Liaocheng Longchang Investment Co., Ltd. (hereinafter referred to as Longchang Company) was established in 2010. Liaocheng JinDi Tax Firm Co., Ltd. was entrusted to audit Longchang Company's enterprise income tax and related tax payment from April 2010 to June 2013, and issued the Liaojindi Zongshenzi [2013] No. 17 tax review opinion on June 27, 2013, determining that the company should pay a total of 1,208,636.31 yuan in various taxes and fees from April 2010 to June 2013. Longchang Company declared 1,412,831.24 yuan of taxes and fees from the external network on January 15, 2014, but it was returned the next day. The declared amount exceeded the amount of tax payable determined by the tax firm. On December 12, 2016, the Dongchangfu Taxation Inspection Bureau filed a case for investigation of Longchang Company's suspected tax evasion. Because it was determined that Longchang Company failed to declare and pay tax on the overdue interest and other payments involving the Li Qingrong and Xu Xiaoguo cases, which constituted a false declaration of tax evasion, the Dongchangfu Taxation Inspection Bureau issued the Dongchang Ditaxijichu [2016] No. 1057 "Tax Administrative Processing Decision" and the Dongchang Ditaxifa [2016] No. 1057 "Tax Administrative Penalty Decision" on July 3, 2017. Longchang Company refused to accept the "Tax Administrative Processing Decision" and applied to the People's Government of Dongchangfu District, Liaocheng City for administrative reconsideration. The People's Government of Dongchangfu District, Liaocheng City rejected Longchang Company's administrative reconsideration application because the Dongchangfu Taxation Inspection Bureau did not confirm the guarantee submitted by Longchang Company, and Longchang Company did not meet the conditions for filing an administrative reconsideration as stipulated in the "Rules on Tax Administrative Reconsideration". Longchang Company refused to accept the "Tax Administrative Penalty Decision" and filed an administrative lawsuit, requesting the revocation of the three penalty decisions in the Dongchang Ditaxifa [2016] No. 1057 "Tax Administrative Penalty Decision", namely a fine of 50% of the unpaid tax amount for Longchang Company's failure to declare and pay business tax, city maintenance and construction tax, and enterprise income tax in 2011, 2012, and 2013, with a total fine of 677,400 yuan.

During the investigation of the administrative penalty case of Longchang Company by the Dongchangfu Taxation Inspection Bureau, the former Dongchangfu Branch of Liaocheng Local Taxation Bureau requested instructions on April 11, 2017 on whether Longchang Company should pay business tax on the overdue interest that had not been recovered. Longchang Company did not recover the overdue interest from the judgment of the Li Qingrong and Xu Xiaoguo cases.

The court of first instance held that: After the plaintiff Longchang Company issued a review opinion from the tax firm, it did declare taxes and fees, and the declared amount exceeded the amount of tax payable determined by the review opinion. Moreover, the defendant's staff member Fan Yuzhen stated that there was a corresponding record on the network after the declaration. Therefore, it cannot be determined that the plaintiff Longchang Company had the intention of making a false tax declaration. The parties in this case all acknowledged that the plaintiff Longchang Company did not recover the overdue interest from the judgment of the Li Qingrong and Xu Xiaoguo cases. During the investigation of the administrative penalty case of Longchang Company by the Dongchangfu Taxation Inspection Bureau, the former Dongchangfu Branch of Liaocheng Local Taxation Bureau requested instructions on April 11, 2017 on whether Longchang Company should pay business tax on the overdue interest that had not been recovered. Therefore, under the circumstances that the tax administrative authority was unable to determine whether the plaintiff Longchang Company should pay business tax on the overdue interest that had not been recovered, the penalty decision in question determined that the plaintiff Longchang Company's failure to declare tax on the overdue interest was a false tax declaration of tax evasion, which was unclear in facts and insufficient in main evidence. The court ruled to revoke the (1), (2), and (3) items of the tax administrative penalty decision No. Dongchang Ditaxifa [2016] 1057 against the plaintiff Liaocheng Longchang Investment Co., Ltd.

The First Inspection Bureau refused to accept the original judgment, arguing that the appellee clearly knew that its tax payable amount reached more than 1.2 million yuan but ultimately declared only 104 yuan, which was sufficient to prove that the appellee had the subjective intention to evade tax payment and actively pursue the consequences of national tax revenue loss. The former Dongchangfu Branch of Liaocheng Local Taxation Bureau requested instructions on whether the appellee should pay business tax on the overdue interest that had not been recovered, not because it was unable to determine whether business tax should be paid, but because the case had been reported multiple times by the informant, and even reported to the provincial style hotline and the State Administration of Taxation multiple times, causing serious social impact; the request was made in accordance with the principle of prudence. Therefore, it requested the second instance court to revoke the original judgment according to law and change the judgment to reject the appellee's claims.

The court of second instance held that: The focus of the dispute in this case is whether the appellee Longchang Company constitutes a tax evasion act of false tax declaration. In this case, the original Dongchangfu Taxation Inspection Bureau determined that the appellee Longchang Company had a tax evasion act of false tax declaration, mainly because Longchang Company failed to declare tax on the overdue interest of the Li Qingrong and Xu Xiaoguo cases. The appellee argued that, according to the "Accounting System for Financial Enterprises" issued by the Ministry of Finance and the "Announcement of the State Administration of Taxation on Issues Concerning the Recognition of Loan Interest Income of Financial Enterprises" (Announcement No. 23 of the State Administration of Taxation in 2010), business tax should not be levied on overdue accounts receivable interest involving the Li Qingrong case and the Xu Xiaoguo case. For this reason, on April 11, 2017, the former Dongchangfu Branch of Liaocheng Local Taxation Bureau also specifically requested instructions from relevant higher-level departments on the tax issues involving the appellant. The above facts show that the parties have a legal dispute over whether the overdue accounts receivable interest involving the Li Qingrong case and the Xu Xiaoguo case should be taxed. Therefore, the appellee Longchang Company's failure to declare tax on the overdue interest is not sufficient to determine that it has the intention of "false tax declaration". Therefore, the original Dongchangfu Taxation Inspection Bureau's determination that the appellee had a tax evasion act of false tax declaration and made an administrative penalty based on this was an error in the application of law, and the penalty decision should be revoked according to law. The original judgment was not inappropriate and should be upheld according to law.

In the previous series of articles on taxation related to private lending, we introduced that the interest income generated from such legal acts would involve value-added tax, value-added tax surcharges, and individual or corporate income tax. In this issue, we will focus on understanding the time limit for tax obligations, starting with a look at the general provisions.

1. General Provisions for the Time Limit of Interest Tax Obligations

Value-added tax: Receiving interest falls under the loan services in the financial services under the value-added tax sales service item. According to Article 19 of the "Provisional Regulations on Value-Added Tax", the occurrence of taxable sales behavior is the day when the sales amount is received or the voucher for requesting the sales amount is obtained; if the invoice is issued first, it is the day when the invoice is issued. Article 45 of the "Notice of the Ministry of Finance and the State Administration of Taxation on Comprehensively Promoting the Pilot Program of Levying Value-Added Tax in Lieu of Business Tax" (Cai Shui [2016] No. 36) stipulates that receiving sales proceeds refers to the receipt of funds by taxpayers during or after the sale of services, intangible assets, or real estate. The day of obtaining the voucher for requesting sales proceeds refers to the payment date specified in the written contract; if no written contract is signed or the payment date is not specified in the written contract, it is the day when the transfer of services or intangible assets is completed or the day when the ownership of real estate is changed.

Corporate income tax: Article 18 of the "Regulations on the Implementation of the Enterprise Income Tax Law" stipulates that interest income shall be recognized as realized on the date when the debtor should pay interest as agreed in the contract.

Individual income tax: Article 6, Item 6 and Article 12, Paragraph 2 of the "Individual Income Tax Law" stipulate that income from interest, dividends, and bonuses, and incidental income shall be subject to individual income tax calculated on a per-income basis, with the amount of each income as the taxable income. If there is a withholding agent, the tax shall be withheld and paid on a per-income basis.

From the above tax laws, administrative regulations, and normative documents, whether it is the date of receiving payment, the payment date specified in the contract, or the service completion date without a contract in value-added tax (also applicable to business tax before VAT reform in this case), or the interest payable date agreed in the contract for corporate income tax, or the date of each income obtained for individual income tax, they are actually the same thing when there is no interest overdue. The date and amount of interest received by the lender are consistent with the agreement between both parties. Even if no contract is signed, the day when the principal and interest are repaid is considered the service completion date. Except for the value-added tax payment obligation time for issuing invoices in advance, which may differ slightly from the income tax, it only differs by about ten to fifteen days before others pay interest, which has little impact on the overall tax burden. However, once the interest is overdue, the agreed payment date and amount will be inconsistent with the actual receipt date and amount. There will be disputes about which amount and date should be used as the standard for determining the tax obligation according to general regulations.

2. Special Provisions for the Time Limit of Tax Obligations When Interest is Overdue

Article 92 of the "Legislation Law" clearly states that special provisions shall apply when the laws, administrative regulations, local regulations, autonomous regulations and separate regulations, and rules formulated by the same agency are inconsistent with general provisions. The tax treatment when interest is overdue is a special provision. Compared with the general provisions on the time limit for interest tax obligations, this rule should also be followed even if the legal status of tax normative documents is lower.

 In January 2000, the State Administration of Taxation issued the "Notice on Printing and Distributing the 'Trial Measures for the Declaration and Management of Business Tax in the Financial and Insurance Industries'" (Guo Shui Fa [2000] No. 015). Article 5 stipulates that for loans where financial institutions have overdue loans exceeding the period for which accrued interest receivable should be accrued according to the financial system and have not received interest, only loans registered in the form of memorandum accounts shall have the date of actual receipt of interest as the time when the tax obligation occurs.

In February 2002, the State Administration of Taxation issued the "Notice on Printing and Distributing the 'Measures for the Declaration and Management of Business Tax in the Financial and Insurance Industries'" (Guo Shui Fa [2002] No. 009), which replaced the previous Guo Shui Fa [2000] No. 015. Article 18 stipulates that loan business shall be handled in accordance with the "Notice of the State Administration of Taxation on Issues Concerning the Time When the Obligation to Pay Business Tax on Bank Loan Interest Income Arises" (Guo Shui Fa [2001] No. 38).

Articles 1 and 2 of Guo Shui Fa [2001] No. 38 stipulate that for interest receivable that is overdue for less than 180 days (including 180 days) from the interest accrual date, the date of obtaining the right to interest income shall be the time when the tax obligation occurs; if the interest is overdue for more than 180 days (excluding 180 days), the tax obligation occurrence time for the newly accrued interest receivable on the loan, regardless of whether the loan principal is overdue, shall be the date of actual receipt of interest. This document expired on April 30, 2006.

The currently effective normative document for income tax is the "Announcement on Issues Concerning the Recognition of Loan Interest Income of Financial Enterprises" (State Administration of Taxation Announcement No. 23 of 2010), which clearly states that for overdue loans, the interest receivable that occurs after the overdue period shall be recognized as realized on the date of actual receipt, or on the date when it is recognized as interest income in the accounting even if it is not actually received. Interest receivable that has been recognized as interest income, but has not been recovered after 90 days of overdue, and the current interest income has been reduced in the accounting, shall be allowed to deduct the current taxable income. When the uncollected interest receivable that has been reduced from interest income is recovered in subsequent years, it shall be included in the current taxable income for tax calculation.

The currently effective normative document for value-added tax is the "Notice on Clarifying Value-Added Tax Policies for Finance, Real Estate Development, Education Auxiliary Services, etc." (Cai Shui [2016] No. 140), which stipulates in Article 3 that interest receivable that occurs within 90 days from the interest accrual date after the issuance of the loan shall be subject to value-added tax in accordance with current regulations, and interest receivable that occurs after 90 days from the interest accrual date shall not be subject to value-added tax for the time being, and shall be subject to value-added tax in accordance with regulations when the interest is actually received.

The above-mentioned tax normative documents have relatively clear provisions on the tax-related treatment of overdue interest, but they are all aimed at specific objects, namely financial enterprises, including the People's Bank of China, commercial banks, policy banks, credit cooperatives, securities companies, financial leasing companies, securities fund management companies, finance companies, trust investment companies, securities investment funds, insurance companies, and other institutions established and operating financial insurance business with the approval of the People's Bank of China and the China Banking and Insurance Regulatory Commission, etc. It is not clear whether the overdue interest of non-financial enterprises' private lending can be applied by reference.

3. How to Determine the Interest That Has Not Been Implemented in This Case

The starting point of the tax dispute in this case is when the interest receivable that should be received but has not been received as legally ruled by the people's court should be declared and paid. The tax authorities believe that even if the enterprise has not received the interest, it should declare and pay taxes when the judicial document takes effect, while the enterprise believes that it should not declare and pay taxes if it has not received it. If it is a financial enterprise, it can be resolved according to the special tax treatment regulations for overdue interest mentioned above, but Changlong Investment Co., Ltd. is not a financial enterprise. In the case of unclear or conflicting provisions in relevant laws, regulations, and normative documents, the author will discuss the disputed issues in light of the circumstances of this case.

First of all, reaching the point where interest needs to be confirmed by judicial ruling means either the agreement was unclear or the principal and interest have become overdue. From the perspective of the VAT (business tax) obligation period for interest, the contractually agreed interest collection date is replaced by a judicial ruling, and judicial documents will calculate interest and penalty interest up to the actual repayment date. Therefore, unless someone is out of their mind and issues an invoice to the other party after the court confirms the interest, neither the contractually agreed date nor the service completion date applies; only the date of receipt of payment applies.

Secondly, from the perspective of the general tax obligation provisions for interest in corporate income tax, it seems closest to the tax authority's view in this case, because the "Implementation Regulations of the Corporate Income Tax Law" stipulates that interest income is recognized according to the contractually agreed date of payable interest. However, regardless of whether judicial rulings fall within the scope of contracts, from the perspective of the "Accounting Standards for Business Enterprises," the income recognition conditions are that it can bring economic benefits to the enterprise and can be reliably measured. Therefore, overdue interest that is receivable but not received cannot bring economic benefits to the enterprise nor determine the final amount, and does not meet the income recognition conditions. It is interest but not interest income, and therefore cannot be subject to the general tax obligation period provisions for interest income in corporate income tax.

Thirdly, from the basic principles of tax law, the principle of substantive taxation and the principle of tax fairness require that the taxpayer's tax burden should be determined based on the taxpayer's true ability to pay, and not only on whether it superficially meets the elements of taxation, but also on horizontal and vertical fairness. In this case, the overdue interest receivable but not received, from the perspective of substantive taxation, the possibility of obtaining income is still uncertain, and currently, there are also provisions in tax policies that defer the declaration and payment deadline to the actual cash flow generation time after the tax obligation arises. In addition, the overdue interest of financial institutions can be subject to tax obligations when actually received, which is also a legally recognized and similar type of lending behavior. It would violate the principle of tax fairness if overdue interest on private loans cannot enjoy the same tax treatment as financial enterprises.

In summary, for non-financial enterprises' judicially confirmed overdue interest receivable but not received, the tax treatment provisions for overdue interest of financial enterprises should be referred to, instead of simply applying the general provisions of the interest tax obligation period, and choosing the agreed interest collection date to determine the time for declaring and paying taxes. Of course, for the amount recovered, according to Article 561 of the "Civil Code," interest is generally given priority over principal. If there is only so much principal and interest, it is also possible to repay the principal first and then the interest from the perspective of tax burden optimization, after all, the principle of agreement applies to the order of repayment.

Next time, we will talk about the different tax effects of liquidated damages, compensation, and capital occupation fees. Please stay tuned.