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Title: Major Announcement: A Coal Enterprise Suspected of Involvement in a 45 Million RMB "False Billing" Case Settles Without Prosecution

Nov. 19, 2023, 10:01 p.m.
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On April 27, 2022, the criminal investigation into a coal enterprise, represented by Huashui Agency, suspected of issuing false value-added tax special invoices (with a total value of over 45 million RMB) was concluded. The X City, Y District Procuratorate issued a non-prosecution decision to the involved enterprise, stating that the evidence provided by the X City Public Security Bureau, Y Sub-Bureau, was insufficient to establish the crime of issuing false value-added tax special invoices and did not meet the conditions for prosecution. After nearly two years of defense work by Huashui lawyers, the case resulted in a non-prosecution decision by the prosecutor's office, receiving high recognition from the client. Due to reasons such as tax policies and industry characteristics, the coal industry has consistently been a hotspot for false billing cases, with high tax-related risks. This article summarizes and analyzes the specific handling of this case, along with its core legal issues. The aim is to provide useful insights for the judicial handling of similar cases involving enterprises suspected of issuing false invoices in the future.

I. Case Overview

Company A is a coal trading enterprise with a business scope that includes coal retail operations. Due to A Company's strong financial position and large-scale coal procurement, many small coal mines and intermediaries sought to cooperate with A Company in coal trading. However, as they were unable to issue value-added tax special invoices and meet A Company's supplier threshold, they chose to affiliate with other coal trading enterprises to conduct coal purchase and sales transactions with A Company.

Individuals A and B, both executives of A Company, were responsible for the company's coal procurement business. Between December 2015 and March 2017, in order to earn a certain distribution price difference, A and B decided privately to act as intermediaries for A Company, organizing the source of goods in their personal capacity. Through an introduction by Wang, A and B engaged in coal purchase and sales transactions with A Company on behalf of three coal trading companies—B, C, and D. They collected payments and simultaneously issued value-added tax special invoices to A Company that matched the actual transaction details.

In May 2020, the Y Sub-Bureau of the X City Public Security Bureau took criminal coercive measures against seven individuals, including A and B, for suspected false issuance of value-added tax special invoices in A Company's coal procurement business. On November 11, 2021, the Y Sub-Bureau determined that A Company accepted value-added tax special invoices from companies B, C, and D, totaling 45 million RMB. Subsequently, the case was transferred to the Y District People's Procuratorate of X City for review and prosecution. During the process, due to unclear facts and insufficient evidence, a supplementary investigation was requested on January 15, 2022.

II.Four Core Defense Arguments in this Case

(I) The Coal Purchase and Sales Business Model and Invoice Receipt Adhere to Tax Laws

Article 21 of the "Interim Regulations on Value-added Tax" stipulates that taxpayers engaging in taxable sales activities should issue value-added tax special invoices to the purchasing party requesting such invoices. The "Measures for the Implementation of the Pilot Reform of Business Tax to Value-added Tax" Article 2 stipulates that when units operate through contracting, leasing, or affiliation, and the contracting party, lessee, or affiliated party operates outwardly in the name of the contractor, lessor, or affiliated party, with the contractor assuming related legal responsibilities, the taxpayer is the contractor.

In this case, according to A Company's procurement system, coal mines without formal qualifications or individual sellers could not become compliant suppliers for A Company. This forced small coal mines and individual sellers to affiliate with other legitimate coal trading enterprises to supply A Company, either directly or through other intermediaries. Regardless of the affiliation or direct sales method, the coal sales enterprises are statutory taxpayers for value-added tax and have a legal obligation to issue value-added tax special invoices to A Company. A and B adopted the affiliation or sales model to sell the individually procured loose coal to A Company. As the coal purchase and sales transactions between A Company and the three companies were genuine, the three companies should issue value-added tax special invoices to A Company, and the information on the invoices should be consistent with the actual transaction.

The "Notice on Strengthening Several Issues in Value-added Tax Collection and Management" (Guoshui Fa [1995] No. 192), Article 1, item 3, stipulates that when taxpayers purchase goods or taxable services, pay transportation fees, the unit making the payment must match the selling unit or service provider that issued the deduction voucher to declare the deductible input tax amount; otherwise, the deduction will not be allowed.

In this case, A Company signed coal purchase and sales contracts with three companies, made payments to them, and the three companies, in their own names, delivered coal to A Company's yard and issued value-added tax special invoices consistent with the actual transactions. From A Company's perspective, obtaining invoices complies with the "three flows into one" provision in the Guoshui Fa [1995] No. 192 document and does not constitute false issuance.

(II) Judicial Authorities' Recognition of "Fund Flow" is a Fragmented View, Lacking Objective and Comprehensive Examination of the Complete Fund Chain

The present case arose due to the pursuit of profit by individuals A and B, who, in abusing their managerial authority, borrowed funds from the company, personally procured coal, and collaborated with individuals such as Wang for sales. Subsequently, a financial transaction trail emerged involving A Company's public account, the public accounts of three companies, private accounts of individuals like Wang, private accounts of A and B, and A Company's cashier's private account. Law enforcement agencies interpreted this fund movement as "fund flow" and considered it a key piece of evidence in establishing the false issuance of invoices.

However, the defense contends that, considering the genuine coal trading transactions that occurred at A Company and the statements provided by A, B, and A Company's financial personnel, it is evident that in the coal business in question, A and B independently borrowed funds from A Company to purchase coal. Therefore, after three companies received payments from A Company for the sale of coal, they needed to repay the funds that A and B had already paid to the coal mines. Upon obtaining the funds, A and B also needed to return them to the company from which they initially borrowed. Consequently, the flow of funds as "public accounts of three companies → private accounts of individuals like Wang → private accounts of A and B → private account of A Company's finance" based on the lending relationship is distinct from the legal relationships arising from the payment of goods between A Company and three companies under the sales contract. Therefore, the fund transfer traces in the case do not constitute "fund flow" in the context of false invoicing. The judicial authorities, without investigating and verifying the fact that A and B borrowed funds from the company to purchase coal and the legal relationships behind the various fund transfers, erroneously classified the fund flow between A Company's public account, A and B, and A Company's financial private account, and three companies' private accounts as evidence of "fund flow" in the case of A Company's alleged false issuance.

(III) Judicial Authorities' Determination of Loss of National Tax Revenue by the Involved Enterprise is Unclear, with Insufficient Evidence

Value-added tax is a turnover tax levied on the added value generated during the circulation of goods and services. According to the principle of taxation, the calculation of the payable value-added tax amount involves determining the overall tax burden on taxable goods and then deducting the amount of tax already paid on legally deductible items from the overall tax burden. Article 4 of the "Interim Regulations on Value-added Tax" stipulates that, except as provided in Article 11 of these regulations, the taxable amount for the taxpayer's sale of goods, labor, services, intangible assets, and real estate is the balance after deducting the current input tax from the current output tax. Article 8 stipulates that the taxpayer's payment or assumption of the value-added tax amount for purchased goods or taxable services is considered input tax. Deductions are allowed for input tax amounts obtained from value-added tax special invoices issued by the selling party.

Therefore, as long as suppliers at various stages of commodity circulation truthfully issue value-added tax special invoices according to the transaction quantity and amount, and declare and pay the value-added tax on time and in full, their issuance of value-added tax special invoices to the receiving party will not result in a loss of national value-added tax revenue. The normal declaration and deduction of input tax by the receiving party will also not cause a loss of national value-added tax revenue.

In this case, individuals A and B sold coal to A Company through three companies. A Company paid the three companies for the goods, and ultimately received genuine goods. As a result, A Company assumed the already-paid tax on the goods in this transaction. Essentially, A Company obtained the right to offset the tax already paid on the involved goods. At the same time, existing evidence indicates that the three companies did not engage in any behavior of failing to declare and pay value-added tax on the invoices in question. Therefore, A Company's acquisition of value-added tax special invoices from the three companies and the subsequent declaration and deduction of value-added tax do not constitute an act that would cause a loss of national tax revenue.

According to the available evidence in this case, it originated from the three companies obtaining falsely issued invoices. Regarding how to handle the situation where downstream receiving parties obtain value-added tax special invoices in such cases, the State Administration of Taxation's "Announcement on Issues Related to Taxpayers Issuing Value-added Tax Special Invoices to External Parties" (State Administration of Taxation Announcement No. 39 of 2014) explicitly states:

"Taxpayers evade taxes by falsely increasing the input tax on value-added tax, but if they issue value-added tax special invoices to external parties and meet the following conditions, it does not constitute the false issuance of value-added tax special invoices:

1. The taxpayer has sold goods to the receiving taxpayer.
2. The taxpayer has received payment for the sold goods, provided taxable services, or received evidence of claiming sales proceeds.
3. The content of the value-added tax special invoice issued by the taxpayer to the receiving taxpayer is consistent with the sold goods, provided taxable services, or received evidence, and the value-added tax special invoice is legally obtained by the taxpayer and issued in their own name.

Value-added tax special invoices obtained by the receiving taxpayer that meet the above conditions can be used as tax deduction vouchers to offset the input tax amount."

Based on the business situation between A Company and the three companies, combined with the available evidence, A Company's actions in obtaining value-added tax special invoices from the three companies comply with the provisions of the above announcement. Their deduction does not cause a loss of national tax revenue. Any potential tax evasion by the three companies through falsely inflating input tax and the resulting potential loss of national tax revenue should be borne by those three companies, and is unrelated to A Company.

(IV) The Procuratorial Authorities Should Correctly Distinguish the Legal Responsibilities of Each Involved Entity to Avoid Presumption of Guilt

Value-added tax special invoices are genuine records of business transactions between buyers and sellers. Although legal scholars have recognized that false issuance is not a genuine joint offense, in practice, the receiving party often becomes implicated due to tax investigation. The defense argues that when investigating downstream receiving enterprises, the focus should be on determining the existence of genuine goods transactions and analyzing specific elements of false issuance crimes, such as "subjective intent to defraud national tax" and "consequences of causing loss of national tax revenue." It is essential not to categorically determine that the receiving party is guilty of false issuance simply because the issuing party is implicated in false issuance or suspected false issuance.

Announcement No. 39 of 2014 played a role as a "buffer zone" to address the potential issue of "implication" in practice, cutting off the negative effects of false issuance implication and preventing legitimately compliant business receiving parties from being presumed to have engaged in false issuance. In this case, individuals A and B, using the names of companies B, C, and D, sold coal to A Company. The three companies received payment from A Company for the sale of coal and issued invoices in their own names that matched the actual transaction. Even if the three companies engaged in falsely inflating input to evade taxes, A Company's acceptance of the invoices based on genuine business does not constitute false issuance.

III. Relevance of this Case to False Invoicing Cases in the Coal Industry

(I) The Defense Work on Difficult Issues such as Determining Affiliation Relationships and Fund Flow Holds Decisive Significance

In false invoicing cases within the coal industry, the determination of affiliation relationships and the establishment of fund flow are focal points in judicial scrutiny. The defense's decisive significance lies in arguing the establishment of affiliation relationships and demonstrating that the involved funds do not constitute a flow, thus holding critical importance in defense work for false invoicing cases.

According to the "Comprehensive Business Tax Reform to Value-added Tax Pilot Policy Training Reference Materials" issued by the State Administration of Taxation's Goods and Services Department, the main features of affiliated operations include: (1) it is a form of borrowing; (2) it involves independent accounting; and (3) it is a temporary arrangement. If these characteristics are met between civil entities, it can be recognized as a factual affiliation relationship. This perspective is also recognized in judicial practice. Even if an affiliation relationship cannot be established, the act of a coal enterprise "truthfully issuing invoices" does not have the intent to defraud national value-added tax and does not result in a loss of national value-added tax revenue. As per the provisions of Document No. [2015] 58, it should not be evaluated as a crime. Instead, it should be handled as a general administrative violation, and legal measures and penalties should be applied to the issuing and receiving parties.

In practice, there is considerable divergence among tax authorities, public security agencies, and courts when handling false invoicing cases regarding the nature of fund flow and the relationship between fund flow and false invoicing. The determination of whether there is fund flow in the involved business and whether there is a direct positive correlation between fund flow and false invoicing plays a crucial role in establishing whether false invoicing has occurred. In determining the relationship between "fund flow" and "false invoicing," the following key points need to be emphasized and confirmed:

Firstly, it must be established whether "fund flow" objectively exists. The determination of fund flow is not subjective speculation; it requires complete and objective evidence, such as bank statements, payment applications, payment records, etc. If there is no evidence proving the objective existence of a closed-loop fund flow in the involved business, then the discussion of fund flow in relation to false invoicing is not applicable.

Secondly, the factual transactions and legal basis of fund transactions need to be clarified. Generally, the flow of funds between accounts is based on specific transaction facts and legal relationships, such as buying and selling, leasing, borrowing, etc. After accurately determining the transaction facts and legal relationships behind each fund transaction, supporting evidence such as contracts, documentary evidence of fund transactions, shipping confirmations, transport documents, etc., should be collected to break the subjective presumption that fund flow is used for false invoicing.

Since the fund transactions between commercial entities are very frequent, signs of so-called fund flow between accounts are easily formed. However, to judge whether the flow of funds is due to false invoicing, it is not sufficient to only observe the signs of fund movement. It is crucial to examine the substantive nature of each transaction associated with fund movement. As long as each transaction is objectively and genuinely valid, even if there is "fund flow," it is merely formal and does not constitute the "fund flow" required for "false invoicing."

(II) Applying for a Hearing During the Examination and Prosecution Stage Has Significant Importance in Obtaining a Non-Prosecution Decision Legally

According to Article 4 of the "Provisions on the Work of Hearing in the Examination of Cases by People's Procuratorates," for cases involving the necessity of detention review, non-prosecution, criminal appeals, civil litigation supervision, administrative litigation supervision, public interest litigation, etc., where there is significant controversy in determining facts, applying legal principles, and handling cases, or cases with significant social impact that require hearing the opinions of parties involved and other relevant personnel in person, a hearing can be convened with the approval of the chief procurator. According to Article 16, the opinions of the hearing officer are important references for the People's Procuratorate to handle cases in accordance with the law.

After this case was transferred for examination and prosecution, the defense had extensive communication with the prosecuting authority, submitting written legal opinions. After considering the defense's opinions, the prosecuting authority preliminarily concluded that the public security agency's determination lacked clarity and evidence. To efficiently resolve disputes, the defense proactively applied for a prosecutorial hearing, which was approved by the prosecuting authority. Personnel from judicial and tax authorities attended the hearing. During the hearing, the defense expressed their opinions effectively, gaining approval from all parties. In the end, the prosecuting authority made a decision not to prosecute. The prosecutorial hearing played a crucial role in effectively resolving disputes in this case. In practice, defense lawyers in false invoicing cases should review whether the conditions for a prosecutorial hearing are met, actively apply for the prosecutorial hearing procedure, and fully exercise their defense rights during the examination and prosecution stage.

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