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Two Major False Invoicing Risks Faced by the Coal Industry and Response Strategies

Nov. 19, 2023, 10:23 p.m.
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Due to the scarcity of coal resources, each coal mine operates in a seller's market. As a result, coal trading enterprises and coal-consuming businesses often struggle to obtain sufficient value-added tax (VAT) special invoices during procurement. Additionally, given the prevalent use of individual transport capabilities in China's road transportation, the transportation costs incurred in coal buying and selling transactions cannot acquire adequate invoice documentation. Over time, this situation has led to challenges for coal trading enterprises and coal-consuming businesses in managing the associated corporate income tax and VAT burdens.To address these issues, many coal trading enterprises and coal-consuming businesses opt to obtain VAT special invoices through third-party channels, thereby triggering the risk of false invoicing. Currently, numerous cases of false invoicing involving coal enterprises have erupted nationwide. In the context of ongoing collaborative efforts by tax authorities to combat tax fraud, continuous upgrades and optimizations of the Golden Tax Phase III system, and the increasing intelligence of data-driven comparisons, tax and judicial authorities are managing invoices in a more real-time fashion.In response, coal enterprises should conduct regular self-assessments to promptly identify potential tax risks. Simultaneously, when dealing with ongoing cases of false invoicing, attention should be paid to understanding the nature of transactions from both the formal and substantive aspects.

I. Two False Invoicing Risks Faced by the Coal Industry

(I) False Invoicing Risk in Coal Buying and Selling Operations

Before September 1, 2014, China implemented a coal business qualification review system, allowing only enterprises with corresponding qualifications to engage in coal trade. Individuals were not permitted to participate. During this period, the practice of small coal mines operating through affiliation was widespread. This situation was not exclusive to the coal industry; in pharmaceuticals, transportation, petrochemicals, and other bulk commodity trading sectors, affiliations often occurred. While affiliates had significant resources, they lacked the corresponding qualifications, leading them to operate and invoice through affiliation. Additionally, to address the issue of insufficient acquisition of input invoices, some coal trading enterprises resorted to intra-industry allocation of "surplus invoices" to alleviate the problem of excessively high tax burdens. The prevalence of proxy invoicing was notable.

(II) False Invoicing Risk in Coal Transportation Operations

Coal transportation is primarily carried out through railway and road transport, with road transport facing more severe false invoicing issues. This is closely related to the current development status and operational characteristics of China's road transport industry. The entities engaged in road transport operations in China exhibit characteristics of being "numerous, small, scattered, and weak." While a few state-owned transport enterprises operate uniformly and are centrally managed, the majority of entities handling transportation tasks are individual transporters. In this context, when coal enterprises purchase transportation services, they typically have to procure from numerous individual transporters, relying on individual vehicles for transport. This situation results in coal enterprises confronting significant challenges related to false invoicing in transportation invoices. This problem is not only specific to the coal industry but also a formidable obstacle that the road transport industry must address in its development.

II. Title: Common Operating Models Suspected of Falsification in the Coal Industry

To address the issue of insufficient input tax deduction caused by the inability to obtain value-added tax special invoices after coal purchase and transportation, various models have emerged in practice for coal trading enterprises to purchase coal and transportation services. The two most controversial models suspected of falsification are as follows:

1. Small coal mines operating under the umbrella of large coal mines: Small coal mines or coal trading enterprises seek legitimate large coal mines to have the small coal mines operate under the name of a third party qualified to issue value-added tax special invoices. The party under which they are affiliated issues value-added tax special invoices to the coal trading enterprises based on the actual conditions of coal purchase and sale transactions.

The affiliation operation in coal transportation is similar to the affiliation operation in coal purchase and sale. By affiliating individual transport capacity under the name of a transportation enterprise, the transportation enterprise issues value-added tax special invoices to the enterprises purchasing transportation services based on the actual transportation service conditions.

In the above affiliation operations, due to the weak legal awareness of the affiliated and affiliating parties, the lack of formal affiliation contracts after reaching oral affiliation agreements raises suspicions about the authenticity of the affiliation. This, in turn, leads tax authorities to suspect that the parties involved in issuing and receiving invoices have no real transportation business, implicating them in falsification and even prompting referral to law enforcement for criminal investigation.

2. Third-party companies issuing invoices "truthfully on behalf of others": Qualified third-party entities that can issue value-added tax special invoices issue invoices to the purchasing party on behalf of the seller or service provider based on the actual transaction circumstances after completing coal procurement or transportation services.

In this model, although the value-added tax special invoices issued by the third party accurately reflect the types, quantities, and amounts of goods/services in line with the actual transaction, suspicions may arise during the process, such as fund inflow or payment of invoicing fees. Tax authorities still tend to categorize it as falsification, potentially leading to law enforcement involvement and criminal proceedings.

III. Strategies for Dealing with Suspected Falsification in the Coal Industry

1. Determine whether the "affiliation operation" conforms to the provisions of the State Administration of Taxation's Announcement on Issues Related to Taxpayers Issuing Value-Added Tax Special Invoices to External Entities (No. 39 of 2014). If it complies, it does not constitute falsification under tax law and does not qualify as a criminal offense. If it does not comply, further evaluation is needed to determine whether it meets the criteria for falsification.

2. Recognize that "truthful representation" does not meet the criteria for falsification as it is based on actual transactions and involves the full payment of value-added tax. Treat it as a general tax administrative violation rather than a criminal act, especially when there is no intention to deceive or cause loss of tax revenue to the state.

IV. Relevance of Non-Prosecution and Acquittal Cases to the Spirit of the "Reply" and "Opinions"

(I)Case One: Non-Prosecution of "Affiliated Invoicing" in Coal Purchase and Sale Business

Case Summary:
During the period from 2012 to 2014, the defendant, Chen Moumou, jointly operated a coal business, selling coal acquired from small coal mines to Jilin Qifeng Company. Due to the inability of the small coal mines to provide invoices, Chen Moumou, following a suggestion, obtained value-added tax special invoices from Meifeng Company in LinKou County. Chen Moumou, acting on behalf of Meifeng Company, entered into a coal purchase and sale contract with Jilin Qifeng Company. The court ruled that this "affiliated invoicing" did not constitute the crime of falsifying value-added tax special invoices.

The court referred to the State Administration of Taxation's Announcement No. 39 of 2014 and Legal Research [2015] No. 58, which clarify that "affiliated invoicing" does not constitute the crime of falsifying value-added tax special invoices if it meets the criteria outlined in the relevant regulations.

(II)Case Two: Non-Prosecution of "Affiliated Invoicing" in Freight Transportation Business

Liu, the owner and operator of Anshun Jie Freight Transportation Company, allowed individual vehicle owners to affiliate their vehicles with the company for the provision of freight transportation services to local mining companies. In 2018, Liu was investigated for alleged falsification of invoices but was not prosecuted. The court considered that, as Liu truthfully declared and paid taxes, and there was no intention to deceive or cause loss of national value-added tax revenue, his actions did not constitute the crime of falsifying value-added tax special invoices.

The court emphasized that Liu's actions did not have the intention to deceive, did not result in the loss of national value-added tax revenue, and did not pose a threat to society, thus not meeting the criteria for the crime of falsifying value-added tax special invoices.

(III)Case Three: Acquittal of "Truthful Representation Invoicing" in Freight Transportation Business

Li, the owner of Xihong Service Department, engaged in freight transportation services through affiliations with three logistics companies. Due to being a small-scale taxpayer, Li could not issue invoices with the required tax rate, so he approached another logistics company, Wenzhou Bo, to issue invoices on his behalf. Li was acquitted of the charge of falsifying value-added tax special invoices.

The court concluded that Li's act of seeking others to issue invoices, without evidence of intentional tax evasion, did not align with the legislative intent and did not constitute the crime of falsifying value-added tax special invoices.

IV. Conclusion:

The presented cases illustrate that legal authorities focus on examining financial flows, goods flows, transportation flows, and invoice flows in coal industry falsification cases. The courts give weight to verbal evidence in proving the absence of genuine transactions. Affiliation must meet certain conditions to be considered a crime, and defendants may find it challenging to argue against the essence of the transactions. While legal guidelines such as Announcement No. 39 and Legal Research [2015] No. 58 provide clarity on certain issues, practical implementation varies, and legal professionals should actively defend against accusations, especially given the complexity and professionalism of falsification cases in the coal industry.

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