When Receiving a False Special Invoice, What Should an Enterprise Do? (ⅠⅠ)

(Continued from the previous article)

• Provision on bona fide acquisition of false special invoices

«Circular of the State Administration of Taxation on the Settlement for the Taxpayers Obtaining the False Special Invoice of Value-added Tax without Acknowledgement» defines what is “bona fide”.

It is stated in the Circular that the purchaser shall be deemed to have obtained the false special invoice in good faith if all the following conditions are met:

• a genuine transaction between the purchaser and the seller;
• the sale is made using the special invoices of the province (autonomous region, municipality directly under the Central Government, and cities listed in the plan) in which the purchaser is located;
• all the contents of the special invoices match with the actual ones, such as the name of the seller, the seal, the number of goods, the amount, and the tax amount; and
• no evidence that the purchaser knows that the special invoices provided by the seller were obtained by illegal means.

On the other hand, tax authorities of the purchaser’s location shall grant credit for input tax or export tax refund in accordance with the law, if:

• the purchaser is able to obtain again from the seller a legal and valid special invoice issued by the anti-counterfeit tax-control system; and
• the purchaser has obtained the certificate that the tax authorities in the place where the seller is located have conducted or are conducting an investigation and punishment on the seller’s false special invoices accordingly.

However, if the above conditions cannot be met, the input tax deducted or the export tax refund obtained by the purchasing party shall be recovered accordingly.

In addition, if the taxpayer has obtained in good faith a false special invoice that has been recovered and deducted in accordance with the law, then the taxpayer does not need to consider the provisions of Article 32 of the «Tax Collection Administration Law of the People’s Republic of China»: – If the taxpayer fails to pay the tax in accordance with the prescribed period, and the withholding agent fails to settle the tax in accordance with the prescribed period, the tax authorities shall, in addition to ordering the payment within the prescribed period, impose a late payment fee of five percent of the tax due on a daily basis. If the taxpayer fails to pay the tax in accordance with the prescribed period, the taxation authority shall, in addition to ordering the payment within the prescribed period, impose a late payment fee of five ten thousandths of the late payment of tax on a daily basis from the date of the late payment of tax. In other words, tax authorities will not add the late payment fee arising from the recovery of past taxes.

• Necessary documentation in case the tax inspection happens

Through the above layer-by-layer analysis, accountants of enterprises need to prepare the necessary financial documents to respond to tax inspection, while supporting themselves if they are bona fide purchasers, including but not limited to: –

• the original special invoice was identified as a false invoice
• purchase and sale contracts/business contracts or other contracts involving the invoice
• the goods involved in the incoming order, outgoing order, transfer orders, or transport documents
• relevant accounting documents
• bank payment voucher
• VAT declaration report for the month in which VAT is deducted, and CIT annual return
• statement of the entire business transaction and tax declaration

To sum up, enterprises do not need to be too panicky after receiving the Notice of Tax Inspection. Prepare the above list of supporting materials first and conduct self-inspection after communicating with the relevant tax officer to understand the situation. Companies that have evidence to prove they are bona fide invoice purchasers should actively respond to the tax authorities’ inspection and cooperate with the follow-up investigation. The enterprise will usually pass the tax inspection successfully if they respect all the conditions mentioned previously.

If you have any questions, please feel free to contact us.

References:

«Circular of the State Administration of Taxation on the Settlement for the Taxpayers Obtaining the False Special Invoice of Value-added Tax without Acknowledgement»

http://www.chinatax.gov.cn/chinatax/n359/c448/content.html