In the past, distributors focused on the market, but in the new environment, we believe that distributor owners should place compliance management and tax planning on par with sales growth. As we mentioned earlier, the core of the Fourth Phase of Golden Tax is 'governing taxes with data.' The requirements for compliant operations have never changed; only the regulatory means have changed. Therefore, operational methods you previously thought were 'not a big deal' are now risk points that must be avoided, such as issuing false invoices. In recent years, the state has cracked down heavily on false invoicing. After the launch of the Third Phase of Golden Tax, it became possible to locate false invoicing more precisely, and cases detected by tax authorities are everywhere. What is a false invoice? Some enterprises purchase invoices to inflate costs, or sell VAT invoices to earn handling fees, commonly known as buying and selling invoices, all of which fall under false invoicing. Distributors operating legitimately might say, 'Buying and selling invoices is illegal; I certainly won't do that.' In reality, false invoicing is not as simple as you think; it includes various situations, and you might inadvertently get involved. What is a false invoice? 'False issuance' refers to the content of the invoice not matching the actual business operations. Distributors may mainly be involved in the following two categories:
1. Issuing invoices to others that do not match the actual business operations; 2. Having others issue invoices to you that do not match the actual business operations. 'Non-conformity' includes discrepancies in quantity, amount, tax amount, as well as discrepancies in the buyer's name, seller's name, goods name, unit, and even invoices issued without any real transaction. Simply put, there are two categories: one where you are the issuer of the invoice, and the other where you are the recipient. This still sounds abstract, but after reading the specific situations below, you will understand the risks of false invoicing you might encounter in actual operations. Several Situations of False Invoicing First Category: Issuing invoices to others that do not match actual business operations. 1. For profit, violent false issuance Register a company without any actual business activities. Because you can obtain special VAT invoices during the short-term existence, you issue false special VAT invoices externally, even without forging contracts or making false fund payments. This kind of false issuance is illegal profit-seeking. Distributors who operate normally and have basic tax law knowledge should not touch this. However, it is worth noting that many distributors register multiple companies. Your main operating company may not have such behavior, but do any other companies under your name involve this? 2. For profit, surplus invoice false issuance The application for special VAT invoices is strictly controlled. Strictly speaking, they can only be used to issue invoices for your actual sales. But in daily operations, distributors may have so-called 'surplus invoices,' for example, when a customer does not need an invoice. Some distributors may then issue false special VAT invoices to enterprises in need for a handling fee, illegally profiting. In addition, input tax credits may also form 'surplus invoices.' Enterprises with a large amount of input tax credits that cannot be fully deducted within the expected operating period may 'use' the ending credits to issue false special VAT invoices externally for illegal gains. Of course, some companies do not do this for active profit, but due to personal relationships, helping others issue invoices. However, regardless of how 'surplus invoices' arise or for what reason, false invoicing must be avoided. Issuing false invoices for others has always been a focus of tax audits. Here is a real audit case: A trading company issued 70 special VAT invoices in 2020, was investigated and identified as false invoicing in 2022, and was heavily fined, with relevant responsible persons also held criminally liable. The above two situations are where you, as the business entity, are the issuer of the invoice. But false invoicing also includes situations where you are the recipient. Second Category: Having others issue invoices to you that do not match actual business operations. 1. To inflate costs, purchasing invoices without actual transactions. The trading and circulation industry has thin profits. Some distributors, to reduce VAT and corporate income tax burdens, purchase invoices by paying handling fees without actual transactions. This falls under having others issue false invoices to you. Once the issuer is identified as false, the Golden Tax system can directly query the recipient. The tax authority of the issuer will directly transmit the 'Notice of Confirmed False Issuance' to the tax authority of the recipient, thus directly finding the recipient unit. The tax department will further verify based on bank flows, fund returns, etc. If it is confirmed that false invoices were obtained, the input VAT cannot be deducted, and the corresponding costs cannot be deducted before corporate income tax. Moreover, the tax authority will recover taxes and late fees, and may impose a fine of 50% to five times the amount. If it constitutes a crime, criminal liability will be pursued. 2. There is an actual transaction, but the issuer is inconsistent with the seller. The above is without actual transactions, but even with actual transactions, there may be risks. For example, you purchase goods from upstream, but the seller does not issue you an invoice, instead finding a third party to issue the invoice. Or you do not request an invoice for a lower price, and then obtain an invoice from elsewhere for deduction. The problem here is that the issuer is inconsistent with the actual business entity, which also constitutes false invoicing and will be identified by the tax authority as tax evasion. In addition to paying back taxes and late fees, you may be fined 50% to five times the amount of tax evaded. If it constitutes a crime, you will be held criminally liable. Distributors generally do not encounter this when taking goods from brand owners, but if you frequently resell goods, you may easily touch such tax risks. 3. To inflate expenses, using office supplies, meeting fees, consulting fees, etc. to offset taxes. To inflate expenses, reduce profits, and pay less corporate income tax, many companies seek various expense invoices. If your company's books show a large amount of 'meeting fees,' 'consulting fees,' 'service fees,' 'training fees,' but you cannot provide relevant materials to prove these are real expenses, you need to be careful. Because these are keywords, the Golden Tax system will flag anomalies based on these keywords and your company's filing information, and push risks. If the tax authority verifies that they are false invoices, the enterprise will also face risks of tax supplements, late fees, and fines. Response Measures The above types of false invoicing are very easy to be audited under the Fourth Phase of Golden Tax. Distributors must avoid them. Here we suggest doing the following work well: First, establish a red-line awareness and resolutely do not actively touch it. Whether it is issuing false invoices for others or actively obtaining false invoices from others, resolutely do not do it. Second, have a preventive awareness and ensure the consistency of the three flows. In the trading business, it is inevitable to resell goods to each other. When taking goods from upstream, how to avoid being caught in the risk of actively obtaining false invoices? Have a preventive awareness. When purchasing, do a background check on suppliers, strengthen payment management, and keep documents and vouchers. Grasp the key principle of 'consistency of the three flows,' that is, the flow of funds (bank payment and receipt vouchers), the flow of invoices (the issuer and recipient of the invoice), and the flow of goods, these three flows should be consistent. Third, strengthen internal norms and improve the reimbursement system. Strengthen the review of invoices. The principle is that invoices that do not match actual business should not be reimbursed, especially for large amounts, which require supporting materials plus invoices to be reimbursed. Regarding how distributors can operate compliantly and efficiently, we have invited the author of this article, Ms. Cai Yanfu, partner of Zhongrui Tax Group, to attend the First China FMCG Distributor Conference from October 9 to 11, to elaborate on the Fourth Phase of Golden Tax and distributor response strategies for efficient operation.