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Courts in many places are promoting criminal compliance reforms, and enterprises and entrepreneurs involved in tax-related crimes are exempted from criminal penalties!

Due to the late establishment of China's modern tax law system, a large number of enterprises, especially private enterprises, lack the necessary understanding of tax compliance, so tax-related crimes have also become a "roadblock" that impedes the development of private enterprises, and many entities have been sentenced to criminal penalties for suspected tax evasion and fraudulent invoicing.2022 Since April 22, the compliance reform for case-related enterprises led by the Supreme People's Procuratorate has been rolled out nationwide and has achieved good results in practice. Since April 2022, compliance reforms led by the Supreme People's Procuratorate for enterprises involved in tax evasion have been rolled out nationwide and have achieved good results in practice. By handling a number of cases involving compliance reforms, we have noticed that the previous compliance reforms led by the procuratorate had some problems in practice due to the lack of court involvement:

1. Procuratorial authorities only have a single way of closing cases with "relative non-prosecution", and do not easily carry out compliance reforms for felonies that may be sentenced to more than 10 years of imprisonment. Due to the high penalty for the crime of false VAT invoicing, it is impossible to carry out compliance, which is not conducive to saving the real enterprises.

2. The period of review and prosecution stage by the procuratorial authorities is too short, and there are cases in which the enterprises involved in the case did not file compliance applications in time, or the enterprises could not complete the rectification within the period, so they can only resort to the court in the end.

3. At the trial stage, the court lacks a policy basis for applying to the enterprise's willingness to file a compliance rectification application, and to the sentencing recommendation of the prosecuting authority based on the compliance rectification circumstance that breaks the statutory sentence or suspended sentence.

At present, the extension of criminal compliance to the trial stage will strive to solve the above problems, which is conducive to saving the real enterprises. In practice, courts have already issued "exemption from criminal punishment" sentences through compliance at the trial stage. It should be noted that there are some unique problems for enterprises in tax-related crimes, which need to be further refined in the reform. This paper first summarizes and analyzes the current pilot policy, and then interprets the current pilot from the perspective of how court involvement in compliance differs from that of the prosecutor's office.

I. Supreme Court releases policy intention, many places take the lead in following up the trial stage compliance reform pilots

(I) President Zhang Jun has repeatedly stated that the courts should participate in and cooperate with the compliance reform system

Since President Zhang Jun took office at the SPC, he has repeatedly stated publicly that the courts should be involved in reforming the compliance of enterprises involved in cases.20 On March 23, 2023, at a teleconference of the national courts to study and implement the spirit of the National People's Congress and the National People's Congress, President Zhang Jun pointed out that around the implementation of the principle of "treating the private enterprises and private entrepreneurs as one's own people," the courts can On March 28, President Zhang Jun investigated the Haidian District People's Court in Beijing and emphasized that "the reform of commercial and criminal compliance is not only the work of the procuratorial authorities, but also the role of the courts." In the context of the Supreme Court's statement, all over the world have to carry out the relevant pilot reform work.

(II) Hubei Province was the first to "test the waters" of enterprise compliance at the trial stage, and the defendants were exempted from criminal punishment.

In May 2021, the Gucheng County Court in Hubei Province accepted a case involving a crime committed by a private enterprise. Generally speaking, cases that have been brought to court by the procuratorial authorities are no longer in line with the Supreme Prosecutor's regulations on the scope of compliance. However, considering that the enterprise involved in the case was in good operating condition and was a major tax collector, the court referred to the Supreme Prosecutor's policy on compliance reform for enterprises involved in the case and ruled to suspend the trial and initiate compliance rectification. In the end, the enterprise in question passed the inspection by a third-party regulatory organization, and the court sentenced the person in charge of the enterprise to "exemption from criminal punishment".

(III) A number of jurisdictions have issued minutes, opinions, and measures clarifying the institutional mechanisms for court participation in compliance rectification.

Hubei: On April 3, 2023, the Hubei Higher People's Court and Provincial Procuratorate held a joint meeting of their party groups and adopted in principle the "Guiding Opinions on Handling Compliance Cases Involving Enterprises (for Trial Implementation)" of the two courts, which clarifies the procedures for the interface between procuratorial and judicial organs in handling compliance cases.

Jiangsu: On April 11, the Jiangsu Provincial Higher People's Court and the Provincial People's Procuratorate jointly issued the Minutes of the Symposium on Strengthening Collaboration and Cooperation in Compliance Cases Involving Enterprises, which further standardized the procedures for the courts' collaborative handling of compliance cases involving enterprises.

Liaoning: The Liaoning Provincial Higher People's Court and the Liaoning Provincial People's Procuratorate indicated at a joint meeting on compliance reform for enterprises involved in cases that they would make joint efforts to promote compliance reform for enterprises involved in cases and establish a collaboration mechanism.

Heilongjiang: On April 13, the Heilongjiang Provincial Higher People's Court and the Heilongjiang Provincial People's Procuratorate jointly formulated the "Measures on Carrying Out Compliance Reform Work Involving Enterprises Involved in Cases (for Trial Implementation)," to comprehensively promote compliance reform work involving enterprises involved in cases in the court system.

Inner Mongolia: The Higher People's Court of the Inner Mongolia Autonomous Region issued the "Justice and Efficiency" Judicial Mechanism for Optimizing the Development Environment of the Private Economy and Stabilizing Expectations (for Trial Implementation)" to all courts in the region, requiring the establishment of a mechanism for reviewing the "compliance" rectification of private enterprises involved in a case to guide the private enterprises to carry out compliance reforms. Private enterprises are required to establish a mechanism for reviewing the "compliance" of private enterprises involved in cases, and to guide them to carry out compliance reforms.

(Ⅳ) Trend Summary Observation: It is a general trend for the People's Courts to be deeply involved in the compliance reform of enterprises involved in cases.

Summarizing the above policy trends from the Supreme Court and local courts, it is clear that the participation of people's courts in case-related enterprise compliance reforms is a general trend that is unstoppable. The reform of compliance of enterprises involved in cases is conducive to the protection of the healthy development of the private economy and the rescue of entities that have accidentally embarked on the path of crime due to negligence and compliance problems. Since the court is in the trial stage of the criminal procedure and has final effect, it is inevitable that it needs to participate in this major reform. At the same time, compared with the Procuratorate, the court has a more ample trial period, a more neutral status, and more ways to conclude cases, which makes it more capable of realizing the matching of crime and punishment.

II. The reform clarifies that the courts are involved in the compliance and rectification of the enterprises involved in the case, and cooperate and collaborate with the procuratorial authorities in handling the compliance

(I) Sentencing recommendations made by the procuratorial authorities based on compliance circumstances are generally accepted

Compliance is not a statutory mitigating circumstances, therefore, in the past, for the prosecuting authorities based on the enterprise compliance circumstances of the sentencing recommendations below the statutory penalty or even probation, the court in the acceptance of the issue of doubt: after all, the prosecuting authorities have a policy to support, but the court system does not yet have the corresponding supporting system, whether there is a risk of violation of the law, which plagued the court. This time around the introduction of the policy, the first clear is that the court should generally accept the sentencing recommendations made by the prosecution. For example, Jiangsu's "Minutes of the Symposium on Strengthening the Synergy of Compliance Work of Enterprises Involved in Cases" stipulates that qualified compliance and rectification by enterprises can be set out as discretionary mitigating circumstances in the sentencing recommendations and adjudication documents; and Heilongjiang's "Measures on the Reform of Compliance Work of Enterprises Involved in Cases (for Trial Implementation)" stipulates that, with respect to the probationary authorities' recommendations for the postponement, exemption, or mitigating punishment of enterprises in accordance with their guilty pleas, admission of penalties, and compliance and rectification, the ...... should generally be adopted.

(II) Compliance rectification not completed at the examination and prosecution stage is extended to the completion of the trial stage

The Procuratorate carries out compliance rectification, which can generally only be completed at the stage of review and prosecution, and ultimately decides whether to issue a decision not to prosecute. However, the period for reviewing and prosecuting is one month, which can be extended by half a month for major and complex cases. One and a half months is too much of a rush for enterprises, especially large ones, to carry out compliance rectification, resume normal operations and ideally become profitable. Even if they are forced to carry out rectification, they may ultimately fail to pass the review of the third-party regulator. In view of this, Jiangsu has stipulated that for cases where compliance assessment and acceptance have not yet been completed by the expiration of the period for review and prosecution, compliance rectification work can be continued at the trial stage. Utilize the more generous trial stage to do a solid job of compliance.

(III) Enterprises filing compliance applications at the trial stage, with the court deciding whether to initiate or not

At the examination and prosecution stage, the authority to decide whether to initiate compliance lies with the prosecuting authority. After entering into trial proceedings, the enterprise may file a compliance application to the court twice. Jiangsu stipulates that for cases where an application for compliance rectification is made at the trial stage, the People's Court, in conjunction with the opinion of the People's Procuratorate, will decide on a comprehensive basis whether or not to agree to proceed. Although the court still needs to refer to the opinion of the procuratorate, it has the right to make its own decision, which is conducive to better protecting the interests of enterprises.

(Ⅳ) Cooperate with the procuratorate to do a good job in the long-term investigation after the case is closed

Compliance can not be "paper compliance", can not close the case, we must do a good job of the enterprise involved in the long-term investigation. Previously, the main procuratorial authorities to carry out post-case investigation, the people's court to participate in, in favor of better supervision of long-term business compliance.

III.Characteristics and advantages of compliance rectification for enterprises involved in crimes at the trial stage

(I) It takes time for enterprises involved in tax-related crimes to pay off their taxes, giving them the opportunity to apply for compliance rectification twice.

According to the current regulations of the Supreme Prosecutor's Office on compliance rectification of enterprises involved in tax-related crimes, the prerequisite for compliance rectification is that the enterprises and their responsible persons "plead guilty and accept the punishment", and at the same time actively salvage the losses and unfavorable impacts caused by the crimes. In tax-related crimes, the main illegal consequence of the enterprises and their responsible persons is the loss of tax money of the state, therefore, when applying for the initiation of compliance rectification, the procuratorial authorities will pay special attention to whether the enterprises have paid the full amount of tax, late payment fees and fines. However, in practice, we also see that the motivation for enterprises to evade taxes and falsely issue tax credits is to alleviate the plight of enterprises with insufficient input tickets and cost tickets, and to reduce the cost of enterprises. In many cases, the enterprise is a "proxy" invoice, the cost of the actual expenditure, and not all the retained tax, so the enterprise is required to immediately set up a huge amount of value-added tax, enterprise income tax, the task is too arduous for the enterprise. If the enterprise fails to make up the full amount of tax at the stage of examination and prosecution, but can make up for the loss of national tax at the stage of trial, then it can carry out compliance through the court and obtain a more satisfactory result.

(II) Utilizing the advantage of longer trial period to carry out solid enterprise compliance and resume normal operation

As mentioned above, the prosecutor's office has a shorter period for reviewing and prosecuting, which makes it difficult to do a good job for some enterprises with complicated cases and large scale. However, the trial period at the trial stage is more lenient. According to the provisions of the current Criminal Procedure Law, the trial period for first instance prosecution cases is two months and no later than three months. However, if the Procuratorate supplementary investigation, the trial period can be recalculated, so that the trial period can be extended.

(III) Flexible use of recommendations for the withdrawal of prosecution, exemption from criminal punishment, probation and other ways to close the case

Procuratorial authorities are reluctant to carry out compliance rectification for felonies at the stage of examination and prosecution, the fundamental reason is that the procuratorial authorities only have a relative non-prosecution of a way to close the case, but for the person in charge of felonies that may be sentenced to more than 10 years, the decision not to prosecute only through the compliance rectification, the crime and responsibility of the penalty does not match significantly, and there is a risk of indulgence in the crime. However, there are various ways for the court to close a case in criminal proceedings, i.e., if the enterprise eliminates the impact of the crime after compliance and rectification, the court may recommend that the procuratorate withdraw the prosecution and reopen its decision not to prosecute; or it may decide to exempt the enterprise from criminal penalties. For cases that are significant and have a bad impact, where compliance and rectification are not sufficient to completely eliminate the criminal impact, the court may, where appropriate, impose a fixed term of imprisonment below the statutory sentence or impose a suspended sentence. In short, the court has more measures.

IV.With trial stage compliance reform in full swing, the outlook for carrying out compliance for tax-related crimes

(I) The entrepreneurs involved in the case are facing more than 10 years of imprisonment or compliance rectification may be applied

Among tax-related crimes, the crime of fraudulent export tax refund and the crime of false VAT invoicing are felonies, and the amount of falsely opened (fraudulently obtained) taxes above 2.5 million yuan should be sentenced to more than 10 years of imprisonment. According to the current internal regulations and minutes of meetings of some local procuratorates, the procuratorates will generally not initiate a compliance rectification policy in cases where a sentence of more than 10 years of imprisonment may be imposed. However, it should be noted that the existing provisions relating to sentencing circumstances for false driving and tax fraud offenses are premature and actually out of touch with the times, and their penalties are not commensurate with the extent of the offense.

At the stage of review and prosecution, the procuratorial authorities are generally unwilling to do the compliance and rectification of the enterprises involved in cases that may be sentenced to more than 10 years, because the procuratorial authorities believe that if they make a "decision not to prosecute" the person in charge of the case, the crime and responsibility do not match the punishment, and they have the risk of judicial liability. Therefore, in practice, some prosecutor's offices to take separate cases, that is, the enterprise is not prosecuted, but the prosecution of entrepreneurs. This is obviously not conducive to the protection of private entrepreneurs.

However, the case is different if it reaches the trial stage. At the trial stage, the court can make a mitigated sentence (e.g., a sentence of less than three years' imprisonment) or a suspended sentence based on the circumstances of the compliance and rectification, so as to reach a match of crime, responsibility and punishment, and its way of closing the case is more flexible and diversified. Therefore, we advocate that there should be no restriction on the scope of corporate compliance rectification at the trial stage, and that felonies can be closed by means of corporate compliance rectification and a suspended sentence for the person in charge.

(II) By carrying out compliance in the court stage, enterprises have more time and space to pay back taxes, late fees and fines

As mentioned above, a large number of cases of enterprise tax-related crimes are not cases where the enterprise takes all the tax money for itself, but where the enterprise has purchased goods and there is a real transaction of goods, but there is no invoice for input credit or cost deduction. Therefore, it takes a certain amount of time for enterprises to raise funds to pay taxes, late fees and fines. Because the time available at the review and prosecution stage is so short, businesses may not be able to raise funds and thus miss the opportunity to comply. The fact that the case is now at the court stage is equivalent to an extension of time for enterprises to raise funds.

In addition, we believe that according to the purpose of compliance and rectification and the design of the system, it is more conducive to the protection of the entity enterprises and more in line with the general situation of tax-related crimes that the enterprises should pay the taxes, late fees and fines as a result of the compliance and rectification of the enterprises rather than as a condition for the initiation of the compliance and rectification.

(III) Lawyers conducting the defense of innocence does not affect the initiation and effectiveness of compliance

At present, according to the relevant provisions of the Supreme Prosecutor, whether an enterprise can carry out compliance is closely related to whether the person in charge pleads guilty or not. However, in the actual handling of cases, due to the specialization of cases involving tax-related crimes and other reasons, there are differences in the characterization of the charges in some cases between the crimes of tax evasion, false invoicing of VAT and illegal purchase of VAT invoices. We are of the view that if the enterprise and its responsible person recognize the circumstances of the business involved in the case and do not object to the facts of the case and the amount investigated by the public security authorities, they should be recognized as having a good attitude and pleading guilty to the crime. As for the application of the charges, it is a matter of legal interpretation, and lawyers should be allowed to plead their case on the basis of their independent right to defense. At this level, the court is in a more neutral position, more likely to hear and recognize the views of the defense lawyer.

(IV) Courts have a legal basis for handing down sentences of exemption from criminal penalties and mitigation of penalties, so as to alleviate the misgivings of grassroots courts

When the Procuratorate led the reform, compliance was not a mitigating or exempting circumstance for criminal punishment, nor was it a legal ground for the Procuratorate to withdraw a case. As a result, the courts thought that there was a lack of clear legal provisions to support them in the process of carrying out compliance, and they did not dare to use them or were reluctant to do so. However, with the statement of the Supreme Court and the introduction of corresponding policies and regulations by provincial-level high courts around the world, the courts have been able to carry out compliance and issue sentences that are exempt from criminal punishment, suspended or lower than the statutory sentence with a policy basis to support them, which will make the grassroots courts dare to use the compliance policy for the protection of private enterprises and private entrepreneurs. Considering the strong vitality of the compliance system in practice over the past two years, with the completion of the reform of the prosecution and the law, this system will inevitably be incorporated into the Criminal Procedure Law, becoming an integrated institutional mechanism that carries out the entire process of investigation, examination and prosecution, and trial.

 

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