Article 10(1)(iii) of the Supreme People's Court and Supreme People's Procuratorate's Judicial Interpretation on Tax-Related Cases explicitly includes “issuing VAT special invoices through fictitious transaction entities for business operations ineligible for tax deduction” within the scope of false issuance. This provision aims to target the use of surplus invoices for fraudulent issuance, with the associated criminal risks significantly increasing following the issuance of the judicial interpretation. In practice, differing judicial interpretations of surplus invoice fraud lead to substantial variations in the criminal liabilities ultimately borne by relevant parties. This article analyzes surplus invoice fraud through the lens of a real-world case.

I. Case Introduction

In 2020, Company A, operated by Party A, obtained input VAT special invoices from purchases of oil from CNOOC and other companies. During external sales, some buyers did not require VAT special invoices. After selling at a discount, Company A did not issue invoices, resulting in surplus input VAT. From December 2020 to May 2022, during project construction, Company B operated by Party B lacked input invoices for procured raw materials like sand and gravel. Party B instructed employees to contact Party A, who then issued VAT special invoices to Company B without actual business transactions, utilizing Company A's surplus input tax credits. Ultimately, the procuratorate charged Company A, Company B, Party A, and Party B with the crime of issuing fraudulent VAT special invoices. The court convicted them based on the charges brought by the procuratorate.

In this case, although the involved parties engaged in the act of issuing fraudulent VAT special invoices, they were not convicted of the crime of issuing fraudulent VAT special invoices. This reflects judicial practice's attention to and consideration of the particularities of issuing surplus invoices.

II. External Over-invoicing Using Surplus Invoices Does Not Necessarily Constitute the Crime of Over-invoicing Special VAT Invoices

(I) How Does Surplus Invoice Over-invoicing Arise?

Surplus invoice over-invoicing occurs when a company with actual sales transactions does not issue invoices to the genuine purchaser because the transaction counterparty does not require a special VAT invoice. This generates excess input tax credits, known as “surplus invoices,” which can then be issued to a third-party company in exchange for a fee. This type of fraudulent issuance is prevalent in industries where the sales end does not require invoices, such as the electronics industry, petrochemical industry, and online live-streaming industry.

Historically, the modus operandi for surplus-type fraudulent issuance could be broken down into two steps: First, the issuing party (i.e., the seller) sells goods to the actual buyer and receives payment through private accounts. They neither issue an invoice nor report the uninvoiced income to the tax authorities, thereby concealing the actual sales revenue. Second, the invoicing and receiving parties would sign fake purchase contracts and fabricate fund flows. The invoicing party would then issue surplus invoices to the fictitious buyer (the receiving party). While keeping the kickbacks in the company account, the invoicing party would funnel the goods payment back to the receiving party through private accounts. This method was easily detected by authorities due to its distinct fund-circulation pattern, exposing the fake business relationship between the parties and carrying high criminal risks.

In recent years, the surplus invoice fraud scheme has evolved to become more covert. The issuer now combines the two-step process into one: the genuine purchaser transfers payment directly to the recipient, who then transfers both the payment and kickbacks to the issuer. The recipient obtains the VAT special invoice based on this transaction, eliminating the need for funds to flow back. This makes the scheme harder for judicial authorities to detect.

(II) Impact of the Supreme People's Court and Supreme People's Procuratorate's Tax-Related Judicial Interpretations on the Characterization of Excess Invoice Types as Fraudulent Issuance

Since capital flow reversal serves as a crucial investigative lead in fraudulent issuance cases, new criminal methods that do not generate such reversals necessitate alternative means to verify business authenticity. Prior to the issuance of the Supreme People's Court and Supreme People's Procuratorate's tax-related judicial interpretations, investigative authorities required explicit evidence proving the absence of genuine transactions between the invoicing and receiving parties before further determining whether the invoicing party engaged in fraudulent issuance. However, following the introduction of the Supreme People's Court and Supreme People's Procuratorate's tax-related judicial interpretations, if the invoice recipient lacks a reasonable need to procure the relevant goods, yet obtains a large number of invoices for those goods from the issuer, and there is evidence proving that the goods were directly delivered by the issuer to consumers, investigative authorities may directly determine, based on Article 10, Paragraph 1, Item 3, that the issuer engaged in fraudulent invoicing by fabricating a third-party entity unrelated to the transaction to issue invoices for transactions that do not meet the conditions for tax credit deduction. This constitutes fraudulent invoicing involving the fabrication of a transaction entity.

The criminalization of fictitious transaction entity-type fraudulent invoicing stems from the improper extension of the VAT deduction chain. From the perspective of VAT administration, China employs a tax collection model based on sequential deductions, ensuring full tax revenue collection through input-output tax offsets. However, this does not imply that the VAT transaction chain can be extended indefinitely. If a transaction chain that should have terminated at the consumption stage is artificially prolonged, causing the input tax credit chain that should have ended to restart and graft onto another VAT transaction chain—thereby being used to offset output tax generated by a different transaction—it may result in an overall reduction of VAT revenue. In fact, the new modus operandi differs from past methods only in detail; both essentially involve surplus invoice-type fraudulent issuance and should be treated identically in legal classification.

(III) Classification of the Issuing Party Requires Examination of Its Intent and Whether the Receiving Party Suffered VAT Revenue Loss

First, it must be clarified that the issuer in surplus-type fraudulent invoicing engages in two distinct acts: 1. Selling goods to the actual purchaser without issuing an invoice and failing to pay taxes. This constitutes tax evasion. Under criminal law, even if the threshold for criminal liability is met, the issuer should first be held administratively liable for tax evasion before criminal liability for tax evasion can be pursued. Second, the issuer issues invoices intended for the actual purchaser to the recipient instead. This act requires specific analysis based on the principle of subjective-objective consistency.

Under this principle, if the perpetrator lacks criminal intent for a specific offense, they do not constitute that crime even if they perform the objective acts of that crime. For issuers in surplus-type fraudulent invoicing:

1. If the recipient colludes with the actual purchaser to deceive the issuer, leading the issuer to mistakenly believe the recipient is the actual purchaser and thus issue the invoice to the recipient, the issuer commits the act of issuing invoices for fictitious transactions. However, since the issuer lacks the intent to issue false invoices and has no intent to evade taxes, no crime is constituted.

2. If the issuer knows the recipient is not the actual purchaser—i.e., is aware of the separation of invoice and goods—further examination is required regarding the issuer's knowledge of the recipient's specific circumstances. If the issuer, unaware of whether the recipient engaged in genuine business transactions and without investigating the recipient's circumstances, recklessly issues surplus invoices externally, it can at minimum be deemed that the issuer exhibited subjective intent to allow the recipient to fraudulently claim VAT credits. In such cases, if the recipient also incurs VAT revenue losses due to obtaining the invoice for credit deduction, the issuer can be found guilty of the crime of falsely issuing VAT special invoices.

3. If the issuer is aware that the recipient genuinely procured goods from a third party but, due to circumstances beyond the recipient's control, failed to obtain a VAT special invoice and thus cannot claim input tax credits, and the recipient is compelled to purchase surplus invoices from the issuer solely to exercise their right to credit, In such cases, the issuer's issuance of surplus invoices to the recipient is not indiscriminate. The issuer's subjective intent is to assist the recipient in avoiding overpayment of VAT, not to defraud VAT credits. Where evidence indicates the recipient did not suffer VAT tax losses due to the credit, it is inappropriate to characterize the issuer's conduct as constituting the crime of falsely issuing VAT special invoices.

III. Does the Purchaser of Surplus Tickets for Input Tax Deduction Necessarily Commit the Crime of Issuing False Special VAT Invoices?

(I) Motivations for the Recipient Purchasing Surplus Invoices to Offset Input Tax

There are two primary reasons why recipients purchase surplus invoices to offset input tax: First, to avoid overpaying VAT. This typically occurs when the recipient engages in genuine procurement activities, but the counterparty—often an individual—refuses to issue invoices, thereby obstructing the recipient's right to claim VAT deductions. To prevent overpayment of VAT, the recipient purchases surplus invoices. Second, to fraudulently claim VAT credits. This manifests in two ways: First, the recipient itself is a shell company that uses surplus invoices to offset its own fictitious sales invoices. Second, the recipient conducts actual business operations but primarily engages in activities requiring no external procurement of services or goods—such as consulting firms—where revenue stems mainly from employees providing external consulting services, inherently generating few input credits. To fraudulently claim input tax credits, the invoice recipient falsifies internal employee services as outsourced business—essentially disguising non-deductible transactions as tax-deductible ones—and obtains invoices from third-party staffing agencies for input tax credit purposes.

(II) Classification of the invoice recipient based on whether they possess actual deduction rights

1. If the recipient lacks genuine business operations, they inherently lack substantive deduction rights. Their primary objective is to fraudulently claim VAT deductions through fabricated transactions, demonstrating clear intent to evade taxes. Furthermore, purchasing surplus invoices for input tax credits without actual business activities inevitably causes VAT revenue losses. Classifying such recipients as guilty of the crime of issuing fraudulent VAT special invoices is entirely appropriate.

2. If the recipient has actual business operations, they possess a right to deduction. However, it is further necessary to determine whether the recipient holds an equivalent, substantive right to deduction—that is, whether the input tax deducted from purchasing surplus invoices exceeds the amount deductible from their actual business operations. Taking the logistics industry as an example: transportation companies procure transportation services from individual drivers. These drivers should apply to tax authorities on behalf of the transportation companies for 3% VAT special invoices. In practice, however, transportation companies often struggle to obtain invoices from individual drivers. To avoid overpaying VAT, they purchase surplus invoices from other transportation companies to offset input tax. If the tax amount on invoices obtained from other companies exceeds the amount that should have been invoiced by individual drivers, the excess portion falls outside the recipient's deductible scope and may be classified as fraudulent invoicing. If the recipient has genuine business transactions and the purchase of surplus invoices for input tax deduction does not exceed the amount deductible for actual business operations, the author believes that the recipient is deducting input tax within the scope of their actual, equivalent deduction rights. There is no intent to fraudulently obtain VAT refunds, nor does it result in VAT revenue loss. Therefore, it should not be characterized as the crime of issuing false invoices.

IV. Conclusion

Returning to the aforementioned case, the author believes that judicial authorities determined the involved parties lacked intent to defraud VAT refunds and that the transactions did not result in actual VAT losses. Therefore, they did not classify the act as constituting the crime of issuing fraudulent VAT special invoices. In fraudulent issuance cases, while the behavioral patterns of various parties may appear similar, in-depth analysis of each case's causes, methods, and industry context reveals distinct characteristics. These unique factors ultimately lead to differing legal liabilities for each party involved. When facing charges of fraudulent invoicing, individuals must not be complacent. They should thoroughly, comprehensively, and objectively analyze their business models, organize evidence materials, and engage in full communication with the investigating authorities to achieve a favorable legal characterization.