Today, the Ministry of Finance and the State Administration of Taxation announced to the public the Announcements No. 8, 9, and 10 of 2020 issued on February 6, which involve tax preferential policies to support the prevention and control of pneumonia caused by novel coronavirus infection. Announcement No. 9 specifically clarifies the tax preferential matters for anti-epidemic donations. Prior to this, the claim that charitable donations could avoid taxes had already spread on the Internet, fueled by the distribution of donated masks by the Hubei Red Cross. On January 31, the news that the Hubei Red Cross had "donated masks to Putian-affiliated hospitals" caused an uproar online. After some fermentation, the Hubei Red Cross admitted on February 1 that there were problems such as lax review, strict implementation of procedures, lack of attention to detail, and an unsolid work style in the distribution of materials, and stated that it would conduct a thorough review and hold direct responsible persons accountable in accordance with regulations. On February 4, with the approval of the Hubei Provincial Commission for Discipline Inspection and Supervision and reported to the Provincial Party Committee, three leaders of the Hubei Red Cross were held accountable, and one full-time vice president was dismissed. However, netizens obviously did not intend to let it go. While the Red Cross was apologizing, some netizens revealed that the donor, Beijing Sengenbiya Biological Engineering Technology Co., Ltd. (hereinafter referred to as Sengenbiya), and the recipient, Wuhan Ren'ai Hospital, actually had the same boss, which is equivalent to moving money and materials from the left pocket to the right pocket, donating from one's own people to one's own people, and at the same time defrauding donation invoices to evade taxes. Some online influencers also posted an article titled "How can enterprises successfully avoid taxes and gain both fame and fortune? Putian-affiliated Wuhan Ren'ai Hospital teaches you hand-in-hand," proposing that the bosses of Putian hospitals purchase medical equipment, such as 100,000 yuan worth of masks, from another medical equipment company B controlled by themselves through a trading company A controlled by themselves, and then donate them to the Red Cross at a price of 360,000 yuan, and donate them to their own hospitals designated by the Red Cross. The Red Cross accepts donated materials for rescue and public welfare undertakings and enjoys preferential treatment of tax reduction and exemption in accordance with relevant national regulations. That is to say, Sengenbiya and Wuhan Ren'ai Hospital are related, one party donates to save tax, and the other party gets materials for free, which not only saves a large amount of tax, but also gains a good reputation for being enthusiastic about public welfare. Such a "show operation" brings both fame and fortune! For a time, the Red Cross and the Putian system, two former "internet celebrities," once again became the focus of online criticism.

So, can such an "operation" really bring both fame and fortune? Below, the author will give you an analysis from the perspective of laws, tax regulations, and policies.

In response to the current COVID-19 epidemic, the main donations are cash and medical supplies. Donation tax policies for other items such as services, intangible assets, real estate, and equity will not be discussed in this article. Direct cash donations do not involve VAT issues, so let's see how donations of materials are regulated.

1. VAT aspect

Article 4 of the "Detailed Rules for the Implementation of the Provisional Regulations on Value-Added Tax" stipulates that if a unit or individual business household donates self-produced, commissioned processing, or purchased goods to other units or individuals free of charge, it shall be deemed as the sale of goods. The Ministry of Finance and the State Administration of Taxation's "Notice on Comprehensively Promoting the Pilot Program of Replacing Business Tax with Value-Added Tax" (Cai Shui [2016] No. 36) also clarified that the above-mentioned behavior should be calculated and paid VAT as if it were a sale.

Deemed sales means that although the goods are not really sold and no money is received, and no income is recognized in accounting, the goods must still be treated as sold in tax law. For example, in VAT, the output tax must be included in the calculation and payment of VAT, and in corporate income tax, the income must be recognized and included in the taxable income.

Isn't it said online that "the Red Cross accepts donated materials for rescue and public welfare undertakings and enjoys preferential treatment of tax reduction and exemption in accordance with relevant national regulations"? The latest donation tax preferential policy just announced by the Ministry of Finance and the State Administration of Taxation today does stipulate that VAT is exempt for qualified anti-epidemic donations, but this policy did not exist when it was said online!

The only effective regulations involving VAT reduction and exemption for charitable donations of materials before were the Ministry of Finance, the State Administration of Taxation, and the State Council Poverty Alleviation Office's "Announcement on the Policy of VAT Exemption for Poverty Alleviation Goods Donations" (Announcement No. 55 of 2019): Its main content is: From January 1, 2019 to December 31, 2022, units or individual business households that donate self-produced, commissioned processing, or purchased goods to units and individuals in targeted poverty-stricken areas through public welfare social organizations, county-level and above people's governments and their constituent departments and directly affiliated institutions, or directly and free of charge, are exempt from VAT. The policies for VAT exemption for donations to disaster-stricken areas such as the Wenchuan earthquake, Luding earthquake, Lushan earthquake, and Zhouqu mudslide have all expired. That is to say, when the donor donates masks to the Hubei Red Cross, they cannot enjoy reduction or exemption in VAT, and they must calculate and pay VAT as if it were a sale. Below, I will conduct a calculation and analysis based on the tax policies at that time.

Returning to the "operation" plan circulating online, donating 100,000 yuan worth of masks at a price of 360,000 yuan to the Red Cross, according to the regulations on deemed sales, is equivalent to selling masks purchased for 100,000 yuan for 360,000 yuan, earning 260,000 yuan. Whether this markup link is completed in the A trading company or in the B medical equipment company, it will eventually need to pay 26/1.13×13%=29,900 yuan in VAT. Others donate goods at the price they purchased them for, and there is no VAT to pay if there is no increase in value. Such an operation requires not only donating materials but also paying extra VAT to the state!

But some netizens say that the VAT is a little more, but the extra 260,000 yuan can be deducted from the corporate income tax when donating, so is it still a profit! Is this really the case? Let's take a look at the regulations on corporate income tax.

2. Corporate income tax aspect

The "Implementation Regulations of the Enterprise Income Tax Law" and the "Notice of the State Administration of Taxation on Issues Concerning the Income Tax Treatment of Enterprise Disposal of Assets" (Guo Shui Han [2008] No. 828) both clarify that if an enterprise uses goods for donation or sponsorship, it shall be deemed as the sale of goods. If it is an ordinary enterprise, at a corporate income tax rate of 25%, the extra 260,000 yuan will require the enterprise to pay an additional 26×25%=65,000 yuan in tax. If it is a high-tech enterprise like Sengenbiya, at a preferential tax rate of 15%, the extra 260,000 yuan will also require the enterprise to pay an additional 26×15%=39,000 yuan in corporate income tax.

The "Notice of the Ministry of Finance and the State Administration of Taxation on Relevant Policies Concerning the Pre-tax Carry-forward Deduction of Enterprise Income Tax for Charitable Donation Expenditures" (Cai Shui [2018] No. 15) stipulates: "The donation expenditures of enterprises through public welfare social organizations or county-level (including county-level) and above people's governments and their constituent departments and directly affiliated institutions for charitable activities and public welfare undertakings shall be allowed to be deducted when calculating the taxable income within 12% of the total annual profit; the portion exceeding 12% of the total annual profit shall be allowed to be carried forward to the following three years for deduction when calculating the taxable income." This is the general provision regarding charitable donations.

First of all, I want to make it clear to everyone that donations can indeed be deducted from corporate income tax, but the amount of the deduction is calculated on the taxable income. When calculating the corporate income tax payable, the taxable income is multiplied by the 25% tax rate for ordinary enterprises, the 15% preferential tax rate for high-tech enterprises, and the less than 10% preferential tax rate for small and micro enterprises, so there is not much left.

Secondly, there are conditions for calculating the deduction. The part of the donation that exceeds 12% of the profit in the current year can only be deducted in the next three years. That is to say, if you earn 1 million this year and donate 360,000, you can only deduct 1 million × 12% = 120,000 this year. When calculating corporate income tax, you can pay up to 12 × 25% = 30,000 yuan less. The remaining 240,000 yuan will be deducted in the next three years. If the company is unfortunately losing money in the next three years, the 240,000 yuan will be void.

According to the latest Announcement No. 9 of the Ministry of Finance and the State Taxation Administration, donations that meet the conditions of this epidemic are allowed to be fully deducted when calculating taxable income, without being restricted by 12% of the annual profit. Previously, the preferential policies were only applicable to poverty alleviation donations in areas out of poverty and public welfare donations to the Beijing 2022 Winter Olympics, Winter Paralympics, and test events. Before today, I had never heard of any special preferential policies for corporate income tax donations for the COVID-19 epidemic.

Even if the new preferential policy allows the donor to deduct the full amount, donating 360,000 yuan of masks through the Hubei Red Cross Society can deduct 360,000 yuan of taxable income at one time, and the corporate income tax payable will be reduced by up to 36 × 25% = 90,000 yuan; if Sengenbiya is a high-tech enterprise, the corporate income tax payable will be reduced by 36 × 15% = 54,000 yuan.

According to the online operation mode, let's calculate from the perspective of corporate profits to see if the donating company has actually benefited.

(1) Assuming that Company A is an ordinary enterprise, it spent 100,000 yuan to purchase masks from its related company B, added 260,000 yuan, and donated them to the Red Cross Society. The cost is 100,000, the value-added tax is 29,900, the corporate income tax is 65,000, and the donation deduction income tax is 90,000. The total loss of profit from this donation is 100,000 + 29,900 + 65,000 - 90,000 = 104,900 yuan.

(2) Assuming that Company A is a high-tech enterprise, it spent 100,000 yuan to purchase masks from its related company B, added 260,000 yuan, and donated them to the Red Cross Society. The cost is 100,000, the value-added tax is 29,900, the corporate income tax is 39,000, and the donation deduction income tax is 54,000. The total loss of profit from this donation is 100,000 + 29,900 + 65,000 - 90,000 = 114,900 yuan.

If Company A honestly donates at the purchase price, let's calculate its profit situation again.

(1) Assuming that Company A is an ordinary enterprise, it spent 100,000 yuan to purchase masks from Company B and donated them to the Red Cross Society at the original price. The cost is 100,000, the value-added tax is 0, the corporate income tax is 0, and the donation deduction income tax is 25,000. The total loss of profit from this donation is 100,000 - 25,000 = 75,000 yuan.

(2) Assuming that Company A is a high-tech enterprise, it spent 100,000 yuan to purchase masks from Company B and donated them to the Red Cross Society at the original price. The cost is 100,000, the value-added tax is 0, the corporate income tax is 0, and the donation deduction income tax is 15,000. The total loss of profit from this donation is 100,000 - 15,000 = 85,000 yuan.

From this comparison, it can be seen that the donor donates more than it gets back, no matter how it donates. It is really too much to think about using public welfare donations to avoid taxes! And this online operation mode has no tax avoidance effect except for paying more "IQ" tax!

Some netizens have pointed out that the key to this "mask gate" is to move money and materials from the left pocket to the right pocket, and donate to their own people. Even if the donor does not benefit, the recipient benefits!

1. VAT aspect

The Ministry of Finance and the State Administration of Taxation's "Notice on Comprehensively Promoting the Pilot Program of Levying Value-Added Tax Instead of Business Tax" (Finance and Taxation [2016] No. 36) clearly states that medical services provided by medical institutions are exempt from value-added tax. Therefore, Wuhan Ren'ai Hospital does not need to deduct the input tax amount for the masks it receives. In other words, it does not matter to Wuhan Ren'ai Hospital whether Sengenbiya issues an invoice, or what kind of invoice it issues.

However, if the recipient unit is not a medical institution, such as China Construction Third Engineering Bureau, the construction unit of Huoshenshan Hospital, the construction services it provides must pay value-added tax. According to regulations, the value-added tax special invoice obtained for donated materials can be used to deduct the input tax amount. Assuming that China Construction Third Engineering Bureau obtains this batch of masks worth 360,000 yuan, and also obtains the value-added tax special invoice issued by the donor, it will pay 36 / 1.13 × 13% = 41,400 yuan less in value-added tax than simply receiving the materials without a special invoice.

2. Corporate income tax aspect

The "Corporate Income Tax Law" stipulates that income from accepting donations shall be included in the total income of the enterprise for each tax year and shall be subject to corporate income tax. This is a general provision. The Ministry of Finance and the State Administration of Taxation's "Notice on Issues Concerning the Exemption of Corporate Income Tax for Non-profit Organizations" (Finance and Taxation [2009] No. 122) stipulates that income from non-profit organizations accepting donations from other units or individuals is tax-exempt income. Therefore, whether Wuhan Ren'ai Hospital, which is defined as a Putian-based hospital, has to pay corporate income tax on the donated materials it receives depends on whether it is a non-profit organization.

In 2000, the State Council's Office for Restructuring the Economic System and other eight departments jointly issued the "Opinions on the Reform of Urban Medical Institutions and Health," which classified medical institutions for the first time, dividing them into non-profit and for-profit categories, and clarified that non-profit medical institutions enjoy tax incentives and financial subsidies, and need to implement government-designated prices. For-profit medical institutions have their medical service prices liberalized, operate independently in accordance with the law, and pay taxes in accordance with regulations. Since then, medical institutions in China have been managed as public non-profit hospitals, private non-profit hospitals, and private for-profit hospitals. Public non-profit hospitals are public institutions and are managed by the government's health and family planning departments; private non-profit hospitals are partnership legal persons and are registered with the civil affairs departments; private for-profit hospitals are company-based enterprises and are issued business licenses by the market supervision departments.

According to the exposed information, Ren'ai Hospital is officially known as Wuhan Ren'ai Hospital Co., Ltd., which is a company-based private for-profit medical enterprise. Therefore, Wuhan Ren'ai Hospital must include the full amount of donated materials in its total income. Considering that hospitals generally do not meet the standards for small and micro enterprises, they generally pay corporate income tax at a rate of 25%. In addition, similar to Wuhan Ren'ai Hospital, Putian-based hospitals are basically private for-profit enterprises and should pay taxes in accordance with regulations.

According to this online operation mode, Putian-based hospitals have to pay an additional 36 × 25% = 90,000 yuan in corporate income tax for receiving 360,000 yuan worth of masks. The original 100,000 yuan worth of masks only required paying 10 × 25% = 25,000 yuan. Their own people made their own people pay 65,000 yuan more in taxes, which is definitely an "IQ" tax!

According to the "Supplementary Notice on Issues Concerning Pre-tax Deduction for Public Welfare Donations" (Cai Shui [2010] No. 45) issued by the Ministry of Finance, State Administration of Taxation, and Ministry of Civil Affairs, for public welfare donations made through public welfare social organizations, enterprises or individuals should provide public welfare donation receipts printed by the financial departments at or above the provincial level (including provincial level) and affixed with the seal of the receiving donation unit, or the receipt of the "General Non-tax Revenue Payment" affixed with the seal of the receiving donation unit, in order to be able to deduct before tax as required.

In addition, according to the "Notice on Issues Concerning Pre-tax Deduction for Public Welfare Donations through Public Welfare Mass Organizations" (Cai Shui [2009] No. 124), non-monetary assets donated shall be calculated at their fair value. And the donor shall provide a certificate indicating the fair value of the donated non-monetary assets when donating to public welfare mass organizations and people's governments at or above the county level and their constituent departments and directly affiliated institutions. If the above certificate cannot be provided, the public welfare mass organization shall not issue public welfare donation receipts or the receipt of the "General Non-tax Revenue Payment".

As analyzed earlier, to prove to public welfare organizations that these masks are worth 360,000 yuan, there must be an invoice of 360,000 yuan. Issuing an invoice means paying a large amount of "IQ tax." Although the Red Cross Society of Hubei Province does have many problems in the distribution of donated materials in the face of this epidemic, it is not enough to let the Putian system donate wherever it points. That is to say, if you want to donate masks purchased for 100,000 yuan at 360,000 yuan, unless your affiliated company is willing to issue a sales invoice of 360,000 yuan, or the charity is opened by your family, otherwise the price is more than 3 times higher than normal, and you can't come up with a reasonable explanation, no one will issue you a public welfare donation invoice or non-tax receipt of 360,000 yuan. If the donor cannot obtain a legal donation certificate, the corresponding donation amount cannot be deducted before enterprise income tax, and another large sum of money will be lost!

It is understood that both Sengen Biya, the donor of the masks, and the Red Cross Society of Hubei Province have denied the existence of targeted donations. In addition to Wuhan Ren'ai Hospital, the other half of the 36,000 KN95 masks were given to the public hospital, Tianyou Hospital affiliated to Wuhan University of Science and Technology.

In summary, the online public welfare donation tax avoidance model that seems to be decent cannot stand analysis and scrutiny. Objectively, giving love requires cutting meat. The relevant tax incentives are to encourage this behavior and give the donor a certain amount of compensation, but if you want to gain both fame and fortune, unless you dare to simply and rudely evade taxes, no matter how "showy" the operation is, it is difficult to achieve.

On January 31, the author suggested in a public account article titled "A More Perfect Way to Show Love to Wuhan" that public welfare and charitable organizations should cooperate with medical institutions that do not have public fundraising qualifications, authorize the release of fundraising information, and adopt a targeted donation model, in which the charitable organization directly sends the materials to the hospital after registration and verification. Unexpectedly, after the Hubei Red Cross mask incident detonated public opinion, on February 1, the Wuhan Red Cross Society took the lead in adjusting the donation process, allowing domestic units or individuals to directly connect with the targeted donation medical institutions if they donate to the hospital, and directly send the materials to the recipient unit after confirmation. If donation vouchers are required, donation procedures can be handled at the Red Cross Society with the relevant certificates of the recipient unit. This is also a helpless move in extraordinary times when the credibility and ability of the Red Cross Society are widely questioned. However, taking such a big step at once and the steps are not consistent, there may be many problems before the supporting regulatory measures are introduced.

1. The risk that donors cannot enjoy the pre-tax deduction policy.

Announcement No. 9 of 2020 issued by the Ministry of Finance and the State Administration of Taxation today stipulates that enterprises and individuals donate cash and goods for responding to the pneumonia epidemic infected by the new coronavirus through public welfare social organizations or state organs such as people's governments at or above the county level and their departments, and directly donate goods for responding to the pneumonia epidemic infected by the new coronavirus to hospitals undertaking epidemic prevention and control tasks, which shall be allowed to be fully deducted when calculating the taxable income. If you donate directly to the hospital, you should pay attention to two aspects. First, the hospital must be a hospital that undertakes the task of epidemic prevention and control. I believe there will be a corresponding list of directories in the future. If you donate directly to a hospital that does not undertake the task of epidemic prevention and control, you can only follow the general tax regulations for public welfare donations and cannot enjoy the pre-tax deduction policy for enterprise income tax. Second, the donated materials are limited to items for responding to the pneumonia epidemic infected by the new coronavirus. If they do not fall within the above scope, such as cash, staff living supplies, etc., they cannot enjoy the pre-tax deduction policy for enterprise income tax. However, the decision of the Wuhan Red Cross Society on February 1 seems rather hasty and involves items and hospitals that are directly donated, which is rather general. If the donor only implements the donation behavior directly according to the guidance of the Red Cross Society, there may be situations that do not comply with tax regulations, so that they cannot enjoy preferential policies.

2. The risk of being punished for unauthorized public fundraising.

According to the current "Charity Law", public fundraising shall be carried out by charitable organizations that have obtained a public fundraising qualification certificate issued by the civil affairs department. The "Measures for the Administration of Public Fundraising by Charitable Organizations" clarifies that charitable organizations that have obtained public fundraising qualifications in accordance with the law may conduct fundraising activities to the public, and organizations and individuals that do not have public fundraising qualifications shall not conduct public fundraising. The Wuhan Red Cross Society allows direct targeted donations to hospitals, which is regarded as cooperation between organizations or individuals that do not have public fundraising qualifications and charitable organizations that have public fundraising qualifications in accordance with Article 26 of the "Charity Law", and the charitable organization conducts public fundraising. However, the announcement of the Wuhan Red Cross Society cannot represent the attitude of public welfare organizations outside Wuhan. Hospitals, non-medical institutions, and even individuals in other regions may still be suspected of violating the provisions of the "Charity Law" if they publicly raise funds to the society without the authorization of local charitable organizations, and may be fined not less than 20,000 yuan but not more than 200,000 yuan. If the act constitutes a violation of public security administration, the public security organ shall impose a public security administration penalty in accordance with the law. Combining the problems exposed by this epidemic public welfare donation, I believe that the relevant laws and regulations will make adjustments that are more in line with social conditions.

  3. The risk of violating regulations by using affiliated enterprises as donation beneficiaries.

Article 37 of the "Charity Law" stipulates that when a donor agrees with a charitable organization on the use and beneficiaries of donated property, it shall not designate its interested parties as beneficiaries. Since charitable organizations used to distribute donated materials mainly in a non-targeted donation mode and supplemented by targeted donations, public welfare organizations have the opportunity to devote more energy to review and control all targeted donations. Now the Wuhan Red Cross Society allows domestic units or individuals to directly connect with the targeted donation medical institutions if they donate to the hospital, and directly send the materials to the recipient unit after confirmation. The hospital here does not specifically refer to public non-profit hospitals. If the private for-profit hospital and the donor have a related relationship, this fully decentralized targeted donation model may indeed be used to transfer profits, adjust taxes, and finance in the name of donating funds and materials.

  4. The risk of fraudulently obtaining vouchers to evade taxes.

Targeted donations are directly connected with medical institutions. When issuing donation certificates to public welfare organizations in the later period, donation procedures are handled only with relevant certificates from the recipient unit. If people with ulterior motives provide false or forged unit certificates, increase the number of materials, and falsely increase the value of donated materials, since the donation behavior has been completed, the public welfare organization cannot verify the authenticity of the materials, which objectively increases the possibility of being defrauded of issuing high-value public welfare donation invoices. In addition, Announcement No. 9 stipulates that donors can handle pre-tax deductions with the donation acceptance letter issued by the hospital undertaking the task of epidemic prevention and control. Illegal elements may use information asymmetry to fabricate prices and defraud the recipient unit to issue acceptance letters with inflated prices. Illegally obtaining donation certificates through the above means to handle pre-tax deduction matters, so as to achieve the purpose of tax evasion.