Shanghai A foreign company and Shanghai B foreign company are both wholly owned companies established by the same overseas headquarter, but they belong to different business sectors. In August 2022, the A foreign company signed a technology development contract with a total amount of RMB 2,000,000 with the client. After the completion of the technology development contract, the A foreign company was in a profitable state, while the B foreign company, a related company, had the recoverable loss of more than RMB 3,000,000. In order to reduce taxes, the overseas headquarter arranged the B foreign company to issue the VAT invoices of RMB 2,000,000 to the client. Since A and B are related companies, the client did not argue with that, and accepted the invoices issued by the B foreign company for bookkeeping, and paid RMB 2,000,000 service fee to the B foreign company.

Two months after the invoices were issued, Shanghai tax administration found abnormal through the Golden Tax Phase Ⅲ System. After investigation and evidence collection by the tax administration, it was affirmed that the B foreign company fictitiously issued VAT invoices, while the A foreign company deliberately concealed income, and the client used the fictitiously issued VAT invoices. All these three companies were severely punished by the tax administration!

Dongjin Remind:

The tax administration requires that the transaction of companies be consistent in three flows: contract flow, capital flow and invoice flow. In order to reduce taxes, some companies will arrange related companies to issue invoices or collect payments. Since the tax administration can investigate at any time if it finds any abnormality through the Golden Tax Phase Ⅲ System, Dongjin reminds companies to pay attention to it and avoid being punished. Companies should also strictly review invoices and payments to avoid being involved and punished.

Mike Chang

Partner

mikechang@shanghaiinvest.com