The main taxation issues currently facing pharmaceutical enterprises relate to distribution. A lack of changes to the current system of controlling pharmaceutical circulation has perpetuated the established model of benefit distribution.
As a result, pharmaceutical companies resort to off-book operations to conceal their sales revenue, inflate their costs and expenses, and use fraudulent or illegally obtained VAT invoices to extract profits, leading to a variety of compliance risks.
Tax management through data can leverage phase IV of the golden tax system (intelligent tax) to detect illegally operating pharmaceutical companies in a timely manner, analyse suspicious clues and assess illegal situations.
Tax authorities can expand and deepen their inspections by breaking down information barriers.
The exposure of several typical cases highlights the need for pharmaceutical companies to strengthen their tax compliance framework to meet the regulatory challenges of tax management through data.
COMPLIANCE CONSTRUCTION KEYS
Management of external suppliers is of great importance in compliance construction.
Supporting evidence provided by these enterprises must be kept, especially service contracts, which should be reviewed for main terms and conditions, as well as implementation of services and payment settlement. Contracts should be standardised, and definitions of consulting service fees and sales commissions should be clarified for lawful tax treatment.
These companies must submit regular reports to ensure the authenticity of business transaction expenses, and provide a complete chain of evidence for reference purposes without engaging in any tax violations such as false claims.
The qualification management and capacity evaluation of these companies should be strengthened, and their business capabilities should be systematically assessed on a regular basis, including their employee information, business premises, business scale and credit records, to evaluate whether their operational capacity meets current service requirements.
Conducting dynamic early warning for external suppliers is core to implementing compliance.
Digital invoice compliance management tools such as Jinxin Yipiaotong (www.jinxin01.com/) can achieve an efficient and multi-frequency compliance flow of invoices and supplier credit.
It provides enterprises with risk assessment and early warning solutions for suppliers’ comprehensive risks from multiple dimensions including basic status and negative risks of suppliers, information on abnormal operations, verification of shareholders, survival status and criminal risks.
In cases where upstream and downstream enterprises issue risky invoices due to changes in their business status – such as absconding and losing contact, abnormal operations, revocation of business licences, suspected tax violations and false invoices – it is crucial to take timely measures such as transferring financial inputs to avoid corporate risks.
The biggest risk for pharmaceutical companies is input tax invoices, requiring compliance management to be at the core of fiscal and tax compliance.
Input tax invoices are the red blood cells of business operations and an important antenna for taxation supervision under tax management through data.
By utilising digital tools’ unique risk rule library and external risk database – as well as the big data risk rule engine, combined with the current tax regulatory focus and hotspots – it is possible to carry out refined management on goods or taxable labour services, service name abbreviations, and thousands of commodity details in input tax invoices.
This allows for reconstruction of the underlying logic of various cost data, and conducting high, medium and low-risk assessments on various invoices. This approach helps to warn of the risk of false invoicing in advance, greatly reduces the risk of false acceptance, and decreases subjective intention of unit crimes, providing strong data support for effectively responding to and investigating key tax violations such as false issuance and receipt of invoices.
Refined cost management should be implemented.
After refining the management of input tax invoices for big data, pharmaceutical companies can gain a panoramic understanding of their internal financial and taxation dynamics, clarify tax obligations and compliance risks for various tax types, and realise dynamic management of business costs.
This can be achieved by: (1) avoiding capital risks through invoice checking; (2) eliminating unreasonable and non-compliant invoice categories by classifying and managing invoices, and relieving the execution pressure of the finance department; and (3) controlling key invoice categories, optimising financial management, realising dynamic budget management, and improving the company’s data-based financial and tax management.
Strengthen comprehensive credit management and effectively address historical financial and taxation problems.
The core logic of taxation big data supervision is to model the high-frequency taxation, market supervision violations and internal violations of pharmaceutical enterprises, and ultimately implement them as various risk control indicators.
Pharmaceutical companies must be rid of their fluke mentality. First, they need to do a good job of system inspection on historical invoices, carry out dynamic management of business data for a cycle of three years, systematically retain evidence for ticket-related business, and meet the requirements of regulatory authorities to ensure integrity of the chain of evidence and traceability management of historical invoices.
Second, external professional and data services should be entrusted to achieve relative symmetry of information between enterprises and the government as much as possible, working backwards from the law enforcement logic to achieve a compliance path and synchronisation with regulatory logic.
To implement digital construction of finance and taxation, pharmaceutical enterprises need to be forward-looking and practical in finance and taxation compliance.
They should establish a precise control and pre-final accounts system based on the digitalisation of enterprise operations, and take a long-term and dialectical approach to establishing a fiscal and tax compliance system.
This will enable them to handle tax department inspection with greater ease, obtain a good credit rating, and achieve healthy and sustainable development.
Quan Kaiming is a partner and Yuan Wei is an associate at AllBright Law Offices. Xie Meishan, an associate at the firm, also contributed to the article
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