Lawyers Liu Tianyong and Zhang Qian were interviewed and published on tax compliance in the coal industry

Editor's note: According to the "2023 Annual Report on the Development of the Coal Industry" recently released by the China Coal Industry Association, the mainland's raw coal output last year was 4.71 billion tons, a year-on-year increase of 3.4%, a record high. As the basic energy source of the mainland, coal occupies an important strategic position in the national economy. In the field of taxation, the tax-related risks of the coal industry show the characteristics of multiple taxes and links, and the problems of false opening and tax evasion in the operation process of coal enterprises are prominent, which restricts the healthy and sustainable development of the coal industry. Recently, the Supreme People's Court and the Supreme People's Procuratorate also mentioned at the press conference on judicial interpretations and typical cases of tax-related crimes that the coal industry is a high-incidence area for false tax fraud. Under the regulatory trend of the eight departments across the country to jointly crack down on tax-related violations and crimes, the tax compliance of coal enterprises is urgent. Since 2021, Huashui has continuously launched tax compliance reports for the coal industry, and continues to pay attention to the latest regulatory situation and tax-related risks of enterprises in the coal industry. Recently, lawyers Liu Tianyong and Zhang Qian of Huashui Law Firm were interviewed by China Tax News on the common tax-related risks and corporate compliance suggestions in the coal industry, analyzed the tax-related risks existing in the purchase, sale, processing and equity transfer of coal enterprises, and discussed the causes of the risks and countermeasures. In addition, based on the many tax-related risks existing in the coal industry, lawyer Liu Tianyong published the article "Coal Enterprises Should Transform, Tax Should Be Compliant", and put forward suggestions for the prevention and control of tax-related risks of coal enterprises from four aspects: standardizing business processes, improving management systems, strengthening internal control teams, and regularly investigating risks. The full text is as follows.

A small flame can destroy thousands of acres of greenery

-- Tax experts advise coal companies to pay attention to the prevention and control of tax risks and avoid leaving "fire" hazards

Coal is the mainland's basic energy source and important industrial raw material, shouldering an important responsibility to ensure energy security. According to the "Coal Industry Tax Compliance Report (2024)" released by Beijing Huashui Law Firm, among the 145 tax-related administrative cases in the coal industry in 2023, 34 were false invoicing cases, accounting for more than 23%. Relevant experts said that some coal enterprises are likely to have different degrees of tax risks in the process of improving production efficiency and accelerating green transformation, and relevant enterprises should pay attention to preventing and controlling tax risks in all aspects of production and operation.

Reporter Kang Xiaobo, Pei Shiming, correspondent Guo Kaihua

According to the "2023 Annual Report on the Development of the Coal Industry" recently released by the China Coal Industry Association, in 2023, the country's raw coal output will be 4.71 billion tons, a year-on-year increase of 3.4%, a record high. While the output of raw coal is increasing, the tax-related violations of laws and regulations of some coal enterprises cannot be ignored. According to the "Coal Industry Tax Compliance Report (2024)" (hereinafter referred to as the "Report") released by Beijing Huashui Law Firm, there will be 145 tax-related administrative cases such as false invoicing and tax evasion in the mainland coal industry in 2023, and tax-related risks exist in all aspects of production and operation. "For coal enterprises, it is necessary to pay attention to the prevention and control of tax risks in all aspects of production and operation to avoid leaving 'fire' hazards. Liu Tianyong, director of Beijing Huashui Law Firm, said.

Purchase and sales: Excessive sales lead to the risk of false opening

In the process of coal purchase and sales, cases of false VAT invoices are not uncommon. According to the report, among the 145 tax-related administrative cases in the coal industry in 2023, 34 were false invoicing cases, accounting for more than 23%.

Liu Tianyong said that the reason why the risk of false invoicing frequently occurs in the coal purchase and sales link is closely related to the characteristics of the industry. At present, the mainland implements a quota system for coal mining, and some coal mining enterprises, especially small enterprises, cannot sell and provide special VAT invoices in their own names for coal mined in excess of the quota. In this case, there are modern opening, affiliation and other modes in the industry, which is easy to breed the risk of false invoicing.

Coal Trading Company A in Province S mainly buys commercial coal from coal chemical companies and sells it directly to local coal users and small factories, and since consumers and small factories rarely ask Company A to issue invoices, Company A generates a large amount of surplus input invoices. Company B mainly purchases raw coal from small coal kilns and sells it to coal chemical companies. Due to the over-mining of small coal kilns, invoices could not be issued in accordance with the law, and Company B had the problem of insufficient input for a long time. Through the introduction of the intermediary, Company B reached a cooperation with Company A: Company B obtained input invoices from Company A by paying a certain invoicing fee to Company A. In the invoicing process, Company B provided the pound bills and settlement statements made by purchasing raw coal to Company A, and Company A issued invoices according to the quantity and amount recorded in the documents.

Through tax big data analysis and on-the-spot investigation, the local tax authorities found that there was no relationship between Company A and Company B for the purchase and sale of goods, but Company A issued invoices to Company B, which was "issuing special VAT invoices for others or for others without purchasing or selling goods", which constituted false issuance of special VAT invoices, and should be investigated for corresponding legal responsibility and transferred to the judicial authorities for handling. The court held that Company B's actions subjectively had the intention and purpose of undermining the order of the state's invoice management, objectively violated the state's prohibitive provisions on special VAT invoices, and carried out the act of purchasing special VAT invoices from entities that had no right to sell special VAT invoices by paying invoicing fees, thereby undermining the state's administrative order on special VAT invoices, and its conduct met the constitutive elements of the crime of illegally purchasing special VAT invoices, and finally convicted Company B of the crime of illegally purchasing special VAT invoices.

Liu Deming, head of the tax risk management unit of the Yuxian Taxation Bureau of the State Administration of Taxation, told reporters that in practice, some coal trading companies are greedy for cheap and lucky, mistakenly thinking that they will not be found if they "quietly" purchase over-mined coal in private and obtain false invoices. At the same time, in recent years, the mainland coal industry has been in a seller's market, and in the face of fierce market competition, some small coal mines have sought to cooperate with large formal coal mines to carry out coal sales through the mode of affiliated operation, resulting in the situation of "separation of tickets and goods", and at the same time there are advances, loans, etc., which are easy to be identified by the taxation, public security and other departments as not having the return of funds for real goods transactions. In the affiliation mode, there are also situations where oral agreements are used instead of written contracts, which leads the relevant authorities to doubt the authenticity of the affiliation, and then deny the establishment of the affiliation model and determine that the enterprise has false opening.

Liu Tianyong suggested that when purchasing coal, relevant enterprises should pay special attention to whether the seller is affiliated with the phenomenon, learn more about the identity of the seller's business personnel, and timely check whether there is an inconsistency between the "three flows" of goods flow, capital flow and invoice flow. If there is an act such as instructing delivery, it is necessary to keep the other party's explanatory documents, proof of entrusted delivery, etc., and if necessary, the other party should be required to issue a statement of the situation to prove the authenticity of its own business. After the completion of the transaction, the coal trading enterprise shall properly keep the contract, invoice, transport documents, weighing bills, remittance orders and other information related to the transaction.

Processing: "Packaging" of taxable goods into non-taxable goods

In the coal processing sector, there are also many tax-related risk cases. According to the reporter's understanding, the processing links of the coal industry mainly include classified processing and deep processing, both of which may have different risks.

Zhang Qian, a partner at Beijing Huashui Law Firm, said that classified processing generally refers to the process of removing mineral impurities and harmful elements from coal by applying physical and chemical methods to produce different quality coal varieties through screening, coal molding, coal pulping and other links. In practice, some classified processing enterprises believe that the tax authorities do not understand the technical process, and try to achieve the purpose of concealing real income and evading taxes by confusing coal and related by-products, and eventually the risk occurs.

Company T is mainly engaged in coal washing and sorting and processing business. When the tax authorities used tax big data to conduct risk screening, they found that there was a serious imbalance between the proportion of medium coal produced and sold by Company T and the dumped gangue - under normal circumstances, the proportion of medium coal output in raw coal is 15%~30%, and the proportion of gangue as a solid waste produced in the process of raw coal washing is between 10%~20%, that is, the output of medium coal is higher than that of gangue. However, the weight of gangue produced by Company T is twice that of China Coal, which is obviously inconsistent with the basic situation of the industry. After an in-depth investigation, the tax authorities found that Company A sold China Coal to the outside world through off-the-books operations, and recorded China Coal as gangue in the account books, which was a hidden income. The tax authorities determined that Company T constituted tax evasion, and the amount recovered exceeded 5 million yuan in accordance with the law.

Coal deep processing mainly includes coking and coking chemical product recovery and processing, coal gasification, coal-to-liquid, etc. In practice, some enterprises engaged in coal deep processing fail to understand and grasp the tax policies and regulations in a timely manner, resulting in risks in the treatment of consumption tax.

Company H is an enterprise engaged in coal mining, washing, sales and coal processing. In 2019, the company plans to add the construction of coal-to-liquid projects to use coal and other raw materials to process and produce light coal tar and other products. At the end of 2020, the basic construction of the project was completed, and Company H began to carry out the research and development and production of coal deep processing products. At this time, the state did not clearly stipulate the levy of consumption tax on products such as light coal tar. In June 2023, the Ministry of Finance and the State Administration of Taxation issued the Announcement on the Implementation of the Consumption Tax Policy on Some Refined Oil Products (Announcement No. 11 of 2023 of the Ministry of Finance and the State Administration of Taxation, hereinafter referred to as Announcement No. 11), clarifying that the consumption tax on mixed aromatics, heavy aromatics, mixed C8, stabilized light hydrocarbons, light oil, and light coal tar shall be levied according to naphtha. However, after the issuance of Announcement No. 11, Company H still mistakenly believed that light coal tar products were not subject to consumption tax. Later, after the risk reminder and policy guidance of the tax department, Company H discovered the error, paid the consumption tax and paid the corresponding late fee.

Zhang Qian said that from a practical point of view, the technical process in coal processing, especially deep processing, is more complex, but relevant enterprises cannot try to rely on complex technology to "package" taxable products as non-tax products, and the result of this can only be "lifting a stone to shoot themselves in the foot". In particular, after the issuance of Announcement No. 11, relevant enterprises must carefully refer to the policies and regulations to accurately determine whether the processed products fall within the taxable scope of consumption tax, and if so, they should promptly register for consumption tax and improve the follow-up tax treatment. "If an enterprise cannot accurately judge whether the processed products are treated as naphtha and pay consumption tax, it should take the initiative to communicate with the competent tax authorities, and truthfully and comprehensively provide relevant materials such as product testing certificates, and accurately carry out tax treatment under the guidance of the tax authorities. Zhang Qian said.

Equity transfer: The taxable value is not fair value

With the acceleration of the transformation and upgrading of the coal industry in recent years, integration and optimization, many coal enterprises have undergone equity transfers, and the tax-related risks arising in this process are also worthy of attention.

Chen, a natural person, holds 30% of the equity of A Coal Co., Ltd. In October 2021, Chen transferred all the equity of Company A held by him for a transfer price of 12 million yuan, and made tax declarations and handled equity change registration. When the local tax authorities conducted a tax risk analysis of the equity transfer activities in the jurisdiction, they found that according to the registration information of the prospecting rights and mining rights of Coal Company A and the coal resource reserves of the coal mines to which it belongs, Chen's equity transfer may have a low tax basis. After inspection, the tax personnel found that the main assets of Coal Company A were prospecting rights and mining rights, and Chen's equity transfer price was indeed obviously low and without justifiable reasons, which failed to reflect the fair value of the corresponding equity of Company A. In accordance with the provisions of the Announcement of the State Administration of Taxation on Issuing the Administrative Measures for Individual Income Tax on Income from Equity Transfer (for Trial Implementation) (Announcement No. 67 of 2014 of the State Administration of Taxation), the tax authorities verified Chen's equity transfer income and required him to pay back taxes and impose late fees.

Yang Yanming, deputy chief of the income tax section of the Yangquan Municipal Taxation Bureau, said that from a tax point of view, the equity transfer of coal enterprises is a major tax-related matter, and it is necessary to ask the competent tax authorities for guidance in advance, because the equity transfer not only involves "visible" tangible assets, but also may involve prospecting rights, Mining rights and other intangible assets, not only consider the share of net assets corresponding to the equity at the time of transfer, but also consider the possible benefits of future profitability.

Yang Yanming suggested that the financial team and shareholders of coal enterprises should be familiar with and grasp the Notice of the Ministry of Finance and the State Administration of Taxation on Several Issues Concerning the Treatment of Enterprise Income Tax on Enterprise Restructuring Business (CS [2009] No. 59), the Announcement of the State Administration of Taxation on Issues Concerning the Application of Special Tax Treatment to the Equity Transfer of Non-resident Enterprises (Announcement No. 72 of 2013 of the State Administration of Taxation), and the Announcement of the State Administration of Taxation on Issuing the Administrative Measures for Individual Income Tax on Income from Equity Transfer (Trial) (Announcement No. 67 [2014] of the State Administration of Taxation) and other policies, accurately determine the original value of the cost of equity transfer, reasonably choose the cost method, market method and income method to determine the income from equity transfer, and maintain close communication with the competent tax authorities to avoid tax-related risks caused by blind pricing.

Liu Tianyong, director of Beijing Huashui Law Firm, reminded that in the process of transferring the equity of coal enterprises, the transferor should also pay attention to the timing of tax declaration to avoid risks arising from late declarations. According to the relevant policies, if a corporate shareholder transfers the equity of a coal mining enterprise, the realization of income shall be recognized when the transfer agreement takes effect and the formalities for the change of equity are completed; for individual shareholders, if the share transfer agreement takes effect, the price is paid or partially paid, and the transferee shareholder actually performs the duties of a shareholder, the withholding agent and the taxpayer shall declare and pay taxes to the in-charge tax authorities within 15 days of the following month in accordance with the law. In addition, in order to prevent the transaction default after the share transfer agreement takes effect and the tax liability arises, the transferor may also make a clear agreement in the share transfer agreement in advance, and if the transferee has a breach of contract and the equity transfer transaction is terminated, it shall bear the losses caused by the transferor's inability to return the tax paid. Liu Tianyong said.

Coal companies need to transform and comply with tax regulations

Liu Tianyong

With the steady progress of the goal of carbon peak and carbon neutrality, the coal industry, as one of the main energy sources in the mainland, is accelerating the pace of green and low-carbon transformation. According to the "2023 Annual Report on the Development of the Coal Industry" (hereinafter referred to as the "Report") recently released by the China Coal Industry Association, the green and low-carbon transformation of the mainland coal industry has achieved new results, with more than 1.03 billion kilowatts of ultra-low emission transformation of coal-fired power installations nationwide, a decrease of 0.2% per kilowatt-hour of standard coal consumption for thermal power generation, and continuous improvement of the ecological environment quality in mining areas, with a comprehensive energy consumption of 9 kg of standard coal per ton, a year-on-year decrease of 7.2 percentage points. However, in the face of the complex international energy situation and new development requirements, the green and low-carbon transformation of the coal industry still has a long way to go. In this regard, the report proposes that in 2024, efforts should be made to improve the level of clean and efficient utilization of coal, and comprehensively fight the battle of clean and efficient utilization of coal.

For coal enterprises, green and low-carbon transformation is a challenging and systematic project, enterprises should not only change the traditional extensive business philosophy, but also innovate clean and efficient use of technology, the introduction of energy-saving and environmental protection equipment and professional talents, but also with the determination of "strong men break their wrists" to eliminate backward production capacity, optimize and reorganize business sectors...... This process is not only inseparable from capital investment, but also needs to be guaranteed by a healthy and good industry ecology. However, in recent years, there have been many cases of tax-related violations in the coal industry, and the main links of coal enterprises' production and operation may involve tax risks. If the prevention and control is not effective, it will have an adverse impact on the transformation and upgrading of coal enterprises. Under such circumstances, coal companies must attach great importance to tax compliance and take effective measures to enhance tax risk prevention and control capabilities, so as to lay a solid foundation for successful transformation.

——Standardize business processes. Non-standard business practices are the source of tax risks. From a practical point of view, there may be hidden risks in the current coal industry, whether in the purchase and sale, processing and other links, or in the equity transfer link. In this regard, coal enterprises should carefully review their own business processes, and effectively standardize the process of business development with a sound system and strict management. For example, the relevant enterprise can establish a sound written contract review and retention system, and properly design the terms of the transaction contract based on the system before entering into a transaction with the partner, in which the tax-related terms such as the type, item, tax rate, invoicing time, tax subject, off-price expenses, and liability for breach of contract can be clearly and unambiguously stipulated, and properly keep the contract, invoice, transportation documents, remittance notes and other materials and evidence related to the transaction after the transaction is completed.

-- Improving the management system. The coal industry has a long industrial chain, from upstream coal mining, to coal transportation, and then to downstream coal processing, the whole process involves many types of taxes, in addition to common taxes such as value-added tax, enterprise income tax, stamp duty, etc., but also involves resource tax, water resource tax, consumption tax and other taxes. It is necessary for coal enterprises to sort out in detail what taxes are involved in their own business, what are the policies and regulations of these taxes, and on this basis, establish a sound management system, clarify the responsibilities of financial and taxation personnel, and the practical operation specifications of each tax, so as to ensure that each tax can be handled in compliance and accurately.

——Strengthen the internal control team. With the in-depth development of smart taxation, tax authorities continue to improve the level of precise supervision through tax big data. For qualified coal enterprises, they can strengthen digital construction and promote the deep integration of industry, finance and taxation. For example, relevant enterprises can develop appropriate ERP management systems according to their own basic conditions, strategic development goals, basic processes of procurement, supply and marketing, etc., covering procurement, weighing, production, sales, settlement, finance, taxation and other processes, further standardize production, transportation, supply and marketing, and financial and tax processing behaviors, realize real-time data transmission, synchronous restrictions, and non-tampering, better protect the authenticity of business, and realize effective control of the whole business process. At the same time, coal enterprises can also set up internal control teams or departments based on their own actual conditions, so that major transactions are reviewed by professionals, and regularly conduct tax-related risk prevention training to the management of the enterprise's business, finance, administration and other departments, so as to further enhance the compliance awareness of all members of the enterprise.

- Regularly check for risks. Coal enterprises should attach great importance to regular "physical examination", from the authenticity of business, the authenticity of goods, the receipt and payment of funds, the consistency of bills and goods, tax payment and other aspects of a comprehensive investigation of whether there are risks and hidden dangers; In addition, if a coal enterprise has already had a tax risk or even a tax crisis, it must not be left to chance, let alone try to conceal the truth, and should actively cooperate and provide relevant materials truthfully, comprehensively and accurately according to the requirements of the tax department. When the conclusion of the tax audit is announced, the enterprise should actively respond to the rectification of non-compliant business operations and mitigate the risks as much as possible.

(Author's Affiliation: Beijing Huashui Law Firm)