Introduction: The future of the industry belongs to distributors who are willing to comply and continuously strive for compliant operations. This needs to be viewed separately. For modern channels like KA and CVS, invoicing is standard due to customer compliance requirements. However, for circulation, wholesale, and various e-commerce channels, customers often do not require invoices, leading some distributors to underreport income to reduce tax burden. They may adopt the following practices:
1. Receiving payments through corporate accounts but not recognizing revenue. Payments are received via corporate accounts, but the receipts are not recorded as revenue or are recorded as intercompany transactions.
2. Receiving payments through private accounts. Sales proceeds are collected via personal accounts of the boss or employees, WeChat, Alipay, etc., without being recorded or declared for tax.
3. Cash receipts. Direct cash payments are not recorded or declared for tax—though this method is becoming less common with the prevalence of mobile payments.
In the trading and distribution industry, this is nothing new. You might say that many distributors who operate this way have never had problems. But with the arrival of the Golden Tax Phase IV, what's different?
A key point of Golden Tax Phase IV is tax-bank information sharing.
What does that mean? In the past, tax authorities had to follow formal procedures to access personal fund accounts of individuals related to a case, such as legal representatives, financial personnel, and shareholders, to verify hidden income. However, Golden Tax Phase IV establishes a channel for information sharing and verification between financial institutions and tax authorities. For example, based on the large-value and suspicious transaction reporting system of banks and non-bank payment institutions (like WeChat and Alipay), transaction information that may involve tax issues is pushed to tax authorities. This greatly improves the efficiency of tax audits. Besides detecting anomalies through corporate bank accounts, personal accounts of related individuals, WeChat, and Alipay accounts, tax authorities can also compare your tax compliance by examining the reasonableness of inventory, intercompany transactions, gross margins, profit margins, tax burden rates, upstream and downstream ledger data, and even industry-wide income, costs, and profits. Once anomalies are detected through big data comparison, you can easily become a key audit target for tax authorities. This is the core of Golden Tax Phase IV's "tax governance through data."
In fact, distributors who operate legitimately know that sales revenue must be taxed and that not issuing invoices or reporting taxes poses compliance risks. So why does this behavior persist? Subjective malice cannot be ruled out, but the industry environment is a more common reason. Some distributors say, if all sales are invoiced and taxed, there is no profit left, and the business is not viable. This is indeed a current reality: thin industry margins make compliant operations difficult for many distributors. However, Golden Tax Phase IV will only intensify audits of such practices. On one hand, there is the pursuit of profit and long-established practices; on the other, there are compliance requirements and faster audit methods. What should be done? Some distributor bosses, facing this contradiction, maintain a mindset of luck, thinking that since many are non-compliant, they can continue as before—only dealing with it if audited. This passive attitude is certainly wrong. In a sense, such distributors will eventually be eliminated. The future of the industry belongs to distributors who are willing to comply and continuously strive for compliant operations. If you are such a distributor, we have two levels of advice: tax and operational.
First, at the tax level. With Golden Tax Phase IV, financial and tax compliance is the only way out, and reducing tax burden must be done through legal means.
1. On compliant operations Bosses must establish compliance awareness, promptly rectify past non-compliance, standardize bookkeeping, and pay taxes according to law. (1) Sales receipts should be through corporate accounts; if private accounts are used for business reasons, funds should be promptly transferred to corporate accounts. (2) What if my customers don't want invoices? There is a misconception: whether you are tax-compliant is not necessarily related to whether customers want invoices. Sales revenue for which customers do not require invoices should still be included in accounting records, and when declaring VAT, report it as un-invoiced income. (3) For past non-compliance, if taxes are owed, promptly correct and pay the due taxes and late fees to avoid later penalties, further interest, and even criminal risks.
2. On tax planning Establish proper planning awareness: tax planning should be done in advance and legally, not to exploit tax loopholes or evade taxes after the fact. (1) Based on business strategy, set up different equity structures, design different operating entities according to customer types, adopt different business models considering tax factors, and fully enjoy tax incentives compliantly. (2) Tax planning for relevant business should be done in advance; after activities have occurred, tax obligations have arisen and are fixed, making "tax planning" futile and risky. (3) Seek support from "reliable" tax professional institutions to conduct comprehensive tax health checks, provide compliance improvement suggestions, and tax planning consultation.
About the authors: Cai Yanfu, Partner at Zhongrui Tax Group, senior tax advisor, certified public accountant, appraiser, high-end tax talent, tax consultant to 30+ corporate groups and listed companies, providing tax consulting, auditing, and training to 1000+ corporate groups.
Ren Wenqing, Head of New Distribution Academy, FMCG industry analyst, host of the "BC Integration" column, with research interests in channel digitalization, distributor business growth, and new retail in FMCG.