The “Interpretation on Several Issues Concerning the Application of Laws in Handling Criminal Cases Endangering Tax Revenue Administration” (“the Interpretation”), jointly issued by the Judicial Committee of the Supreme People’s Court and the Procuratorial Committee of the Supreme People’s Procuratorate, came into effect on March 20th, 2024. The Interpretation clarifies the provisions applicable to Offenses Against Tax Collection and Management that are stated under Section 6, Chapter III,  Part II of the Criminal Law of the People’s Republic of China. It also effectively repeals the previously issued interpretations with the same scope.

In this brief overview, we will focus on the key highlights of the Interpretation to deepen understanding and raise awareness on this new interpretation.

I. Tax evasion statute

1/ Precisions regarding false declaration and failure to file tax returns

Firstly, the Interpretation provides specific examples of behaviors that are identified as false tax declaration by “cheating or concealment”, including concealment of income or assets by signing “yin-yang contracts” also called “twin contracts”. This refers to two documents being produced for the same agreement. One expresses the parties’ true intentions, while the other, with a lower sum to minimize taxation, is presented to tax authorities. It’s the first time that the judicial authorities clearly deem the “yin and yang” contracts as a behavior of tax evasion.

It as well provides specific situations that constitute “failure to file” and re-emphasizes that withholding agents are submitted to the same sanctions under certain circumstances.

In addition, the interpretation sets the amounts of evaded taxes beyond which imprisonment sentences of varying degree are applicable. For example,  falsely making out special invoices for value-added tax or any other invoices to defraud a tax rebate for exports (article 205 of the Criminal law of China) is punished by an imprisonment between 3 and 10 years if the amount of tax is not less than CNY 500,000 (“relatively large amount”) and is punished by an imprisonment over 10 or life imprisonment if the amount of tax is not less than CNY 5,000,000 (“large amount”)   as stated in article 11 of the judicial interpretation..

It also clarifies which taxes should be included in the notion of “amount of evaded tax payment”.

2/ Precisions regarding the “first offender” provision

The interpretation specifies that if the taxpayer, as long as he is a first-time offender, pays the tax owed after receiving a recovery notice from tax authorities within the prescribed period, and has been administratively punished, he should not be pursued for criminal responsibility.

Related to this provision, the Interpretation also specifies that taxpayers who evade tax payment shall not be pursued criminally as long as the authorities have not issued a recovery notice in accordance with the law.

3/ Clarifying behaviors recognized as “means of transferring or concealing property.”

The Criminal law has a specific punishment for taxpayers who transfers or conceal property in order to prevent the tax authorities from recovering the owed taxes. The Interpretation specifies behaviors that fall within the scope of this concealment.

 

II. State export tax refunds fraud

1/ Listing behaviors that can be deemed as false declaration and fraudulent means to defraud the state export tax refunds (204)

In response to the recent years’ rapid growth of export tax refund fraud, the Interpretation lists circumstances that can be defined as fraudulent means. It also defines the amount and circumstances beyond which punishment is increased.

Interpretation further specifies that in case of attempted fraud, without obtaining the export tax refund, the punishment may be mitigated or reduced according to circumstances.

2/ Precisions about falsely issuing VAT invoices or other invoices to defraud export tax refunds (205)

The Interpretation states circumstances that shall be deemed as issuance of false VAT special invoices or other invoices used for defrauding export tax refunds or offsetting tax payments. It also defines the amount and circumstances beyond which punishment is increased.

 

III. False invoice issuance

The Interpretation defines the amount and circumstances beyond which fraud can be qualified and/or beyond which punishment is increased for the following frauds:

  • Forging or selling forged exclusive value-added tax invoices;
  • Illegal sale of exclusive value-added tax invoices;
  • Illegal purchase of exclusive value-added tax invoices or forged exclusive value-added tax invoices;
  • Forging or manufacturing without authority or selling or manufacturing without authority other invoices usable for defrauding export tax refunds or offsetting taxes;
  • Knowingly holding counterfeit invoices.

 

IV. Fraud complicity

The Interpretation specify that anyone who knowingly provides another person with means of fraud (such as account numbers or credit certificates) despite being aware that the person is committing a crime harmful to tax collection and management shall be treated as an accomplice to the corresponding crime.

 

V. Leniency measures

In cases where crimes that harm tax collection and management are committed, if the perpetrator voluntarily repays the taxes, recovers the lost tax revenue, and implements effective compliance rectification, leniency may be granted. In cases where the criminal circumstances are minor and do not warrant criminal punishment, prosecution may be waived, or criminal punishment may be exempted. If the circumstances are significantly minor and do not pose substantial harm, no criminal action shall be taken.

Conclusion

In conclusion, when companies engage in transactions involving tax-related matters, they must pay particular attention and keep in mind this new Interpretation as it gives a more comprehensive framework for addressing offenses against tax collection and management as well as the increased risk of detention/penalty in case of tax related fraud.