According to the "Tax Compliance Report on the Pharmaceutical Industry (2024)" released by Beijing Huashui Law Firm, since the "14th Five-Year Plan", the main business income of the mainland pharmaceutical industry has increased by 9.3% per year, and the total profit has increased by 11.3% per year, and the scale efficiency of the industry has continued to improve. However, while the pharmaceutical industry is developing rapidly, the risk of false VAT invoices cannot be ignored. Liu Tianyong, director of Huashui Law Firm, said that pharmaceutical companies should firmly establish the awareness of tax risk prevention and control, improve the awareness of honest tax payment in accordance with the law, improve the degree of tax informatization of enterprises, standardize the review and management of invoices and various vouchers, and prescribe a good "prescription" for tax compliance.
Common risk point 1: False invoicing through the online service platform
In May 2023, a case reported on the official website of the State Administration of Taxation showed that a criminal gang controlled A Medical Technology Co., Ltd. and used the fictitious business of upstream Internet platform enterprises to falsely issue 3,872 special VAT invoices for information services and marketing fees to a number of pharmaceutical manufacturers, with a total price and tax amount of 353 million yuan.
In practice, there are many possibilities for the suspected false opening of pharmaceutical online service platforms: first, in order to seek profits, regardless of the authenticity of the business, they forge supporting materials and actively cooperate with pharmaceutical companies to issue false invoices; second, they are colluded and defrauded by pharmaceutical companies, consulting companies and service providers, and fail to verify the authenticity of the business, resulting in false invoices; third, the pharmaceutical online service platform provides corresponding services, but lacks relevant materials to prove the authenticity of the business, so it is determined to be falsely opened.
In this regard, Jiang Zhenghe, a partner of Huashui Law Firm, suggested that after a similar situation occurs, pharmaceutical companies, as the recipient of invoices, should actively prepare business and financial information, and explain the authenticity of the business to the tax and public security. If an online service platform evades taxes or opens falsely by inflating items, the enterprise can claim that the platform's input and output should be separated, because although the platform's input is false, the services it provides to the downstream may be genuine, and the sales may not necessarily constitute false opening. If the business of the pharmaceutical enterprise is indeed real, and there is no subjective intention to issue false invoices, on the one hand, it can claim that it obtained false invoices in good faith to avoid criminal risks, and on the other hand, it should prove that the business is true and the costs and expenditures are legitimate, and strive not to be adjusted to the enterprise income tax.
Acquisition in good faith is a civil law concept. According to tax laws and regulations, it can be determined that the special VAT invoice issued by the company is obtained in good faith if the following four conditions are met: first, the buyer and the seller have real business transactions; second, the seller uses the special invoice of the province (autonomous region, municipality directly under the Central Government and city specifically designated in the state plan); third, the content filled in the special VAT invoice is consistent with the real business, mainly including the name of the seller, the seal, the quantity of goods, Fourth, there is no evidence that the buyer knew that the special invoice provided by the seller was obtained by illegal means.
Common risk point 2: False invoicing and bribery are implicated in each other
In January 2023, Anhui Province released five typical cases of bribery. Among them, Xiao Moumou, a legal person of Anhui B Minsheng Pharmaceutical Co., Ltd., was sentenced to 20 years in prison and fined 100,000 yuan for false issuance of special VAT invoices and other crimes. While serving his sentence, he was found to have also committed the crime of offering bribes, and successively offered bribes totaling 2,295,306 yuan and 13,000 US dollars to 11 state officials. For committing the crime of offering bribes, Xiao Moumou was sentenced to 6 years in prison and fined 300,000 yuan.
According to the analysis of the "Tax Compliance Report of the Pharmaceutical Industry (2024)", the relevant departments have strict supervision of drugs and medical devices, and their sales require the endorsement of hospitals and other medical institutions. In order to expand the sales of drugs, pharmaceutical companies often give benefits to doctors and other relevant personnel, which breeds the soil for bribery. In practice, pharmaceutical companies and medical representatives often choose to obtain bribe funds through false invoicing.
The Guidelines for the Prevention and Control of High-Incidence Crime Risks issued by the Jiangxi Provincial High People's Court point out that enterprises shall not reduce the amount of income tax and other taxes paid by enterprises by purchasing ordinary invoices at low prices or issuing false invoices, listing multiple costs, or taking advantage of the difference in tax rates in different industries to evade taxes; Those who commit the above acts while committing the crime of false invoicing, tax evasion, bribery by a unit, and other crimes will be given a heavier punishment based on the circumstances of the crime. Judging from the public cases, false opening and bribery in the pharmaceutical industry are often implicated in each other, and there are those who choose one of the felonies to be punished, and there are also those who are punished for the crime of false opening and bribery, and the sentence will be higher.
Wu Xiaohong, director of the Modern Finance and Taxation Governance Research Center of Hefei University and director of the China Finance and Taxation Law Research Society, reminded that in the next few years, the pharmaceutical industry may still be the focus of tax inspection. For pharmaceutical companies that have violated laws and regulations, intending to reduce their own tax burden and make illegal profits, the tax risk will always be high. "Pharmaceutical companies should seize the time to self-examine and self-correct whether there are false openings and bribery, respond to and resolve the risks that may be involved in criminal punishment, strengthen the construction of internal control and compliance mechanisms, and standardize their own behavior. Wu Xiaohong said.
Common risk point 3: false invoices for the purchase of agricultural products
In July 2023, in the audit of a social security project, the audit department verified the business flow, capital flow and logistics of the enterprise by understanding the business characteristics of the pharmaceutical distribution industry, using financial, tax, and industrial and commercial related data for comparison, and investigated the identity of the sales farmers and the local traditional Chinese medicine planting transactions on the spot. At the same time, Pharmaceutical Company C also colluded with other pharmaceutical companies to falsely issue special VAT invoices of nearly 150 million yuan for other pharmaceutical companies through circular invoicing without real business, resulting in serious losses in national tax revenue.
Yang Feng, head of the goods and services tax section of the Bozhou Municipal Taxation Bureau of the State Administration of Taxation, said that for the purpose of protecting and supporting the development of the "three rural" areas, the mainland allows buyers of agricultural products to issue purchase invoices to individual agricultural producers, and calculate or verify the deduction of VAT input tax. Although agricultural producers are not required to pay VAT on the sale of their own agricultural products, purchasers can still deduct input VAT with agricultural product purchase invoices. Some criminals take advantage of this to increase the cost of enterprises by falsely issuing invoices for the purchase of agricultural products, so as to obtain funds, bribe institutions in the downstream chain such as medicine to expand sales, or deduct input through false invoices for the purchase of agricultural products, so as to achieve the illegal purpose of underpaying value-added tax and enterprise income tax.
In the above case, Pharmaceutical Company C did not purchase and sell real goods, and had no obligation to pay VAT to the state. However, the false VAT special invoice will be used by the invoice recipient to deduct the tax but not pay the tax, resulting in the loss of national tax revenue. Yang Feng reminded that the judgment of false opening crime cannot ignore the substantive judgment of whether it has caused tax losses. If Pharmaceutical Company C falsely issues special VAT invoices for the purpose of inflating performance, not for the purpose of defrauding tax credits, and does not actually cause a loss of state tax revenue, it does not constitute the crime of falsely issuing special VAT invoices.
Source: China Tax News, April 19, 2024, Edition: 07, Author: Xu Mengya, Author's Affiliation: Bozhou Taxation Bureau, State Administration of Taxation. The content of this article is for general information purposes only and is not intended as formal auditor, accounting, tax or other advice, and we cannot guarantee that such information will remain accurate in the future. No person should act on the basis of the information contained herein without having due regard to the relevant circumstances and obtaining appropriate professional advice. The articles reproduced in this issue are for academic exchange purposes only. The original copyright of the article or material belongs to the original author or original copyright owner, and we respect copyright protection. If you have any questions, please contact us, thank you!