inspections, but also puts it at a disadvantage in the IPO inquiries.

(3) CMO/CRO model

These two types of organizations use their expertise to engage in pharmaceutical contract manufacturing business and pharmaceutical contract R&D business respectively. As the cost pressure of pharmaceutical enterprises is transmitted to the front-end, CMOs and CROs may also become tools for pharmaceutical enterprises to reduce their tax burden by fictitious business and false invoicing.

2. listed pharmaceutical enterprises in the new business tax risk

(1) Shell CSO implicates listed pharmaceutical enterprises in false invoicing risk

Case 1: The Tax Bureau of F Province notified the illegal behavior of 13 CSO companies for false VAT invoicing, which falsely issued VAT special and ordinary invoices with a total amount of more than RMB 7.1 million without actual production and operation and without real business transactions with the recipient units. The Decision on Tax Treatment shows that a number of listed pharmaceutical enterprises also appear on its "customer list".

As a matter of fact, the purpose of invoicing by listed pharmaceutical enterprises through shell CSO companies is mainly to raise the ex-factory price in the name of sales promotion fee, etc., to offset the hidden costs such as rebate expenditure in the purchasing and selling process. If it is confirmed that the invoicing party has falsely invoiced and the invoiced party is found to have accepted the false invoicing, the invoiced party will not only face the administrative penalty of false invoicing, but also may be held criminally liable if the amount of false invoiced tax reaches the criminal filing standard. In addition, according to the National Health Insurance Bureau's "Discretionary Benchmarks for Pharmaceutical Pricing and Procurement Credit Rating (2020 Edition)", if the total amount of price and tax for accepting false invoices exceeds 100,000 yuan, the pharmaceutical company will be assessed as "medium breach of trust"; if the amount exceeds 1 million yuan, the enterprise may be assessed as "serious breach of trust", "particularly serious breach of trust", "serious breach of trust", and "particularly serious breach of trust". If more than 1 million yuan, the enterprise may be rated as "serious breach of trust" or "particularly serious breach of trust", and the relevant products will face the penalty of being restricted or canceled from the network. In terms of taxation, if an enterprise is directly judged as Grade D in the tax credit evaluation due to tax violations, the enterprise will not only have to bear the loss of business opportunities caused by its own credit impairment, but will also be prohibited from participating in government procurement activities and some of its high consumption behaviors.

(2) Setting up CSP to charge consulting service fees and conference fees.

Case 2: H-listed pharmaceutical company assigned B enterprise management company to "cluster registration" in the same park address to register more than 900 conference service companies, the company account are managed by the B company, the H company in the name of payment of academic conference fees, medical service fees, etc. 1.675 billion yuan will be transferred to the relevant conference service companies, and then by the B company Company H transferred 1.675 billion yuan to the relevant conference service companies in the name of paying academic conference fees and other medical service fees, and then Company B further disaggregated the funds according to its requirements and transferred them to the accounts of specific persons to pay for the public relations expenses of regional hospitals.

After the implementation of the "two-invoice system", a large number of third-party service companies, such as "consulting management services" and "pharmaceutical science and technology consulting", emerged. Before the "Guiding Opinions of the General Office of the State Council on Further Promoting the Reform of the Subprovincial Fiscal System" (Guo Ban Fa [2022] No. 20) of June 2022 explicitly stated that it would be necessary to "gradually clean up the subsidy or rebate policies that unduly intervene in the market and are linked to tax and fee revenues," pharmaceutical companies utilized multiple identity documents to register multiple companies in enterprise parks with fiscal Rebate policy in the enterprise park registration of a number of companies, the use of the park comprehensive tax burden is extremely low advantage for their own control of the pharmaceutical enterprises false invoices or invoices, false listing of consulting services, conference fees, false increase in the cost of business, the relevant policies are cleaned up, not only the application of financial rebates and tax incentives in violation of the tax is very easy to be required to make up taxes, if there is a lack of evidence to prove that the consulting, conference services really happen, there are funds back to the pharmaceutical enterprises and other circumstances may give the It may incur criminal liability for false invoicing, and a former executive of a listed company has been taken criminal compulsory measures for allegedly obtaining false VAT invoices. In addition, the above-mentioned shell CSPs are highly unified in terms of place of registration, do not have the capital and manpower to carry out the relevant business, or simply flee without paying tax after centralized invoicing, all of which are prone to implicate the risk of the entire invoice chain.

(II) False Expenditures and Inflated Costs Hidden Tax Evasion Risks

Case 3: Company K is a pharmaceutical company to be listed, in order to pay bribes, to avoid regulation, and Company C agreed that Company K to "promotion service fees" in the form of "rebates on sales of drugs" to Company C, by the K company statistics hospitals to calculate the amount of purchases after the rebate, but the K company deducted the promotion service fees. However, Company K deducted the promotion service fee and a contractual dispute arose between the two companies. In addition, in the case of false invoicing of Company D, the total amount of false invoicing price and tax is 10,105,700 yuan, which Company K did not disclose in the prospectus.

For the pharmaceutical enterprises, accepting the falsely issued VAT ordinary invoices will not generate the deduction benefit of VAT input, but booking the said invoices can achieve the purpose of paying less enterprise income tax by deducting the costs and expenses such as the falsely listed advertisement fee, consulting fee and accommodation fee before tax, thus reducing their tax cost. In practice, there are a large number of pharmaceutical enterprises adopting private accounts, cash receipts, private vaults and other ways of off-the-books operation, or taking credit sales with medical institutions to settle the payment of goods, and not recognizing the sales revenue of the recovered sums hanging in the current account for a long time, so as to evade the value-added tax. Even in order to offset the high sales items, some pharmaceutical enterprises have falsely opened invoices for agricultural products for themselves in order to make up for the shortfall of input items. The aforementioned behavior will also increase the risk of tax evasion and induce administrative and criminal liability. In accordance with the provisions of Article 63 of the Tax Collection and Administration Law, enterprises constitute tax evasion, not only to pay back taxes and late fees, but also face a non-payment or underpayment of taxes of more than 50% of the tax or five times the following fine, constituting a crime, but also face the criminal liability of tax evasion.

III. How can listed pharmaceutical companies ensure tax compliance against the background of anti-corruption and anti-monopoly?

In the pharmaceutical industry, in addition to the corruption problem by the whole field, the whole chain, full coverage of the systematic management, from the perspective of market competition, medicine is also a key area of livelihood, commercial bribery, price fixing and other behaviors for the people's livelihood of the damage can not be said to be not big, therefore, there are also two listed pharmaceutical companies because of the monopoly of the raw materials of "life-saving drugs", Therefore, two listed pharmaceutical companies were fined 286 million yuan and 35.05 million yuan for monopolizing the raw materials of "life-saving drugs" and raising the prices of preparations. Under the high pressure of anti-corruption and anti-monopoly regulation, both listed pharmaceutical enterprises and pharmaceutical enterprises to be listed must ensure tax compliance to avoid tax issues affecting their development.

(I) Improve the management organization of pharmaceutical enterprises and strengthen the internal control system of tax compliance

The establishment of a sound and specialized tax compliance management organization is not only an important means for enterprises to prevent tax-related risks, but also an arm to support the listing and compliance of enterprises. On the one hand, the compliance organization should be led or supervised by senior management in order to provide management strength and promote the implementation of specific systems. It also needs to choose the appropriate management method according to its size and form a professional and organized functional department dedicated to tax and financial internal control. On the other hand, pharmaceutical companies need to combine the characteristics of the industry and their own business model, tailored to the development of tax compliance policies and employee manuals, set up a system that includes a review of the authenticity of the costs and expenses, the selection and inspection of service providers, contract approval and anti-commercial bribery, etc., to strengthen the overall tax compliance awareness of the enterprise and its employees, and to achieve the early stage of the business that is to curb tax-related risks.

(II) Focus on business information retention and standardize invoice management

If the sales expenses of listed pharmaceutical enterprises are too high, especially if the proportion of sales expenses to operating income is large, or even if the sales expenses exceed the net profit and other abnormal situations, the tax authorities are very likely to associate them with bribery or inflated cost deduction to trigger false invoicing and tax evasion risks of the enterprises. At present, the listed pharmaceutical companies' sales expenses are of great concern, and a number of companies have been questioned, and if the corresponding expenses lack effective documents and evidence, there is no guarantee that the tax risk will not erupt. Therefore, pharmaceutical enterprises should pay particular attention to the management of marketing promotion, academic conferences, consulting, advertising and other costs and expenses, in addition to business contracts, invoices should be retained, should also be retained in the purchase and sale of negotiation drafts, consulting services, feedback, the content of the venue site photographs and other evidence that can be corroborated that the business is real, there is indeed expenditure, if necessary, should be actively contacted with the organizers, participants, to obtain or make up for the relevant evidence and materials, so as to ensure that the business withstand scrutiny. If necessary, the company should actively contact the organizers and participants to obtain or correct the corresponding evidence, so as to ensure that the business can withstand the scrutiny, and to avoid that the real sales expenses of the company are also denied by the tax and public security, which will increase the economic losses.

In addition, enterprises should pay attention to the selection and investigation of upstream enterprises, strictly follow the requirements of corporate tax compliance management, establish perfect business processes, and properly file contracts, invoices and other documents to avoid the risk of upstream enterprises being proved to be falsely opened and transferring the risk to themselves.

(III) Carrying out tax self-examination in a timely manner and strictly controlling tax risks

For listed pharmaceutical enterprises that have already incurred inquiries from the Exchange, the enterprises should strictly sort out the business processes and business materials, self-examine whether there are cases of accepting false invoices and unreasonable expenses for sales, and fully assess the tax risks of the enterprises on the basis of comprehensively grasping the business information and invoices and vouchers and make evaluation and commitment as to whether the relevant risks have a significant impact on the production and operation of the enterprises and whether it constitutes a substantial obstacle to the issuance of the products. Make evaluation and commitment. For tax problems found in the self-examination, the enterprise shall take the initiative and truthfully pay back taxes and late fees, expressing the subjective intention that the enterprise has no intention to pay back or underpay taxes, so as to avoid further administrative penalties for qualitative tax evasion.

(IV) Hiring tax law professionals to isolate and respond to tax risks

With the development of nationwide centralized rectification of corruption issues, pharmaceutical representatives, doctors and other bribe-taking behavior by the public security and even the disciplinary committee and supervisory committee of the serious treatment of the people involved in the case of the confession of drug enterprises violations of the law, coupled with the implementation of various departments of the law enforcement, such as coordinated implementation of the bribe case, the disciplinary committee and supervisory committee of the tax authorities, public security transferred to the tax department, the tax violations held by the clues, often further implicated in the pharmaceutical enterprises of the false opening, tax evasion, the listed pharmaceutical enterprises have to guard against. Risk, listed pharmaceutical enterprises have to prevent. For this reason, enterprises should pay attention to the tax audit procedure response, hire professional tax lawyers to increase the effectiveness of communication with tax authorities, and strive to maximize the risk in the audit procedure. If they have already received tax treatment and penalty notices, they should properly collect and organize key factual evidence materials such as invoices issued and accepted, financial transactions, capital return, amount of tax fraud, etc., and timely initiate administrative reconsideration, administrative litigation and other relief procedures to avoid the transformation of case risks into criminal risks.