Laws of the People's Republic of China

the State Administration of Taxation

Circular of the State Administration of Taxation Concerning the Relevant Issues on Strengthening the Administration of Special VAT Invoices

Guo Shui Fa [2005] No. 150

The state taxation bureaus of all provinces, autonomous regions, municipalities directly under the Central Government and cities specifically designated in the state plan:

It is recently reported by some regions that it is prevalent that some general VAT taxpayers (hereinafter referred to as the general taxpayers) issue special VAT invoices to the general taxpayers as the third party for tax frauds where no special VAT invoice (hereinafter referred to as the special invoices) needs to be issued in the dealings with small-scale taxpayers. With a view to guarding against falsification of special invoices and stopping the frauds of the deduction of value-added tax and export tax refund by false special invoices, you are hereby notified of the relevant issues as follows:

I.

The taxation authorities shall intensify the administration on small-scale taxpayers. A comprehensive check of small-scale taxpayers shall be conducted, and any taxpayer whose annual sales amount exceeds the standard of small-scale taxpayers shall be regarded as a general taxpayer by the taxation authority according to the relevant provisions. Where a taxpayer meets the conditions of general taxpayers but fails to apply for going through the formalities for the confirmation of general taxpayers, his taxable amount shall be calculated at the VAT rate on the basis of the sales amount, the input taxes may not be deducted and no special invoice may be used therefor. Where a taxpayer who has exceeded the standard of small-scale taxpayers is not confirmed as a general taxpayer according to law, the handling person or person responsible for examination and approval shall be investigated for legal liabilities.

II.

The taxation authorities shall do a good job in the confirmation work of a general taxpayer. The qualification confirmation of a general taxpayer shall be subject to strict examination and approval in accordance with the relevant existing provisions, and any taxpayer that meets the conditions for confirmation of a general taxpayer shall be urged to apply for the qualification confirmation of a general taxpayer. Whenever a taxpayer files an application for the qualification confirmation of a general taxpayer with the taxation authority, the competent taxation authority shall timely carry out the examination and approval of the case, make an appointment for interviews and conduct on-spot verification. If the conditions for confirmation are met, the competent taxation authority shall timely confirm it, and may not delay it under any excuse, nor may it refuse to make confirmation without any justifiable reason.

III.

The taxation authorities shall intensify the administration on special invoices of general taxpayers.

1.

It is necessary to intensify the administration on the use of special VAT invoices by general taxpayers and require the taxpayers to issue special invoices in strict compliance with the Provisions on the Use of Special VAT Invoices and other relevant provisions.

2.

The general taxpayer, whose tax declaration is abnormal, shall be subject to key examination to find whether or not the names of goods indicated in the acquired special invoices or lists of the sold goods accord with the scope of its business or the raw materials consumed in the course of production, and to find whether or not the actual dealer is the issuer of the special invoices in light of the taxpayer's relevant materials, such as the purchase-and-sale contract and the settlement voucher issued by the bank.

Anyone who violates the Provisions on the Use of Special VAT Invoices shall be punished in accordance with relevant provisions; and anyone that is suspected of issuing invoices for any third party or defrauding the input tax deduction or export tax refund shall be transferred to the auditing department for auditing.

IV.

When a taxation authority carries out the authentication of special invoices, it shall seriously examine the content of special invoices, and detain and transfer to the auditing department for auditing those invoices with wrong cryptograph, inconsistent authentication (excluding the inconsistent authentication of taxpayers' identification numbers or the inconsistent authentication of invoices' codes) or repeated authentication.

V.

The taxation authorities shall intensify the work relating to the tax payment evaluation, and shall lay emphases on the tax payment evaluation of those general taxpayers that deduct VAT input taxes by paying for goods in cash, purchasing goods on credit or entrusting any other entity or individual to pay for goods, and shall conduct on-the-spot verification when necessary. Where it finds that any taxpayer purchases any goods that is inconsistent with its actual business, or that the taxpayer fails to pay for the goods for a long time, or entrusts any other person to make large payment without any justifiable reason, or has not concluded a purchase-and-sale contract (excluding the sporadic purchases or sales) for the purchase and sale of goods or the provision of taxable services, the taxpayer shall be transferred to the auditing department for auditing.

Please carry them out accordingly.

the State Administration of Taxation

September 12, 2005