Supplier flees after issuing invoice; tax bureau demands input VAT adjustment. How should your enterprise respond?
Many business owners and finance teams have encountered this frustrating situation:
Standard procurement of goods/services: with complete contracts and corporate payments, obtain special VAT invoices for normal deduction.
Within a short time, the supplier absconded and became unreachable, failing to declare or pay taxes. As a result, this invoice was flagged as an abnormal tax deduction voucher, and the tax authority notified the enterprise to reverse the input VAT.
Real business, payment and delivery completed, but downstream companies still bear tax losses due to upstream supplier's default? Today, we clarify the policy, practical steps, common misconceptions, and pre-risk controls in one go.
1. What is an abnormal voucher?
In accordance with State Taxation Administration Announcement No. 38 of 2019, value-added tax special invoices issued by enterprises that have fled or become unreachable during their existence shall be classified as abnormal VAT deduction vouchers.
Core Policy Rules:
✅Not declared for deduction: Deduction not allowed at this time
✅Already claimed for deduction: In principle, input tax must first be reversed.
Key distinction: Grade A taxpayers have exclusive opportunities!
A-grade credit enterprise: You may submit a verification request within 10 working days. Input tax deduction can be deferred pending review. Upon approval, continue deducting.
B/M/C/D-rated enterprises must first transfer out and submit evidence for tax verification.
II. Key Concept: Bona Fide Acquisition; No Penalties or Late Fees
Policy Basis: Guoshuifa [ 2000 ] No. 187, Guoshuhan [ 2007 ] No. 1240.
Good faith acquisition applies when all of the following 4 conditions are met:
▷The transaction is genuine, involving actual procurement of goods or services.
▷Invoices are issued within the province, and invoice details match actual business transactions.
▷Payments are made to the invoicing company via corporate accounts; no fund回流 occurs.
▷During the transaction, we were completely unaware that the upstream party would abscond and issue false invoices.
👉Benefits of bona fide acquisition: No tax evasion determination, no fines, and no late payment penalties.
⚠️However, bona fide acquisition does not guarantee that input VAT is deductible. If the upstream party has already exited normal operations and cannot reissue invoices, the input VAT will likely remain non-deductible.
Common Financial Pitfalls:
❌Misconception: Real business transactions do not require input tax adjustments.
✅Correct approach: The rule for handling invalid vouchers is "process first, verify later." Even if the transaction is legitimate, the process must follow credit rating guidelines.
3. Receiving a Tax Authority Notice: A 5-Step Action Plan
Step 1: Conduct an immediate internal self-check to identify risks.
Key verification: Ensure the contracting entity, invoicing entity, and payment recipient are consistent. Check for fund backflow, payments to individuals, or private settlements. Any evidence of fund backflow fundamentally alters the nature of the transaction.
Step 2: Compile and bind the complete chain of evidence (critical)
▷Procurement: Purchase contract, bank statement, delivery note, inbound acceptance form, shipping documents, invoice verification screenshot
▷Service Procurement: Service Contracts, Bank Remittance Slips, Project Deliverables, Acceptance Reports, Communication Records, Original Invoices
▷Written "Business Situation Report" detailing the entire transaction process and stating that the upstream party's disappearance was unknown.
Step 3: Submit verification request to the tax authority
Level A: Submit verification request within 10 working days; transfer is temporarily suspended.
Other Levels: Complete input tax transfer as required and submit a full set of evidence for review.
If the tax authority verifies that deduction conditions are met, deduction can be reinstated.
Step 4: Distinguish between VAT and Corporate Income Tax (many companies confuse the two)
VAT: Input tax cannot be deducted due to the upstream supplier absconding and being unable to reissue invoices; such amounts must be transferred out.
Corporate Income Tax: Business transactions and expenses must be genuine. With a complete chain of evidence, costs remain deductible for tax purposes (State Administration of Taxation Announcement 2018 Year 28).
Input VAT transfer-out ≠ Non-deductible cost! This is a critical concept.
Step 5: Civil Recovery to Recover Tax Losses
Since the supplier breached the contract and absconded, causing tax losses, you may file a lawsuit against them in court to claim compensation for the tax losses, supported by the contract, payment records, and tax documents.
Note: Recovery may be difficult if the other party has no remaining assets.
4. Never Cross These Red Lines
Do not forge contracts, inbound delivery notes, or shipping documents. If discovered, this will be classified as malicious acquisition, resulting in tax repayment plus late fees and fines; severe cases will be referred to law enforcement.
Do not conceal fund returns; they are core evidence for determining malicious invoice receipt.
Do not submit a verification request after the deadline. Late submissions will result in the loss of your right to request a processing delay.
5. Pre-event Risk Control: Proactively mitigate risks of upstream supplier defaults
Before onboarding new suppliers, verify their tax status, tax credit rating, abnormal operation records, and audit history.
Maintain corporate-to-corporate transfers; prohibit large cash payments and private account transactions.
Retain complete records of the four flows (contracts, invoices, funds, delivery proofs) for at least 10 years.
For large-scale purchases, add a contract clause stating that if the supplier absconds or issues abnormal invoices, the supplier shall bear all taxes, late fees, and liability for damages.
Final thoughts
Upstream enterprises failing to issue invoices is a typical risk transmission scenario that can also affect legitimate businesses.
If you receive a notice regarding an abnormal voucher, don't panic or wait passively. Prioritize compiling complete evidence and submit a verification request to the tax authority within the statutory deadline. Leverage the "good faith acquisition" policy to protect your rights.
Tax and financial compliance hinges on proactive prevention. Thorough supplier due diligence and robust contract terms are the most effective ways to avoid being caught off guard.