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Tax risk of pharmaceuticals industry escalates again as major cases of fraudulent opening of pharmaceuticals companies erupt in many places

July 15, 2024, 10:34 a.m.
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Ⅰ. The outbreak of a number of places in the field of pharmaceuticals large false invoicing cases, many people involved in criminal attention

(ⅰ)Ulanhot cracked the large-scale false issuing case in the pharmaceuticals field  again

Recently, "Safe Ulanhot" publicized a case of large-scale false invoicing in the field of pharmaceuticals. The Ulanhot Public Security Bureau investigated and found that more than 30 companies had frequently issued false VAT invoices for pharmaceutical manufacturers without actual business dealings. Ulanhot Municipal Public Security Bureau utilized the independently developed "five, three, four, four" method of false invoicing in the pharmaceuticals field and the "rapid identification of shell companies in the field of pharmaceuticals" data model to comprehensively analyze and evaluate the case, confirming that the actual shell companies involved in the case were as high as 1171 companies, involving an amount of 5 billion yuan. The case was fully analyzed and evaluated, and it was confirmed that the actual shell companies involved in the case were as high as 1171, involving an amount of 5 billion yuan. This is the second time that Ulanhot Public Security Bureau has successfully investigated a large-scale case of false invoicing in the pharmaceuticals field. As early as 2022, Ulanhot Public Security Bureau had successfully detected the shocking "7.22" medical field large false invoicing case, which involves 22 provinces across the country, a total of 47 suspects were arrested, the amount of money involved is up to 6 billion yuan.

(ii) Guiyang disclosed the "10•24" case of false invoicing in the pharmaceuticals industry

On the same day, Guiyang public security in the official micro-blogging notification of 10 economic crime typical cases, one of which is the city of Liupanshui City, ShuiCheng District successfully cracked the "10-24" false invoicing case, knocked down four criminal gangs, arrested 10 suspects. The public security organs to dig deep into the pharmaceuticals industry in the field of false invoicing clues, found that the introduction of false invoicing agent 10, downstream false invoicing 146 enterprises, the total amount of false invoices of more than 31,000, the price of the total tax of more than 1.23 billion yuan.

(ⅲ) Summary: 2024 pharmaceuticals industry risks remain high

Currently, localities are actively strengthening the monitoring of false invoicing crimes in the pharmaceuticals sector, in response to the increasing state supervision of the pharmaceuticals industry. In the foreseeable future, the state organs of the pharmaceuticals field of false invoicing type of crime will continue to crack down on the situation, not only help to protect the national tax revenue, but also effectively remove the unethical practices in the pharmaceutical industry, weakening the grey chain of interests to breed, for the market order of the clear and fair competition environment injected with new vitality. In this context, pharmaceuticals enterprises must pay more attention to tax compliance management to ensure that all business activities are legal and compliant, and to avoid the explosion of high-risk business model, which affects the normal operation of enterprises.

Ⅱ. high pressure regulatory in the field of pharmaceuticals remains, the combination of anti-corruption, the securities regulatory review and the fight against false issuing

(ⅰ) Pharmaceuticals anti-corruption continues to maintain a high-pressure situation

On June 19, the website of the Central Commission for Discipline Inspection and the State Supervisory Commission published an article titled "Commentary on this website丨perseverance in promoting the fight against corruption". It emphasizes that the third plenary session of the 20th Central Commission for Discipline Inspection clearly put forward the need to adhere to grassroots efforts to prevent corruption and severely punish corruption in the field of people's livelihoods, focusing on key areas such as education, employment and medical care to carry out remediation.

Medical care, as an important area of people's livelihood, clearing up its unethical practices is crucial to enhancing people's sense of gain. Since the beginning of this year, the country's anti-corruption efforts in the medical field have been increasing, and a large number of hospital party secretaries and presidents have been investigated by the Commission for Discipline Inspection and Supervision on suspicion of violating disciplinary laws, and a number of hospital leaders chose to give themselves up and give a detailed account of their offenses under the strong pressure of anti-corruption remediation. During the investigation, it was found that many hospitals existed the phenomenon of accepting funds to bribe through academic conferences, sponsorship fees, air ticket reimbursement, etc., and these bribes are often illegally laundered through false invoices and other means. Therefore, severe crackdowns on corruption in the pharmaceuticals industry also often involve the investigation and handling of cases of economic crimes such as false invoicing. These measures are aimed at removing corruption from the pharmaceuticals industry, maintaining social justice, and promoting the healthy development of the pharmaceuticals industry and the construction of the rule of law.

(ii) Tax supervision and control to be further strengthened

"Correcting unethical practices in the field of pharmaceuticals purchasing and marketing and in medical services" is a long-term special rectification activity jointly carried out by the Commission on Health and Welfare in conjunction with tax, police, audit, municipal supervision and other departments, aiming at cracking down on commercial bribery and corruption in the field of pharmaceuticals purchasing and marketing, and jointly combating tax-related illegal issues. Since 2018, the focus of each year's special action has been different, covering the implementation of the "two-invoice system" and the illegal behaviors of emerging CSO companies, inflated sales expenses, R&D expenses, and the standardization of academic conferences.

In May of this year, the National Health Commission and other 14 ministries and commissions issued the "2024 Correcting the field of pharmaceuticals purchasing and marketing and medical services in the work of the main points of the notice" (National Health Medical Emergency Letter [2024] No. 101) document, which emphasizes "to increase the governance of the field of pharmaceuticals purchasing and marketing of commercial bribery ...... Focus False invoicing, false transactions, false activities and other forms of irregularities to obtain funds for the implementation of unlawful acts, to maintain a high-pressure situation to combat." In the next few years, the pharmaceuticals industry will remain a key target for tax audits, and the tax risk will always be high for pharmaceutical companies that have illegal behavior and intend to use the current loopholes in laws and regulations to make profits and reduce their tax burden.

(iii) Listing supervision further focus on sales expenses and tax compliance

In April this year, the State Council issued "on strengthening supervision and risk prevention to promote the high-quality development of the capital market, a number of opinions", which emphasized that the regulatory authorities should further strengthen the comprehensive supervision of the listing audit, strict control of access to the capital market, to prevent the occurrence of "with the disease to pass".

For the IPO application of pharmaceuticals, the SFC pays special attention to whether the sales expenses of pharmaceuticals exceed the level of their peers, the reasons for the surge in sales expenses, the authenticity and compliance of academic promotion expenses, exhibitions and research and consulting expenditures, as well as whether the invoices and vouchers of promotional activities are legal, and whether there is any return of funds. Against this backdrop of strong regulation, IPO applications in the biopharmaceuticals industry have stagnated and withdrawal cases are frequent. Recently, Nanjing Haina Pharmaceuticals Technology Co Ltd (Haina Pharmaceuticals) withdrew its IPO application on June 24, according to an announcement by the Shenzhen Stock Exchange. Haina Pharmaceuticals applied for GEM IPO on June 30, 2023, and experienced two rounds of inquiries during the one-year period of the meeting. The Shenzhen Stock Exchange (SZSE) focused on issues such as continuing operation capability, business model, outsourcing of R&D services and self-research capability, business compliance and internal control effectiveness, information disclosure quality and risk disclosure completeness. In the face of the second round of questions from the Shenzhen Stock Exchange, Haina Pharmaceuticals failed to respond for seven months and eventually withdrew its IPO application.

Ⅲ. The pharmaceuticals enterprise tax risk four major causes of analysis

(ⅰ) In order to achieve the goal of profitability and financial fraud triggered tax risk

Pharmaceuticals in the process of business development, in order to further financing to expand production, will actively seek listing. However, enterprises need to meet the requirements of the Securities and Futures Commission and the Exchange for continuous profitability. For example, the regulations for issuance and listing on the GEM Board of the Shenzhen Stock Exchange require that if the issuer is a domestic enterprise and there is no arrangement for differences in voting rights, the market capitalization and financial indicators should meet at least one of the following criteria: (a) the net profit for the last two years is positive and the cumulative net profit is not less than 50 million yuan; (b) the projected market capitalization is not less than 1 billion yuan, the net profit of the most recent year is positive and the operating income is not less than 100 million yuan; (c) Projected market capitalization of not less than 5 billion yuan, and operating income of not less than 300 million yuan in the most recent year. The requirements for listing on the Main Board are even stricter. The Decision on Amending the Administrative Measures for Initial Public Offering and Listing (SEC Decree No. 173) stipulates that the issuer's net profit for the last three fiscal years shall be positive and the cumulative net profit exceeds RMB 30 million; the cumulative net cash flow generated from the operating activities for the last three fiscal years exceeds RMB 50 million; or the cumulative operating income for the last three fiscal years exceeds RMB 300 million, etc. The requirements for listing on the Main Board are even more stringent. The cumulative revenue of the last three fiscal years exceeds 300 million yuan, and so on. Therefore, some pharmaceuticals enterprises may adopt the method of false invoicing in order to list on the stock exchange and realize financing as soon as possible to inflate the amount of sales and increase the book profit of the enterprise.

(ii) Under the "two-invoice system", drugs are shipped out at high prices, costs and expenses are falsely listed in order to break down profits.

Before the implementation of the "two-invoice system", the ex-factory price of drugs is low, and the price is gradually raised by the main bodies of the sales and transportation links. After the "two-invoice system" reform, drug distributors must ensure that they are able to provide the whole process of sales and transportation services from the factory to the final retail or medical institutions. The shortened benefit chain pushes up the ex-factory price of drugs, and while the cost of drugs remains unchanged, the increased price brings higher book profits and a heavier tax burden. Against this background, some pharmaceuticals companies may try to inflate costs and reduce taxes payable by means of fictitious transactions and forged invoices, in order to increase their profit margins.

(iii) Expenditures that cannot be accounted for in the "gold sales" model of pharmaceuticals lead to false invoicing.

At present, China's pharmaceuticals market basically presents a buyer's market situation, product homogenization is more serious, many drugs lack of unique research and development barriers, a large number of generic drugs dominate the market competition. Despite changes in the market environment and regulations, this model of relying on the relationship between pharmaceuticals representatives and doctors to drive sales has not fundamentally changed. Pharmaceutical companies and distributors often pay rebates and commissions to open up sales channels. These additional costs used to be spread among different distributors by lengthening the sales channels and increasing the number of sales segments, but after the implementation of the "two-invoice system," these costs are borne by pharmaceutical companies and distributors, resulting in a huge economic burden for companies and distributors. This has resulted in the enterprises and distributors facing a huge economic burden. In addition, in order to facilitate sales, certain pharmaceuticals representatives may resort to bribery and other illegal means to influence the decision-making process of medical institutions and doctors. These additional costs are eventually passed on to the entire drug distribution chain. In order to cope with these additional costs, some pharmaceuticals companies have to resort to various means to share these expenditures that cannot be accounted for in the official accounts, such as false invoicing and concealment of revenues, among other means. The act of arbitrage has gradually shifted from the distribution chain to the production field, further exacerbating the phenomenon of massive false invoicing and revenue concealment in the industry.

(iv) Changing the nature of commission for medical representatives, and the risk of fraudulent invoicing is easily transmitted

Under the compliance situation, the sales commission paid by pharmaceuticals enterprises to pharmaceutical representatives as individual labor compensation is subject to a maximum of 45% personal income tax. However, in order to avoid the high tax burden, some pharmaceuticals representatives register multiple individual businesses in tax depressions, relying on the park's tax rebate and approved tax rate policy, splitting the income, transforming the nature of income, and changing the actual provision of sales labor services into false service fees, consulting fees, etc., so as to evade taxes. In recent years, with the escalating efforts of the state to clean up tax depressions, the behavior of individuals using tax depressions policy to evade personal income tax has been strictly cracked down. Once the tax evasion behavior of pharmaceuticals representatives is audited, pharmaceutical companies are highly susceptible to be implicated as the invoiced party. In the absence of detailed evidence to prove that the service, consulting and other activities really happened, the invoices for service fees, consulting fees and other invoices are easy to be recognized as false invoicing.

Ⅳ. The four recommendations of the pharmaceuticals enterprise tax compliance

(i) Timely processing of existing high-risk invoices

Pharmaceuticals enterprises should establish a perfect invoice management system for existing invoices, and strengthen the compliance review of suppliers and tax compliance training of employees. Comprehensively check the risk level of existing invoices. For invoices issued by upstream enterprises with high risk, such as CSP and CPO, they should first verify the status of the invoices, and in the event that they find that the upstream suppliers have fled and lost contact with each other, they should communicate with the tax bureau about the actual situation and exchange invoices for other invoices, so as to stop the loss in a timely manner. For invoices confirmed to be issued in violation of the law, self-examination and payment of back taxes should be conducted as soon as possible. In addition, self-inspection and external audits should be conducted regularly to ensure the transparency and legality of tax management, thus effectively reducing tax risks and safeguarding the stability of business operations.

(ii) Revamping risky business models

1. Avoiding the transmission of tax problems by CSOs, CSPs and other organizations

The "two-invoice system" has completely changed the multilevel distribution model of pharmaceuticals distribution in the past, forcing many pharmaceutical distributors to adjust their business strategies, and some of them have begun to rely on outsourcing service companies such as CSOs and CSPs. In recent years, all over the world have characterized such CSO, CSP companies as "money laundering" shell companies, resulting in a large number of CSO, CSP by the strict tax review. Many pharmaceuticals companies, as invoiced companies, are easily involved. Most CSOs and CSPs are usually registered in tax-preferential regions, relying on financial and tax rebates to maintain a long-term pattern of fraudulent invoicing. However, once the tax rebate policy changes or these companies themselves are set up for the purpose of fictitious billing, they face a very high risk of going off the grid.

In order to avoid the above risks, pharmaceuticals companies should try to avoid business transactions with CSOs and CSPs that have just been established or do not have a clear business record, and avoid transactions with companies specifically set up for the purpose of violent false opening. And before engaging in business cooperation with CSOs and CSPs, they should confirm whether their business entities really exist, whether their business activities are legal and compliant, and verify their tax status. In addition, evidence should be retained when dealing with CSOs and CSPs, so that when the risk of false invoicing breaks out in the upstream, the bona fide recipient of the invoice can be claimed with exhaustive evidence that can prove the authenticity of the business, and penalties can be avoided. Meanwhile, it should avoid collusion with CSOs and CSPs to obtain invoices.

2. Avoid false invoicing and inauthentic agricultural products purchase invoices

The phenomenon of high selling and high invoicing is common in the pharmaceuticals industry, and some dealers and pharmaceutical companies may utilize false special invoices to offset VAT, thus reducing the cost of tax burden. Secondly, some pharmaceutical enterprises whose business scope includes Chinese herbal medicines, proprietary Chinese medicines and traditional Chinese medicine tablets may, in order to make up for the shortfall of input items, falsely increase the input items by means of fictitious agricultural products acquisition vouchers, thereby increasing the input tax payable. Under normal operation of pharmaceuticals enterprises and relatively stable product market, the procurement of medicinal materials should also be relatively stable. The tax authorities may determine whether a pharmaceutical enterprise has falsely issued invoices for the acquisition of agricultural products and inflated input tax by analyzing the proportion of input tax on the acquisition of agricultural products in the total input tax. In order to avoid the risk of false invoicing and the tax authorities' disapproval of the purchase price of agricultural products, pharmaceuticals enterprises should operate in a compliant manner, fill in the actual costs incurred truthfully, and effectively prevent potential tax violations.

3. Avoid false invoicing

In practice, the final consumers of pharmaceuticals usually do not have the habit of asking for invoices, resulting in direct-to-consumer pharmacies and drugstores not asking for invoices when purchasing, and pharmaceuticals distribution enterprises have accumulated a large number of affluent invoices. Some pharmaceuticals distribution enterprises have used means such as forging pharmaceutical sales lists to issue false VAT invoices to external parties. The tax authorities need to verify the consistency of the three streams when judging the authenticity of the business, therefore, pharmaceuticals enterprises accepting false affluent invoices are often accompanied by forged logistics information, warehousing documents and so on. Once investigated, the subjective malice of pharmaceuticals enterprises to carry out illegal behavior is difficult to refute, and the consequences are more serious. Pharmaceuticals in the operation of the business should be kept real, to avoid accepting the false rich ticket.

(iii) Keeping good traces of business authenticity

Although some enterprises may indeed incur high sales expenses, there are loopholes in compliance building that result in insufficient traces of sales activities, such as activity contracts and invoices alone, which makes it often difficult for tax authorities to fully recognize the legitimacy of these expenses. In order to avoid pharmaceuticals enterprises encountering unnecessary troubles due to tax issues, enterprises must pay attention to the authenticity of business traces in the course of operation. Therefore, in order to ensure the authenticity of sales activities, pharmaceuticals enterprises are advised to take practical and effective measures in the promotion process. For example, in the process of business promotion, for meeting expenses, in addition to retaining invoices, should also be retained meeting time, location, list of participants, agenda content, site photos and sign-in sheets reflecting the authenticity of the meeting of the relevant documents, in order to clarify the actual occurrence and effectiveness of the activities. The retention of such detailed evidence not only helps internal management and supervision, but also provides sufficient legal proof in the face of tax audits and reduces possible tax risks and disputes.

(iv) Actively responding to tax audits and resolving risks in a timely manner

When dealing with tax affairs, pharmaceuticals enterprises should first conduct a comprehensive tax health check to ensure compliance and transparency of all tax-related operations. Tax self-inspection helps to identify and resolve possible tax problems at an early stage. For example, if an enterprise discovers fraudulent invoicing during a self-inspection, it should take immediate steps to carry out input reversals to avoid administrative penalties after being audited by the tax authorities.

If a pharmaceuticals enterprise has been notified of the filing of an audit case by the tax authorities, it should actively cooperate with the inspection work of the tax authorities by providing information on the authenticity, legality and reasonableness of the business being investigated, such as contracts, fund flows, meeting photos, sign-in sheets, etc. If necessary, it can negotiate with pharmaceutical representatives, experts and scholars to be questioned by the tax authorities and explain the situation. If the tax authorities intend to impose administrative penalties, issued a notice of tax administrative penalties, the enterprise should promptly file a penalty hearing and issue a statement of defense in order to safeguard its legitimate rights and interests. If the enterprise is not satisfied with the tax treatment decision or tax penalty decision made by the tax authorities, it can file a reconsideration or litigation within the prescribed time to solve the problem through legal channels. For those more serious crimes involving criminal risks of false invoicing and tax evasion, pharmaceuticals enterprises need to seek the assistance of professional criminal defense lawyers to minimize the legal consequences and negative impacts that the enterprises may face.

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Copyright@2019 Aequity.ALL rights reserved京CP备17073992号-1