Fax of tax case: Wrongly listed publicity expenses, and paid 1.21 million yuan in back taxes and late fees

Lots of ads from peers

Why does this pharmaceutical company spend so little on advertising?

Recently, the Shenzhen Pingshan District Taxation Bureau of the State Administration of Taxation carried out a tax verification on D Pharmaceutical Company based on the suspicious points of enterprise expenses found during the tax risk analysis, and confirmed that the enterprise had a wrong understanding of the pre-tax deduction provisions of advertising expenses and business publicity expenses (hereinafter referred to as publicity fees) in the tax law, resulting in the wrong listing of publicity expenses and under-declaration and payment of enterprise income tax in the verification year. The Pingshan District Taxation Bureau required D Pharmaceutical Company to adjust the pre-tax expenses, increase the taxable income, and make a decision to pay the enterprise income tax and impose a late fee of 1.21 million yuan in accordance with the law.

There are a lot of sales expenses for enterprises, why is advertising spending scarce?

Not long ago, when the tax personnel of the Pingshan District Taxation Bureau of Shenzhen conducted a tax risk analysis of the enterprises in the jurisdiction, they found that the collection of publicity fees of D Pharmaceutical Company was abnormal, and there were suspicions of exceeding the scope of pre-tax expenditure and underpaying taxes. The Pingshan District Taxation Bureau quickly organized risk response personnel to verify the tax payment of D Pharmaceutical Company.

The tax officer learned that D Pharmaceutical Company is a joint venture, mainly producing and operating sprays, nasal sprays and other medicines. By carefully reviewing the enterprise income tax statements of Pharmaceutical Company D, they found that the sales expenses to operating income of Pharmaceutical Company D from 2020 to 2022 accounted for 81.61%, 76.31% and 65.37% respectively, but the proportion of publicity expenses to operating income in the same period was 0.04%, 0.15% and 0.04% respectively.

Pharmaceutical production and sales enterprises usually use a large number of advertising and large-scale business promotion to sell their products, and the proportion of publicity expenses to operating income is so low, which is very abnormal. At the same time, the tax officer also found a special situation, the enterprise has a large number of sales expenses, which are filled in the "other" column of the period expense schedule in the income tax return.

What's going on?

The tax personnel further analyzed the information of all invoices obtained by Pharmaceutical Company D from 2020 to 2022, and found that the expenses filled in the "Other" column in the expense schedule for the above-mentioned period were mainly "*modern services*promotion service fees", and the enterprise names of the invoices of these invoices all had the words "marketing planning" and so on.

According to the relevant tax laws, the pre-tax deduction of publicity expenses of pharmaceutical manufacturing enterprises cannot exceed 30% of the operating income of the same period.

Therefore, in light of the above-mentioned verification and analysis, the tax officer believes that Pharmaceutical Company D may have problems in the accounting and tax declaration of the company's publicity expenses, and the actual amount of publicity expenses incurred by the company is likely to exceed the deduction limit stipulated in the tax law, but it has not made tax adjustments before tax.

Therefore, they decided to first interview Liu, the financial director of D Pharmaceutical Company, to understand and verify the specific situation.

Mr. Liu introduced the various operations of the enterprise to the tax personnel, saying that the various businesses were true and effective, and there were no problems. At the same time, it insisted that the invoices obtained by the company were legal and compliant, and there was no problem with accounting, and that the reason why the company obtained a large number of service fee invoices was because the upstream enterprises provided planning and other services to the company.

Therefore, according to the information obtained from the verification of the company's invoices in the early stage, the tax officer listed the list of upstream invoicing companies to Liu, and asked him to provide the business contracts, bank statements, work lists and other information of the relevant enterprises in the list and D Pharmaceutical Company for further verification.

Carefully examine and find out the crux of the problem, explain the law and explain the reason to make up the tax

Soon after, Pharmaceutical Company D provided the "Comprehensive Business Service Contract" signed between it and the upstream enterprise as required, bank statements and other materials. In these contracts, both parties have made clear the service items and contents, requirements, amounts and acceptance criteria.

When carefully reviewing the various service contents in the contract, the tax officer found that in the attached "Comprehensive Business Promotion Service Work List", the business channel expansion, hospital service maintenance, chain pharmacy services and third terminal services provided by the upstream enterprises are all used to help D pharmaceutical company to carry out product marketing and target group promotion, etc., which are in line with the provisions of the tax law on the nature of publicity fees in the operation of enterprises, and these service expenses should be included in the publicity fees for accounting according to law.

As a result, the tax officer interviewed Liu again and asked him to explain why the company did not collect the above-mentioned service fees as publicity fees.

In this regard, Liu said that there were no words such as advertising, publicity, and promotion in the service contracts signed by the company and upstream enterprises, and in terms of form, they did not conform to the definition of advertising and publicity fees in the provisions of the "(Guo Shui Fa [2000] No. 84).

Liu said that Article 41 of the document (Guo Shui Fa [2000] No. 84) stipulates: "The advertising expenses declared and deducted by taxpayers should be strictly distinguished from sponsorship expenses. Taxpayers must meet three conditions to declare and deduct advertising expenses: the advertisements are produced through a special agency approved by the industrial and commercial department, the expenses have actually been paid and the corresponding invoices have been obtained, and the advertisements have been disseminated through certain media. ”

The tax officer explained the relevant legal provisions to Liu in detail. The tax officer said that the full text of the document (Guo Shui Fa [2000] No. 84) had expired in 2010, so the description of the relevant business in it was no longer applicable to enterprise accounting.

In addition, although the services covered by Company D's service contracts did not contain the word "advertisement", their content essentially played the role of advertising and business promotion.

Article 2 of the General Provisions of the Advertising Law clearly states that commercial advertising is an activity in which "a commodity operator or service provider directly or indirectly introduces the goods or services it promotes through a certain medium and form within the territory of the People's Republic of China".

Although the tax law does not specifically specify the definition of publicity fees, according to the principle of substance over form, combined with the definition of commercial advertising activities in the Advertising Law, and the concept of publicity fees generally recognized by the market and business circles, enterprise publicity fees should refer to the expenses paid by enterprises for the sale of goods or services, publicity or various promotional activities, and their scope includes the fees paid by enterprises to advertising agencies, media or non-media communication, such as advertising fees, promotional fees, promotion fees, exhibition fees and publicity fees. Therefore, as long as the expenses related to the direct or indirect introduction and promotion of its own goods by the enterprise should be included in the scope of publicity expenses, and the expenses of "product promotion service business" are also within this scope.

Therefore, the tax officer pointed out to Mr. Liu that Company D obtained a large number of invoices with "promotion service fees", which should be included in the publicity fee in the accounting and deducted before tax on a proportional basis.

After patient analysis and explanation by the tax personnel, Liu finally recognized the opinions of the tax personnel, saying that he would re-collect and divide the publicity fee according to the actual business content. With the help of tax personnel, Pharmaceutical Company D readjusted the accounting ratio of publicity fees in the cost, revised the declaration data, increased the taxable income of the annual enterprise income tax for verification, and paid the tax and late payment penalty of 1.21 million yuan in accordance with the law.

Source: China Tax News, 2024-04-23, Edition: 06, Author: Rong Yi, Wu Qiru, Chen Yiping. 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!