Paying taxes in accordance with the law is an ancillary obligation that the parties to a contract should perform. Adjusting the VAT rate is a means for the state to adjust the market by using tax rates in accordance with the law. The time when a taxpayer has a VAT tax obligation and issues a VAT invoice needs to be handled in accordance with tax laws or contractual agreements. Although it is not directly related to the state's tax rate adjustment, it will affect the rights and interests of the contract counterparty due to the tax rate adjustment. Under the background of large-scale tax and fee reductions, the VAT rate may continue to decline and merge. Through this case, the author suggests that only professional and accurate expressions are made in the contract during large transactions, can you enjoy tax dividends according to the agreement when the tax rate changes, otherwise you can only make wedding clothes for others.

  On September 20, 2018, Tianyuan Steel Pipe Tower Company and Xuanhua Iron and Steel Company signed a steel purchase and sale contract, stipulating that the contract validity period is from September 20, 2018 to November 30, 2018. After the contract was signed, both parties performed the contract one after another. As of March 26, 2019, Xuanhua Iron and Steel Company had supplied Tianyuan Steel Pipe Tower Company with various types of steel worth 19,654,108.43 yuan, and issued VAT invoices to Tianyuan Steel Pipe Tower Company at a tax rate of 16%. The remaining 4,567,330.78 yuan of payment was before April 1, 2019. Xuanhua Iron and Steel Company has not issued an invoice, nor has it delivered the corresponding value of steel to Tianyuan Steel Pipe Tower Company. On April 1, 2019, the state's VAT levy ratio was officially lowered to 13%. After April 1, 2019, Xuanhua Iron and Steel Company received another 16,556,393.04 yuan from Tianyuan Steel Pipe Tower Company, together with the previous balance of 4,567,330.78 yuan. Xuanhua Iron and Steel Company delivered the corresponding value of steel to Tianyuan Steel Pipe Tower Company as required by Tianyuan Steel Pipe Tower Company, and issued a VAT invoice of 19,010,937.74 yuan to Tianyuan Steel Pipe Tower Company at a 13% tax rate (the difference between payment and invoicing has been refunded by Xuanhua Iron and Steel Company to Tianyuan Steel Pipe Tower Company).

  Tianyuan Steel Pipe Tower Company believes that the time when the VAT tax obligation occurs is the day when the sales payment for the taxable sales behavior is received. Moreover, in the process of the state's previous reductions in the VAT rate, market suppliers collectively reduced prices accordingly. The contract in question also marked the words "tax included" in accordance with market practices, indicating that the true intention of both parties regarding the price composition is "tax included in the price, separation of goods and tax." Therefore, it filed a lawsuit requesting Xuanhua Iron and Steel Company to compensate it for the tax loss of 104,531.53 yuan caused by the error of issuing invoices at a 16% tax rate but actually issuing invoices at a 13% tax rate, as well as the price loss of 330,567.75 yuan caused by not reducing the contract price along with the tax rate, totaling 435,099.28 yuan. Xuanhua Iron and Steel Company argued that the purchase and sale contract is a typical "sales of goods with advance payment" contract, and the time when the goods are sent out is the time when the VAT tax obligation occurs, and issuing VAT invoices at this time complies with tax regulations. In addition, the state's reduction in the VAT rate without a corresponding reduction in the price, resulting in the appellant's loss of 330,567.75 yuan, has no reason or legal basis, and requested that the other party's litigation request be rejected.

This case went through first and second instance trials. The second instance court held that the first instance court's determination that the payment was an advance payment and that the time when the VAT tax obligation occurred was the day when the goods were sent out complied with VAT laws and regulations. The contract did not stipulate when both parties should fulfill their tax obligations or when they should fulfill their delivery obligations. Xuanhua Iron and Steel Company's issuance of invoices at a 13% tax rate did not violate the contract agreement. In this case, the VAT rate is not a fundamental fact of the sales contract legal act, and the reduction of the VAT rate from 16% to 13% is not enough to cause the loss of the foundation on which the sales contract was established, nor is it enough to cause the parties' contract purpose to be unachievable. It does not constitute a change in circumstances, and there is no clear agreement on tax reduction and price reduction in the contract between the two parties. After April 1, 2019, Tianyuan Steel Pipe Tower Company continued to pay Xuanhua Iron and Steel Company advance payments at the contractually agreed price. Therefore, Tianyuan Steel Pipe Tower Company's request to reduce the contract price lacks sufficient basis. Accordingly, Tianyuan Steel Pipe Tower Company's litigation request was not supported.

1. Understand the VAT tax obligation regulations for transactions of different natures.

  In reality, some strong parties in contracts always regard themselves as "domineering presidents", arbitrarily taking advantage of the other party regardless of whether it is compliant or not. Little do they know that some advantages not only cause "indigestion", but may also result in more being spit out. The author's previous public article " How can construction parties strive for the greatest tax rights and interests in construction projects mentioned a special "Jia Gong" project, which involves this type of typical problem.

   Commercial negotiations should not only focus on benefits but also on reason. Although tax burden clauses can be agreed upon separately, knowing the contract taxpayer and the time when the tax obligation occurs helps to promote contract design and negotiation, avoid "forcing a melon that is not sweet", and even avoid situations where contract clauses conflict with tax laws and are invalid. Below, we will learn about the VAT tax obligation regulations for common contracts according to the "Implementation Rules of the Provisional Regulations on Value-Added Tax":

   (1) If goods are sold by means of direct collection, regardless of whether the goods are dispatched, the day on which the sales payment is received or the evidence of the right to collect the sales payment is obtained shall prevail;

   (2) If goods are sold by means of collection and acceptance and entrusted bank collection, the day on which the goods are dispatched and the collection procedures are completed shall prevail;

   (3) If goods are sold by means of sales on credit and installment collection, the day of collection agreed in the written contract shall prevail. If there is no written contract or the date of collection is not agreed in the written contract, the day on which the goods are dispatched shall prevail;

   (4) If goods are sold by means of advance payment, the day on which the goods are dispatched shall prevail, but for the production and sale of large machinery, equipment, ships, aircraft and other goods with a production cycle of more than 12 months, the day on which the advance payment is received or the date of collection agreed in the written contract shall prevail;

   (5) If goods are sold on consignment by other taxpayers, the day on which the consignment list of the consignment unit is received or the day on which all or part of the payment for goods is received shall prevail. If the consignment list and payment for goods are not received, the day on which the consignment goods are dispatched for 180 days shall prevail;

   (6) If taxable services are sold, the day on which the sales payment is received simultaneously with the provision of services or the evidence of the right to collect the sales payment is obtained shall prevail;

  (7) The following acts of considering goods as sold shall be the day when the goods are transferred. If a taxpayer who has two or more establishments and implements unified accounting transfers goods from one establishment to another for sale (except where the relevant establishments are located in the same county (city)); uses self-produced or processed goods for non-VAT taxable items; uses self-produced, processed, or purchased goods for collective welfare or personal consumption; provides self-produced, processed, or purchased goods as investment to other entities or individual businesses; distributes self-produced, processed, or purchased goods to shareholders or investors; donates self-produced, processed, or purchased goods to other entities or individuals free of charge.

    2. Pay attention to the agreement on the delivery of VAT invoices in the contract.

   In the steel transaction process of this case, the payment made by the buyer is deemed as advance payment. According to tax laws, the seller only has the obligation to pay VAT after the goods are dispatched. After the VAT rate decreases, what can the buyer do to get the original high tax rate invoice? In fact, it does not violate tax laws to stipulate in the contract that the VAT invoice should be issued first. According to Article 19 of the Provisional Regulations on Value-Added Tax, the time when the obligation to pay VAT occurs for taxable sales activities is the day when the sales revenue is received or the voucher for requesting sales revenue is obtained; if the invoice is issued first, it is the day when the invoice is issued.

  The buyer in this case did pay the advance payment before the VAT rate decreased. Hindsight is always 20/20. If the contract stipulated that the seller should issue a VAT invoice to the buyer at the applicable tax rate on or within a few days of the payment date, even if this is an advance payment and the seller has not generated a VAT tax obligation, the tax obligation stipulated by the tax law is advanced based on the contract agreement. The VAT rate on the invoice must of course be based on the tax rate at that time, that is, the one before the adjustment.

  In addition, in addition to stipulating the type of invoice and the time limit for invoice delivery, the contract should also stipulate necessary remedial measures for non-compliant invoices. In reality, there have also been cases where the seller issued a VAT invoice, and then voided the invoice after delivery, making it impossible for the other party to deduct it, resulting in disputes.

  3. Different expressions of contract price will produce completely different effects.

  As mentioned above, allowing the other party to issue a VAT invoice in advance before the tax obligation occurs may involve issues such as capital occupation and sales quota, which directly affects the other party's interests; in addition, changes in the transportation, loss, and delivery of commodities are likely to occur. Issuing a VAT invoice in advance is often inconsistent with the actual quantity and amount delivered, which leads to re-issuing invoices and increases financial costs. Except for partners with a certain degree of trust, it should generally be used with caution.

  The characteristics of VAT determine that tax-inclusive prices and tax-exclusive prices may appear in contract signing. From the perspective of business practice and the principle of VAT calculation, the amount not specifically stated in the contract is the tax-inclusive amount. Only when the contract clearly states that it is a tax-exclusive amount or an amount without an invoice, it refers to the price excluding VAT. Since the VAT rate is not a basic fact of the sales contract legal act, the adjustment of the VAT rate is not sufficient to cause the loss of the foundation on which the sales contract is based, nor is it sufficient to cause the parties' contract purpose to be impossible to achieve, and does not constitute a change of circumstances. So, for this case, is there a more fair and reasonable contract agreement method? The answer is yes! That is, the agreement on tax-price separation is made in advance in the contract. Once the VAT rate changes, the tax-exclusive selling price of the commodity remains unchanged, but the total price changes with the new tax rate.

In summary, while tax rate reductions leading to contract disputes and litigation are uncommon, this case involving tens of millions in commodity transaction contracts, with several million in VAT, lacks clear provisions for invoice delivery and fails to consider tax changes. This highlights a broader issue: many contracts contain similar oversights. I have personally handled numerous disputes over contract prices due to unclear tax agreements. To safeguard your interests, meticulous attention to tax-related clauses in contracts is crucial. The choice between tax-inclusive and tax-exclusive pricing depends on the specific interests of both parties, especially when both general and simplified tax calculation methods might apply. In such cases, a well-defined contract price clause is essential. To obtain a contract template for tax-related pricing agreements, please forward this article and reply "合同价款" in the Tongwang Tax Law official account.

 Reference case: Hubei Electric Power Tianyuan Steel Pipe Tower Co., Ltd. v. Xuanhua Iron and Steel Group Co., Ltd. Contract Dispute Case

 Case number: (2020) Ji 07 Min Zhong No. 936