On 15 March 2024, the Supreme People’s Court (SPC) and the Supreme People’s Procuratorate released the Interpretation of Several Issues Concerning the Application of Law in Handling Criminal Cases of Jeopardising Collection and Administration of Taxes, which became effective on 20 March.
The above-mentioned interpretation provides detailed guidance on charges related to “crimes jeopardising the collection and administration of taxes”, addresses previously disputed situations and issues, and offers a unified basis for judicial authorities to handle such cases.
In particular, the interpretation made further clarifications regarding crimes related to false issuance of special value-added tax (VAT) invoices, or false issuance of other invoices for fraudulent export tax refund and tax deduction (together “false invoicing”).
The interpretation’s key effects
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Clarifying circumstances that constitute the crime of false invoicing. The interpretation listed five circumstances that would constitute false invoicing, which are:
- Issuing invoices, which refer to VAT invoices or other invoices used to fraudulently obtain export tax refunds or tax deductions, without genuine transactions;
- Issuing invoices for taxable amounts for transactions that are not genuinely deductible;
- Issuing invoices through false transaction entities for business activities not legally covered by tax deductions;
- Illegally tampering with electronic information related to invoices; and
- Issuing invoices through other illegal means in violation of regulations.
Accordingly, the determination of false invoicing focuses on whether the intention of the tax deduction inherent in VAT invoices was to falsely claim tax deductions.
Strengthening the definition of false invoicing. Much debate has taken place concerning whether false invoicing that did not result in VAT losses constitutes this type of crime. Previously, the SPC’s second batch of exemplary cases on protecting property rights and entrepreneurs’ rights indicated that actions without intent to defraud tax funds, and without causing tax losses, do not constitute the crime of false invoicing for VAT special invoices.
Furthermore, the Jinan Intermediate People’s Court held, in a 2016 case concerning false issuance of special VAT invoices, that such actions aim only to exaggerate the company’s sales performance and economic strength in order to obtain bank acceptance bills and working capital loans. There was no intent to evade or defraud taxes, nor had it caused any loss of tax revenue, therefore the crime of false issuance of special VAT invoices had not been committed. However, in practice, many courts take a different position.
The interpretation has strengthened the definition of false invoicing by clarifying that actions aimed at inflating performance, financing or obtaining loans without intention to defraud tax deductions or causing tax losses due to deductions should not lead to the charge of having committed the crime of false invoicing.
Relaxed sentencing standards. Compared with the SPC’s 2018 Notice Regarding Issues Concerning the Conviction and Sentencing Standards for the False Issuance of Special Value-Added Tax Invoices, the interpretation relaxed and unified the sentencing standards for false invoicing.
For example, the threshold for determining “huge sum” has been raised from RMB2.5 million (USD345,000) to RMB5 million. Such relaxation helps reduce the criminal risks of companies, and also helps tax authorities and judicial bodies focus on tax-related crimes with serious harmful effects.
Introduced compliance mechanism for accused companies. According to the interpretation, companies which pay up underpaid taxes, recover tax losses and effectively rectify non-compliance issues can receive lenient punishment, non-prosecution or exemption from criminal punishment, or may be deemed to have not committed a crime. This reduces the corporate’s risk of falling into operational difficulties due to weak tax compliance awareness.
Our observations
Beware of differences between criminal and administrative laws. The interpretation provides a strengthened definition of false invoicing, but such actions may still violate tax administrative laws and regulations.
For example, the “acts of issuing false invoices” listed in the PRC Invoice Administration Measures include issuing invoices for others, for oneself, having others issue invoices for oneself, or instructing others to issue invoices that do not match genuine business operations.
These enumerations differ from those in the interpretation. Therefore, actions that do not constitute the crime of false invoicing might fall within the scope of tax administration violations.
Innocent of false invoicing, guilty of other charges. The interpretation mentions that actions not considered as false invoicing might still be subject to criminal liability if they constitute other crimes. For example, under the interpretation, taxpayers who falsely deduct expenses or falsely credit input tax may be prosecuted for the crime of tax evasion.
Effective ratification does not reduce administrative liability. The interpretation stipulates that if relevant actions are not prosecuted, or are exempted from criminal punishment, the cases should be referred to the competent authorities for administrative penalties in accordance with the law.
Therefore, the interpretation maintains the current practice that effective rectification does not exempt a taxpayer from their obligations to pay underpaid taxes, late payment penalties and fines. Furthermore, according to the interpretation, the tax authorities should promptly notify the procuratorate and the court of the resulting situation.
Compliance considerations
With the promulgation of the interpretation, companies should pay attention to the following compliance aspects. Strictly comply with PRC laws and regulations when issuing invoices and be sure to follow the relevant procedures and guidelines to ensure the authenticity and accuracy of invoices.
For example, before issuing an invoice, verify the authenticity of the transaction, issue the invoice according to the dates specified by tax laws, and ensure that the items, quantities and amounts match genuine transactions.
In the event of a dispute, clearly identify the key issues, collect and organise relevant supporting materials, and respond promptly in order to minimise tax-related risks to the greatest extent possible.
Where there might be potential criminal liability for invoice issues, promptly pay up the underpaid taxes, late payment penalties and fines. Based on this, companies can apply article 201 of the Criminal Law (crime of tax evasion) and the scenario under the fourth paragraph, where no criminal liabilities are to be pursued (obstruction of criminal liabilities, provided that administrative liabilities have been applied). The compliance mechanism is another route to mitigating or reducing criminal liability for both companies and individuals.
Clare Lu is a partner at Grandway Law Offices
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