Background: Special Rectification in Coal Industry have found Serious Problems
Since Feb.2020, Nei Mongol Autonomous Region Government and Party Committee have been investigating the illegal problems in the area of coal resources. A series of tax violation cases were found.
Based on years of tax agency experience, Huashui provides early warning of tax-related risks in the coal industry, and proposes risk management recommendations to relevant companies to help the coal industry achieve effective management and control of tax-related risks.
Cap.1: Tax-related risks in the operation of coal enterprises
Ⅰ.Incomplete accounting system
Once coal enterprises’ income exceeds 4 million yuan, they should implement "Accounting Standards for Business Enterprises".
Due to the wrong implementation of the accounting system, coal enterprises list either more expenses or less income will face the legal risks of tax evasion.
Ⅱ. Loose management of VAT invoices
1.Falsely issuing input VAT invoices
2.Falsely issuing output VAT invoices
3.Falsely issuing shipping VAT invoices
For coal enterprises, according to present tax law and regulations, only VAT invoices for purchasing goods and services involving mining roadway auxiliary equipment and ecological restoration of open-pit coal mine were allowed to considered as legal input VAT invoices. As a result, some coal enterprises will buy falsely issued input VAT invoices to reduce tax burden. This kind of illegal actions will lead to administrative penalties and criminal responsibilities.
Huashui suggested that coal enterprises should keep the contract and other materials to prove that the trade is true. Otherwise the loose management of VAT invoices will cause administrative penalties or even criminal penalties.
Ⅲ. Irregular list of pre-tax payment of corporate income tax
The coal industry has a greater demand for labor, as a result the practice of falsely listing wages to evade corporate income tax still exists. However, in the modernization tax collection and management system, those illegal behaviors were easy to be found and caused the legal risks of tax evasion.
Ⅳ.Absence of small tax management system
Due to the remote location of coal mines and weak administrative supervision, coal companies always have the phenomenon of illegal land occupation, houses construction and water use during their operations. Once the tax administrative bureau investigated, some tax will be pursued, such as farmland occupation tax, urban land use tax, real estate tax and water resource tax.
Cap.2: Tax-related risks in the equity transfer of coal enterprises
The main ways of M&A are to purchase the assets and equity of target enterprises by means of cash, equity and assets. For coal enterprises, the main assets are fixed assets such as coal mining and processing equipment, and intangible assets such as prospecting rights and mining rights. The value of prospecting rights and mining rights is extremely high. Therefore, coal enterprises tend to realize M&A through equity transfer in which prospecting rights and mining rights were transferred together. This kind of equity transfer was easy to trigger tax risks which involving stamp duty, personal income tax and corporate income tax.
Ⅰ. The value of intangible assets is not fully reflected. The tax bureau tends to approve a certain amount of equity transfer income.
Ⅱ. The value of intangible assets reduced while the tax bureau refused to refund the tax already paid.
Ⅲ. The transferor fails to pay taxes in time after completing the registration of the equity change. The tax bureau tends to punish the transferor for tax evasion.
Cap.3: Countermeasures for tax-related risks of coal enterprises
Ⅰ. Countermeasures for tax evasion
Although the “Tax Collection and Administration Law” does not clarify the “subjective intention” elements of tax evasion, in the process of handling specific cases, the letter issued by the State Administration of Taxation has indicated its affirmation of the “subjective intention” elements. At the same time, the court also supports this view.
Ⅱ. Countermeasures for the overdue of tax collection period and tax administrative penalty period
“Non-declaration” and “wrong declaration” caused by misunderstanding of tax policies are not subjective intentions of tax evasion, so tax authorities cannot pursue the collection indefinitely. If the investigation and punishment of “non-declaration” or “wrong declaration” exceeded five years, the tax authority will not only lose the right of tax collection, but also lose the power of administrative punishment.
Ⅲ. Determination of the time when the illegal act occurred
“The Corporate Income Tax Law” stipulates that corporate income tax is calculated according to the tax year, and the enterprise shall settle the tax within five months from the end of the year. Therefore, tax evasion in each tax year should be regarded as an illegal act.
Cap.4: Coal enterprises should promptly establish tax-related risk management mechanisms
Ⅰ. Complete business processes and pay attention to keep written contracts
In daily business, coal enterprises should pay attention to keep written contracts to prove the business happened really. When the business is done, coal enterprises should collect every materials involved in the trade, such as contracts, invoices, money orders, etc.
Ⅱ. Establish a complete invoice management system
Based on the real business, coal enterprises should establish a complete invoice management system in order to realize the automatic date collection, and present those information to the managers.
Ⅲ. Properly design the tax-related clauses of equity transfer, and actively communicate with the tax bureau to eliminate disputes
On condition that coal enterprises own the intellectual property, immovable property, mining rights and equity, they should hiring an intermediary agency with legal qualifications to issue an asset evaluation report for the purpose of determining the accurate equity transfer price.
Meanwhile, during the equity transfer, coal enterprises should report to the tax bureau actively and get guidance from tax authorities.