As a TV drama focusing on tax inspection, based on vivid dramas and real cases, “The Great River”, deeply reveals the tax problems faced behind the current rapid economic development, and at the same time popularizes tax knowledge for the audience. Therefore, this article introduces some tax risks in the drama and discusses how companies can effectively avoid these risks in daily life.

1. Related Party Transaction Risk

In the drama, Mr. Zhou of Yuhui Coffee purchased a set of management software with a market price of only 24 million RMB at a high price of 40 million RMB, and the counterparty was Yiteng Technology, and the major shareholder of Yiteng was the ex-wife of Mr. Zhou. The audit found that this kind of related transaction was suspected of inflating costs and transferring profits, which led to the loss of national tax.

This case reminds companies that when conducting related party transactions, they must ensure the fairness of the transaction price, refer to the market price, and avoid transferring profits through unreasonable pricing. And take the initiative to disclose the information of connected transactions to the tax authorities and cooperate with the tax examination.

2. Fraudulent Export Tax Rebate

In the drama, Qike Technology disguised itself as a production-oriented export enterprise and sold low-priced cell phones to its associated companies in Southeast Asia at a high price, and then its domestic associated companies purchased these cell phones back at a low price and shipped them back to Qike Technology to export them again at a high price. Through this kind of operation of exporting the same batch of goods in a continuous cycle, a large amount of export business illusion was created. At the same time, they collude with the shell companies that provide false invoices. These shell companies issue false VAT invoices and other bills for Qike Technology to match the false export business, so that they can apply for tax refunds from the tax authorities.

Therefore, if enterprises want to conduct export tax rebates legally, the correct procedure is as follows: Firstly, enterprises need to declare to the Customs at the export stage and obtain a customs declaration form, which will verify the authenticity of the information and amount of the goods. Secondly, after receiving the payment, enterprises will get an export foreign exchange verification form from the bank. Finally, enterprises prepare value-added tax special invoices for the purchase of raw materials, customs declaration forms, export foreign exchange verification forms and other materials, then submit them to the tax bureau for review. After the review is passed can companies receive the tax refund.

3. Transfer Pricing Risk

In the drama, Zhao Mingda sets up an offshore holding company in a tax haven and transfers the profits to the offshore company with low tax rate through unreasonable pricing, which results in the domestic enterprise's book profit being very low or even loss, while the offshore company accumulates a large amount of profits. This behaviour is not in line with the principle of independent transaction and is recognized by the tax authorities as tax evasion and faces tax review, adjustment and penalty.

Therefore, in real life, enterprises should follow the principle of independent transaction, pricing of connected transactions should be comparable to the price of transactions between independent third parties, and prepare detailed transfer pricing documentation, including master file, local file and country report, to prove the reasonableness of pricing.

By comparing positive and negative cases, "The Great River" points out the importance of tax compliance for companies. Enterprises should draw lessons from the drama, emphasize tax compliance management, establish a sound tax risk prevention and control system, and ensure sound development on the track of legal compliance.

At PHC Advisory, we can offer you full support on matters regarding doing business in China, or any other issues your business may face. If you would like to know more about policies relevant to your business in Italy or Asia, please contact us at info@phcadvisory.com.  

PHC Advisory is a company of  DP Group: an international professional services conglomerate of companies with approximately 100 experienced professionals worldwide. We offer comprehensive services in tax, accounting, and financial consulting, including financial supervision, financial audit, internal audit, internal control over financial reporting, and support for audited financial statements and annual audits, ensuring clients' financial transparency and compliance. 

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The content of this article is provided for informational purposes only, financial advice must be tailored to the specific circumstances on a case-by-case basis, and the contents of this article do not legally bind PHC Advisory with the reader in any way. 

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