Lawyers Liu Tianyong and Zhang Qian were interviewed on tax compliance in the renewable resources industry

Editor's note: Recycling of renewable resources is a key part of the comprehensive utilization of resources, which is of great significance to promote the development of circular economy and achieve green, low-carbon and high-quality development. For a long time, the lack of "source invoices" has been restricting the development of the renewable resources industry, in order to make up for the input gap, to obtain compliant enterprise income tax pre-tax deduction vouchers, some renewable resources enterprises by changing their business models, seeking a third party to open or even purchase VAT invoices, tax-related risks are frequent. In recent years, in order to promote the sustainable development of the renewable resources industry, the Ministry of Finance and the State Administration of Taxation have issued a series of policies, and the "reverse invoicing" policy has also been implemented. Huashui has published compliance reports on tax-related issues in the renewable resources industry for many years, and continues to pay attention to the latest tax regulatory situation and corporate compliance management in the renewable resources 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 renewable resources industry, and put forward risk prevention and control suggestions on three common risk points: "it is difficult to obtain the 'first invoice' for compliance", "not paying attention to confirming the authenticity of the business", and "accepting false invoices from upstream enterprises".

How to prevent and control tax risks? Tax experts advise renewable resource recycling companies to -

Strengthen bottom-line thinking: do real business and open real invoices

Reporter He Shuang, correspondent Lin Jingshuai, Li Yongxing

The renewable resources industry is an important part of the circular economy, and recycling, as the core link of the renewable resources industry, undertakes the task of collecting and processing all kinds of scattered waste materials, which is an important means of realization and development guarantee of the circular economy. According to the Tax Compliance Report on the Renewable Resources Industry (2024) released by Beijing Huashui Law Firm, with the continuous adjustment of the business model of the renewable resources industry, the tax risks of the renewable resources industry in mainland China are becoming increasingly prominent, which is particularly noteworthy. In this regard, Liu Tianyong, director of Huashui Law Firm, suggested that renewable resource recycling enterprises must continue to strengthen bottom-line thinking in their daily operations, do real business, and issue real invoices.

Common risk point 1: It is difficult to obtain the "first invoice" for compliance

In order to deduct the input VAT and the cost of enterprise income tax, the person in charge of the company decided to issue a special VAT invoice to Company H in the name of Company S, Company D and Company X, and the invoice information is subject to the actual purchase of scrap steel by Company H. Later, Company H was filed by the judicial authorities for false issuance, involving 370 special VAT invoices, with a total price of more than 5,800 yuan and a tax amount of more than 800 yuan.

Zhang Qian, a partner of Huashui Law Firm, told reporters that natural person retail investors are the main suppliers in the renewable resource chain, and because of their weak tax awareness or reluctance to pay taxes and fees, they usually do not bring tickets when selling waste materials to recycling enterprises, so in practice, there have long been cases where recycling enterprises cannot obtain VAT invoices from retail investors, and downstream waste enterprises require them to issue invoices.

Recently, the State Administration of Taxation issued the Announcement on Matters Concerning the "Reverse Invoicing" of Resource Recovery Enterprises to Sellers of Scrapped Products by Natural Persons (Announcement No. 5 of 2024 of the State Administration of Taxation), which clarifies that from April 29, 2024, sellers of scrapped products by natural persons sell scrapped products to resource recovery enterprises, and qualified resource recovery enterprises can issue invoices to sellers (i.e., "reverse invoicing"), and resource recovery enterprises shall declare and pay taxes and fees on behalf of sellers after "reverse invoicing". Liu Tianyong said that the introduction of this policy will undoubtedly solve the problem of resource recovery enterprises unable to obtain the "first ticket" to a large extent, and at the same time improve the tax collection and management of natural person sellers, and effectively reduce the tax risk of relevant entities. Ma Bo, Chief of the Goods and Services Tax Section of the Baicheng Taxation Bureau of the State Administration of Taxation, reminded that resource recovery enterprises that are willing to "reverse invoicing" should learn and master the content and precautions of the "reverse invoicing" policy, provide information in a timely manner, and issue reverse invoices in accordance with laws and regulations.

Common risk point 2: Failure to pay attention to verifying the authenticity of the business

In October 2023, the official website of the Fujian Provincial Taxation Bureau showed that a renewable resource utilization company purchased waste materials from individuals, and although it set up account books, there were problems such as the authenticity of the acquisition business costs could not be verified, the cost accounting was chaotic, and the cost carry-over was inaccurate. After investigation, the First Inspection Bureau of the Fuzhou Municipal Taxation Bureau approved the enterprise to pay more than 4,000 yuan of enterprise income tax.

Ma Bo said that in the past, it was difficult for recycling companies to obtain compliant invoices for the purchase of waste materials from retail households, and there was a great controversy over the cost of acquisition business. Under the "reverse invoicing" policy, the reverse invoice issued by the recycling enterprise for the purchase of scrapped products from the seller of scrapped products by qualified natural persons can be used as a pre-tax deduction voucher for enterprise income tax. However, it should be noted that recycling enterprises should keep materials that can prove the authenticity of the business in accordance with relevant regulations, including the purchase contract or agreement for the acquisition of scrapped products, transportation invoices or vouchers, goods weighing bills, transfer payment records, etc., and establish an acquisition ledger to record in detail the time, place, seller and contact information of each acquisition business, the name, quantity, and price of scrapped products. If a resource recycling enterprise submits false information to defraud the qualification of "reverse invoicing" or the resource recovery business is false, the tax authorities will cancel its qualification for "reverse invoicing" and investigate the responsibility in accordance with the law.

The reporter learned that in the above information, it is usually difficult for recycling companies to obtain transportation certificates. In practice, scrapped products are generally transported by the seller himself, and the agreed settlement price also includes the transportation costs, and it is difficult for the seller to issue a transportation invoice to the recycling enterprise if the seller transports it by itself or by finding an individual driver or fleet to transport it. Zhang Qian suggested that in this case, resource recovery companies can retain vehicle information (driver's name, license plate number, driver's license, driving license, etc.), take photos (videos) of vehicle transportation, and save transportation payment vouchers, etc., so as to support the real occurrence of acquisition business and transportation as much as possible.

Common risk point 3: Accept false invoices from upstream enterprises

In November 2023, the Dalian Municipal Taxation Bureau announced a case in which a renewable resource enterprise used false VAT invoices and applied the VAT additional deduction policy in violation of regulations. After investigation, an enterprise asked others to falsely issue 42 special VAT invoices for itself without real business, with a total price and tax amount of 4.0843 million yuan, a false increase tax amount of 337,200 yuan, and an additional deduction of 33,700 yuan in violation of regulations.

In practice, the legal consequences faced by downstream enterprises after being implicated in tax inspections due to false upstream openings are different. In some cases, the tax authorities identified the acceptance of false invoices by enterprises as tax evasion, and imposed corresponding penalties in accordance with the Notice of the State Administration of Taxation on the Handling of Taxpayers Obtaining Falsely Issued VAT Invoices (Guo Shui Fa [1997] No. 134). According to the document, if the drawee uses the special invoice falsely issued by others to declare the tax deduction to the tax authorities for tax evasion, it shall recover the tax in accordance with the Tax Collection and Administration Law and relevant laws and regulations, and impose a fine of less than 5 times the amount of tax evaded. At the same time, enterprises are required to pay value-added tax, enterprise income tax and corresponding late fees.

In this regard, Liu Tianyong reminded renewable resource recycling enterprises to enhance their awareness of tax law compliance, set up an internal compliance and legal department, so that major transactions are reviewed by legal professionals, and the legal department regularly carries out tax-related risk prevention training to business departments, financial departments and administrative management to strengthen business compliance awareness. If it is difficult for an enterprise to set up an independent legal team, it is recommended to hire an external professional team to conduct regular risk screening to resolve potential tax risks in a timely manner.