Tax fraud cases in mainland China on the rise

Wednesday 06 January 2016

by Kathy Siu, Director - Tax, Equiom Hong Kong

Background

On 21 October 2015, the China State Administration of Taxation (SAT) held press briefings and published a tax bulletin to expose four tax fraud cases regarding falsified claims on Export VAT refunds. The cases occurred in Shanghai, Xiamen, Guangxi and Anhui.

In recent years, tax fraud cases in China have become more frequent and complex. In addition to foreign trading entities, some manufacturing enterprises, Customs brokers, freight forwarding companies and other intermediaries have become key tax fraud offenders. Their fraud methods have changed from the traditional use of fake invoices, fake purchase orders, no physical goods and no actual cash flow to the use of real invoices, real purchase orders, actual physical goods and fictitious cash flow. It has therefore become significantly more difficult for the authorities to prevent and combat tax fraud.

SAT has joined forces with the Ministry of Public Securities, Customs and other departments to combat Export Tax fraud. In the first three quarters of 2015, 2,680 export enterprises were investigated, with nearly RMB 5 billion in tax being recovered.

Tax Fraud Cases

The four tax fraud cases notified were:

1. Shanghai Cai Yi Industrial Enterprise tax fraud 

From 2011 to 2014, the suspects made arrangements with individual dealers in Zhejiang to cheat on Export VAT refunds valued at RMB 85M. Eighteen people, including a foreign non-Chinese person, were arrested and will be prosecuted.

2. Xiamen “4.24” tax fraud

From 2012 to 2014, six PRC entities, including Xiamen “4.24”, were involved in cheating on Export VAT refunds valued at RMB 243M. The trial of Xiamen “4.24” has ended, and tax authorities have recovered the entire amount of the Export VAT refund. An additional penalty of the same amount has been imposed on the company. Two people from the company were arrested and will be prosecuted. The other five enterprises are still being investigated.

3. Guangxi Port Fangcheng Lugai Entity tax fraud

From 2009 to 2010, the company illegally purchased export invoices to create a fictitious export trading business, and claimed refunds of RMB 7M on Export VAT. Two people from the company, including the Chief Representative, were sentenced to ten years’ imprisonment plus fines.

4. Anhui Yu-chai Trading Enterprise tax fraud

From 2008 to 2012, the General Manager of this company plus seven staff created fictitious invoices to claim refunds of RMB 52M on Export VAT. The GM was sentenced to life imprisonment, and five of the seven staff were sentenced to imprisonment plus fines.

Equiom's comments

The tax authorities in China are determined to combat tax fraud. If convicted, offenders, whether of Mainland or foreign nationality, could find themselves facing fines and imprisonment in China.

Equiom's tax team has extensive experience in dealing with China’s tax authorities regarding tax audits and tax investigation matters. If you have a business in Mainland China, we highly recommend that you review your tax risks regularly. 


Contact

For further information, please contact Kathy Siu.