Recently, a first instance judgment has been made in the case of allegedly issuing false special VAT invoices covering RMB 20 billion yuan in the petrochemical industry in which Zhao Lin of ZhongYin Law Firm represents X. The court has adopted the defense lawyer's defensive arguments, and finally changed the charge involved in this case from a crime of issuance of false special VAT invoices to tax evasion, and reduce the criminal liabilities from life imprisonment to six years and five months’ imprisonment.

This case is a typical case of “sales issuing invoices of changed name” in the petrochemical industry. China imposes consumption tax on some products. According to China's consumption tax law, chemical products such as asphalt and crude oil are taxable consumer products not subject to consumption tax, while refined oils such as gasoline, diesel, and fuel oil are taxable consumer products subject to consumption tax. Unlike VAT, consumption tax is only levied in one link of commodity circulation. Article 1 of the Interim Regulations on Consumption Tax stipulates that the entities and individuals that produce, entrust the processing of, and import consumer goods specified in these regulations within the territory of the People's Republic of China shall be taxpayers of consumption tax. In other words, any refinery that makes refined oils from chemical products such as asphalt and crude oil shall be a taxpayer of consumption tax.

An important clue for tax authority’s enforcement is the invoice. If the name of goods on the invoice is changed from chemical product to refined oil, a tax authority might consider that a consumption-taxable act has occurred. In the petrochemical industry, in order to hide the link of refined oil production from the tax authority, the name of goods on the invoice is generally changed through an “agency changing invoices”, instead of by a refinery in the link of production of the refined oil. Specifically, the usual transaction mode is as follows: a seller negotiates and makes the transaction with a final purchaser of refined oil, then a refinery completes the production of refined oil, which is directly transported to the final purchaser to complete the transaction; moreover, in order to cover up the link of refining to evade consumption tax, the refinery still issues a chemical product invoice (without paying consumption tax), which is changed into a refined oil invoice through an intermediary trade company, who issues the refined oil invoice to the final purchaser of refined oil (in some transactions, first, the invoice is changed through an “agency changing invoices”, then, the refinery produces and sells the refined oil; and in some transactions, the refinery does not participate in the invoice circulation), as a result of which, there will be inconsistency between the physical transfer of oil products along the oil product trading line and the purchaser and seller indicated on the invoice.

The transaction mode for “sales issuing invoices of changed name” is shown in the figure below:

The public prosecution organ accused the defendant X of an allegedly crime of issuing false special VAT invoices covering a total of about RMB 20 billion yuan, plus a VAT of about RMB 3 billion yuan. According to China’s criminal law, the crime of issuing false special VAT invoices is a felony, and anyone issuing false special VAT invoices totalled a tax amount of RMB 2.5 million yuan or more may be sentenced to imprisonment for more than ten years or life imprisonment. Due to the huge amount of false special VAT invoices allegedly issued by X, X would almost certainly be sentenced to life imprisonment once the court determined that his act constituted the crime of issuing false special VAT invoices.

The public prosecution organ accused the defendant X of an allegedly crime of issuing false special VAT invoices covering a total of about RMB 20 billion yuan, plus a VAT of about RMB 3 billion yuan. According to China’s criminal law, the crime of issuing false special VAT invoices is a felony, and anyone issuing false special VAT invoices totalled a tax amount of RMB 2.5 million yuan or more may be sentenced to imprisonment for more than ten years or life imprisonment. Due to the huge amount of false special VAT invoices allegedly issued by X, X would almost certainly be sentenced to life imprisonment once the court determined that his act constituted the crime of issuing false special VAT invoices.

Although on the surface, the cases of “sales issuing invoices of changed name” in the petrochemical industry appears similar to the crime of issuing false special VAT invoices, its essence is to evade consumption tax by changing invoices, rather than evading VAT through issuing false special VAT invoices. Identifying such cases as committing the crime of tax evasion can better realize the fairness and justice of the criminal law. However, in judicial practice, instead of deeply studying such cases, public security organs, people’s procuratorates and people’s courts usually simply identify criminal facts based on the external form of the invoices, understand the criminal law literally, and finally identify defendants’ acts as the crime of issuing false special VAT invoices and sentence defendants accordingly.

Since this case is characterized as involving a huge amount with a typical transaction mode, the successful defense in this case will serve as an important reference for future judicial judgments on cases of “sales issuing invoices of changed name” in the petrochemical industry nationwide. Moreover, there is a general tendency to mechanize the identification of and expand the coverage of the crime of issuing false special VAT invoices in current judicial practice. How to properly identify the crime of issuing false special VAT invoices is a common topic for all sectors of society. The judgment in this case has a positive effect on transforming the identification of the crime of issuing false special VAT invoices towards the pursuit of substantive justice and the protection of the legitimate rights and interests of the parties.