Some group enterprises operate "capital pools": why do they pay large amounts of taxes under "regular operations"?

The so-called "capital pool" is a space for storing funds like a reservoir formed by the group enterprises that pool the funds of the member enterprises and affiliated enterprises within the group and cooperate with the bank. In this way, the group enterprise can use idle funds to improve financial returns, and subsidiaries and related parties can often obtain liquidity at a cost much lower than the market interest rate.

The use of "capital pool" for capital operation is a common capital allocation strategy used by group enterprises. Through the establishment of a "capital pool", the group company can enhance its control over its subsidiaries and affiliates. The so-called "capital pool" is a space for storing funds like a reservoir formed by the group enterprises that pool the funds of the member enterprises and affiliated enterprises within the group and cooperate with the bank. In this way, the group enterprise can use idle funds to improve financial returns, and subsidiaries and related parties can often obtain liquidity at a cost much lower than the market interest rate. In this process, the tax-related risks involving free lending between companies within the group are easy to be overlooked.

Specific cases

When the Luoyang Municipal Taxation Bureau of the State Administration of Taxation conducted a risk scan of the relevant enterprises in the jurisdiction that had been losing money for a long time and used normal bills, it found that there were suspicious points in the capital transactions between a group enterprise A and its two subsidiaries, Company M and Company N, and Company B, an affiliate of enterprise A. Company A is a leading enterprise in the local manufacturing industry and a high-tech enterprise, with a wide range of business scope. After comparing the financial statements, the tax department found that the two companies M and N and their affiliated company B had serious book losses, and the financing from financial institutions was very small, and the asset-liability ratio of the three companies exceeded 130%, and Company N had even lost its share capital.

After an in-depth investigation, the tax cadres found that enterprise A carried out capital operation by setting up a "capital pool". The specific mode of operation is as follows: enterprise A collects the funds of its subsidiaries and affiliated enterprises into the headquarters account for market operation and the purchase of wealth management products, and at the same time, by virtue of goodwill, issues commercial bills to affiliated enterprises through a number of banks. Relevant enterprises are discounted with bills for daily operations, so as to achieve the purpose of meeting the daily operating capital needs with lower financing costs. Before the maturity of a batch of commercial bills, enterprise A continues to issue new commercial bills and requires the drawee company to discount and repay the previous bills. In this way, it not only satisfies the purpose of enterprise A to concentrate funds to increase revenue, but also reduces the daily financing cost of affiliated enterprises. In the five years from May 2019 to May 2023, Company A successively issued a total of 6.138 billion yuan of commercial bills to Company M, Company N and Company B, but after cross-comparison with the tax information declared by the enterprise, it was found that the enterprise with this part of the current funds did not declare and pay taxes in full and in a timely manner.

risk analysis

The tax authorities conducted an analysis of the tax risks between enterprise A and its member companies.

In terms of VAT, according to Article 3 of the CS [2019] No. 20), from February 1, 2019 to December 31, 2020, the gratuitous lending of funds between units within an enterprise group (including enterprise groups) is exempt from VAT. Later, the Ministry of Finance and the State Administration of Taxation jointly issued an announcement to extend the implementation period of the policy to December 31, 2027. Therefore, the gratuitous borrowing of funds between Company M and Company N is not subject to VAT. However, for the affiliated enterprise Company B, which is not a unit within the enterprise group, according to the relevant provisions of the "Cai Shui [2016] No. 36), the free lending of funds between affiliated enterprises shall be regarded as the provision of loan services for VAT purposes. In this case, Company A and Company B are affiliated enterprises of each other, and whether Company B injects capital into the "capital pool" of Company A, or whether Company A provides free funds to Company B, it should be regarded as providing loan services, and shall pay VAT at the rate of 6%, as well as taxes such as urban construction tax and education surcharge.

In terms of enterprise income tax, according to Article 41 of the Enterprise Income Tax Law, if the business dealings between an enterprise and its related parties do not comply with the arm's length principle and reduce the taxable income or income of the enterprise or its related parties, the tax authorities have the right to adjust it in accordance with reasonable methods. In other words, when an affiliated enterprise borrows funds for free, the fund provider shall be deemed to have provided loan services to the borrower in accordance with the arm's length principle, and the interest income shall be calculated according to the interest rate of the same type of loan in the same period and shall be taxed in accordance with the law. The borrower's qualified interest expenses can be used as costs and expenses to be charged before enterprise income tax. At the same time, the Tax Administration Law stipulates that if the interest paid or received by the financing funds between a taxpayer and its affiliated enterprises exceeds or falls above or below the amount that can be agreed upon between the enterprises without an affiliated relationship, or the interest rate exceeds or is lower than the normal interest rate of the same type of business, the tax authorities may adjust the tax payable.

In this case, the interest income between its affiliates was not actually paid, and the income was not recognized and taxed according to the interest rate of the same type of loan in the same period. At the same time, enterprise A is a high-tech enterprise and the actual tax burden is low, and after further calculation, there is still a 9.8% tax difference between the enterprise income tax burden of company M and N after deducting the enterprise income tax burden other than making up for losses, and the enterprise income tax burden of enterprise A is still 9.8%, and no interest is actually paid to each other, so the tax authorities adjust the interest tax basis and taxable income of the relevant enterprise capital transactions. At the same time, the income from the purchase of wealth management by enterprise A through the idle funds in the "capital pool" should also be included in the taxable income.

In the end, under the guidance of the tax department, Company A paid 38.7287 million yuan of value-added tax and surcharge, enterprise income tax, stamp duty and other taxes and late fees, and Company B paid 4.849 million yuan of value-added tax and its surcharge, enterprise income tax, stamp duty and other taxes and late fees.

Risk Warning

The author reminds that the financial collusion relationship of group enterprises is complex, and the capital exchanges of upstream and downstream enterprises are relatively frequent, so the internal financial risk control department of the enterprise must further sort out the capital operation chain, and pay more attention to the learning and mastery of relevant tax-related policies in the process of improving management efficiency and revitalizing funds, so as to realize the reasonable distribution of profits and the truthful adjustment of the taxable income of the enterprise income tax, so as to ensure that the tax-related risks are resolved while the efficient use of funds is realized, and the compliance operation of the enterprise is ensured.

Source: China Tax News, April 19, 2024, Edition: 07, Author: Li Jing, Zhao Xing, Li Sihai, Duan Linpeng, Author's Affiliation: Luoyang 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!