Some business entities do not have a clear understanding of the criteria for identifying small-scale VAT taxpayers, and apply for small-scale taxpayers when they do not meet the prescribed conditions. This article summarizes the relevant provisions and how to correctly apply them in conjunction with a tax administrative reconsideration case.
Recently, the author has noticed that some business entities prefer to be recognized by the tax authorities as small-scale VAT taxpayers when determining the nature of taxpayers, but some do not have a clear understanding of the criteria for identifying small-scale VAT taxpayers, and also apply for small-scale taxpayers when they do not meet the prescribed conditions, and feel unacceptable after the application is rejected. A recent tax administrative reconsideration case illustrates this problem. Both parties must deepen their understanding of the relevant provisions and apply them correctly.
Case: A law firm filed a tax administrative review
On July 17, 2023, Tax Bureau A issued the Notice of Tax Matters, informing Law Firm B to go through the registration procedures for general VAT taxpayers with the competent tax authorities within 14 days after receiving the documents, or to choose to pay taxes as small-scale taxpayers. If it is not handled within the time limit, the tax payable shall be calculated according to the sales amount according to the VAT rate in the following month after the expiration of the notification period, and the input tax shall not be deducted.
On August 15, 2023, Law Firm B applied to the Tax Bureau A to elect to pay taxes as a small-scale taxpayer. On August 16, 2023, the Tax Bureau A issued a Notice of Tax Matters in response to the application, notifying Law Firm B that its application for choosing to pay taxes as a small-scale taxpayer would not be accepted, and informing it of the following reasons: first, Law Firm B is a partnership and it is self-registered as a "private partnership" in the Golden Tax Phase III system; Second, from April 1, 2022 to March 31, 2023, Law Firm B had taxable behaviors every quarter, with a total sales volume of 5,115,152.65 yuan. Therefore, Law Firm B does not belong to the situation of "non-enterprise units and enterprises that do not frequently engage in taxable behaviors" as stipulated in Article 29 of the "Regulations", and cannot choose to pay taxes as small-scale taxpayers.
Law firm B disagrees with this treatment on the grounds that the law firm is a lawyer's practice institution established in accordance with the "Lawyers Law of the People's Republic of China" and the "Measures for the Administration of Law Firms", and a law firm practice license issued by the provincial-level judicial-administrative organ; Enterprises are required to register with the local market regulatory authority and obtain a business license in accordance with the Regulations of the People's Republic of China on the Administration of Registration of Market Entities. Article 102 of the Civil Code of the People's Republic of China and Article 2, Paragraph 1 of the Regulations on Work-related Injury Insurance clearly distinguish between the concepts of law firm and enterprise. Therefore, law firms do not belong to enterprises, but to non-enterprise units. Moreover, the Circular does not stipulate that a law firm's application to choose to pay taxes in accordance with the written explanation of small-scale taxpayers is inadmissible. Therefore, Law Firm B submitted the relevant written explanation in accordance with the law, but received the decision of the Tax Bureau A not to accept the decision, believing that the basis for the tax bureau's decision was unclear and the law was wrongly applied.
On October 13, 2023, Law Firm B applied for administrative reconsideration to Tax Bureau C, the superior competent authority of Tax Bureau A.
Result: The reconsideration of the determination of the relevant disposition was "split into two"
C. The Inland Revenue Department accepts the application for reconsideration. During the reconsideration, the tax bureau of C, based on the facts of the case ascertained during the trial, determined whether the focus of the dispute in the case was whether law firm B could choose to pay taxes as a small-scale taxpayer.
After reconsideration, the Tax Bureau C determined that Law Firm B had self-declared VAT sales of RMB 5,115,152.65 during the period from April 1, 2022 to March 31, 2023, which had exceeded the VAT sales standard for small-scale VAT taxpayers, and had tax declarations for consecutive periods, and was not a taxpayer who did not frequently engage in taxable behaviors. Paragraph 3 of Article 3 of the "Regulations" stipulates that units and individual industrial and commercial households whose annual taxable sales exceed the prescribed standard but do not frequently engage in taxable behaviors may choose to pay taxes as small-scale taxpayers. Therefore, Law Firm B does not fall under the circumstance of "choosing to pay taxes according to small-scale taxpayers" as stipulated in the Implementation Measures for the Pilot Project of Replacing Business Tax with Value-Added Tax. In issuing the Notice of Tax Matters, the Tax Bureau only quoted the name of the Administrative Measures for the Registration of General VAT Taxpayers, and did not cite the relevant specific provisions of the Measures, nor did it cite the provisions of Article 3, Paragraph 3 of the Implementation Measures for the Pilot Project of Replacing Business Tax with Value-Added Tax, and when explaining the reasons for the decision not to accept the application, it held that "your company belongs to a private partnership, does not belong to a non-enterprise unit, and does not meet the application conditions", which is an error in the application of law.
On January 10, 2024, Tax Bureau C made an administrative reconsideration decision, finding that Tax Bureau A had made an error in the application of law, revoked the Notice of Tax Matters issued by it, and ordered it to make a new specific administrative act within 60 days.
Analysis: Clarify the relevant regulations and apply them correctly
According to the provisions of the VAT management system, the mainland implements classified management of VAT taxpayers, and divides taxpayers into general taxpayers and small-scale taxpayers based on the annual VAT sales amount of taxable acts, and the tax calculation methods, tax rates, and voucher management of the two are different. For example, the tax rate for the sale of goods and services by general taxpayers is 13%, and the tax payable is the balance of the current output tax after deducting the current input tax; However, if a small-scale taxpayer has a VAT payable behavior, the simple method of calculating the tax payable according to the sales amount and the collection rate shall be implemented, and the input tax shall not be deducted, and the applicable tax collection rate is generally 3%. According to Article 2 of the Announcement No. 19 of 2023 of the Ministry of Finance and the State Administration of Taxation, small-scale VAT taxpayers shall be subject to the taxable sales income at a rate of 3%, and the VAT shall be levied at a reduced rate of 1%.
In reality, many enterprises hope to be recognized as small-scale taxpayers in view of the fact that small-scale taxpayers are subject to lower tax rates than general taxpayers and can enjoy more preferential tax treatments. However, these enterprises need to understand the tax regulations for small-scale taxpayers and apply if the prescribed conditions are met.
After combing, the author believes that the current basis for the identification of small-scale taxpayers is mainly as follows:
Article 29 of the Order No. 50 of the Ministry of Finance and the State Administration of Taxation, which came into force on January 1, 2009, stipulates that other individuals whose annual taxable sales exceed the standard of small-scale taxpayers shall be taxed as small-scale taxpayers; Non-enterprise units and enterprises that do not frequently engage in taxable activities can choose to pay taxes as small-scale taxpayers.
Article 3 of the Implementation Measures for the Pilot Project of Replacing Business Tax with Value-Added Tax (effective from May 1, 2016) issued by Cai Shui [2016] No. 36) stipulates that taxpayers whose annual taxable sales amount (hereinafter referred to as "taxable sales") exceeds the standards prescribed by the Ministry of Finance and the State Administration of Taxation are general taxpayers, and taxpayers who do not exceed the prescribed standards are small-scale taxpayers. Other individuals whose annual taxable sales exceed the prescribed standard are not general taxpayers. Units and individual industrial and commercial households whose annual taxable sales exceed the prescribed standard but do not frequently engage in taxable behaviors may choose to pay taxes as small-scale taxpayers.
Article 2 of the Decree No. 43 of the State Administration of Taxation on December 29, 2017, effective as of February 1, 2018 stipulates that if the annual taxable sales amount of a VAT taxpayer (hereinafter referred to as the "taxpayer") exceeds the standard for small-scale taxpayers stipulated by the Ministry of Finance and the State Administration of Taxation (hereinafter referred to as the "prescribed standard"), in addition to the provisions of Article 4 of these Measures, it shall register as a general taxpayer with the in-charge tax authorities. Article 4 stipulates that the following taxpayers shall not register as general taxpayers: (1) in accordance with the provisions of the policy, choose to pay taxes as small-scale taxpayers; (2) Other individuals whose annual taxable sales exceed the prescribed standard.
Article 1 of the "Cai Shui [2018] No. 33), which came into effect on May 1, 2018, stipulates that the standard for small-scale VAT taxpayers is the annual VAT sales amount of 5 million yuan and below.
According to the provisions of the above-mentioned documents, taxpayers can be identified as small-scale VAT taxpayers if they meet one of the following conditions: (1) natural persons; (2) Units (including enterprises or non-enterprise units) with annual value-added tax sales of 5 million yuan and below; (3) Units and individual industrial and commercial households with annual taxable sales exceeding 5 million yuan but infrequent taxable behaviors.
According to the summary of the above-mentioned criteria for the identification of small-scale taxpayers, it can be seen that because the annual sales amount of VAT payable exceeds 5 million yuan and there are regular taxable behaviors, it does not meet the situation of "choosing to pay taxes according to small-scale taxpayers" as stipulated in Article 3 of the Implementation Measures for the Pilot Implementation of the Pilot Project of Replacing Business Tax with Value-Added Tax, and should go through the registration of general taxpayers in accordance with the law.
Article 103 of the Legislation Law of the People's Republic of China stipulates that where the special provisions of laws, administrative regulations, local regulations, autonomous regulations, and special regulations and rules formulated by the same organ are inconsistent with the general provisions, the special provisions shall apply; Where the new provisions are inconsistent with the old provisions, the new provisions apply. In the aforesaid case, the Tax Bureau of A found that Law Firm B did not meet the requirements of "electing to pay taxes as a small-scale taxpayer", which was based on Article 29 of the Detailed Rules for the Implementation of the Provisional Regulations of the People's Republic of China on Value-Added Tax (VAT), which came into effect on 1 January 2009, rather than Article 3 of the Implementation Measures for the Pilot Program of Replacing Business Tax with Value-Added Tax, which came into effect on 1 May 2016. In this regard, the administrative reconsideration decision made by Tax Office C corrected the error of Tax Office A.
The author believes that this case has enlightening significance for the grassroots tax authorities to carry out daily tax collection and management work: first, strengthen the study and combing of laws, regulations and normative documents, and correctly understand and apply, especially the content of the inconsistency between the old and new provisions. The second is to strengthen tax counseling, enhance the accuracy of policy push, screen out the list of taxpayers and payers who are at the critical point of enjoying preferential tax policies through data, determine whether they meet the conditions for enjoying preferential tax policies, and conduct tax counseling in a timely manner for taxpayers and payers who do not meet the requirements. The third is to strengthen the study of tax administrative reconsideration and litigation cases, and regularly carry out training in combination with relevant typical cases.
Source: China Tax News; 07.05.2024; Edition: 07; Authors: Wei Tingting, Zhou Yuwen, Rong Yi; Author's Affilications:Shenzhen 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!