Due to abnormalities in the replies from the tax authorities of upstream enterprises, the competent tax authorities of foreign trade enterprises may suspend or deny export tax refunds for extended periods. This not only severely occupies the enterprises' working capital but also restricts the normal expansion of their businesses. Under such circumstances, how should foreign trade enterprises break the deadlock? This article intends to sort out the historical context of the export inquiry system, analyze the impact of different types of replies on foreign trade enterprises, and provide practical advice for their response.

I. Historical Evolution of the Export Tax Refund Inquiry System

In 1994, China implemented a tax system reform, established the value-added tax (VAT) system, and built a tax collection and administration framework centered on special VAT invoices. In practice, lawbreakers and enterprises defrauded export tax refunds by forging, reselling, issuing on behalf of others, and falsely issuing special VAT invoices, resulting in a massive loss of state tax revenue. At that time, export tax refund supervision mainly relied on the documentary review of single certificates, and there was poor information exchange and obvious information barriers between regional tax authorities. To strengthen the tax supervision of export goods and prevent the risk of tax fraud, the State Taxation Administration (STA) issued the Provisions on Tax Inquiries for Export Goods (Guo Shui Fa [1995] No. 37, expired), establishing a cross-regional collaborative verification export tax refund inquiry system targeting high-risk areas such as Jiulong and Shantou in Guangdong, as well as bulk export goods. Subsequently, the STA successively issued multiple documents to improve the export inquiry system, including the Notice of the State Taxation Administration on Strictly Examining Export Tax Refunds and Strengthening Tax Inquiries for Export Goods (Guo Shui Ming Dian [1996] No. 56, expired), the Supplementary Notice of the State Taxation Administration on Issues Concerning Tax Inquiries for Export Goods (Guo Shui Han [1998] No. 406, expired), and the Notice of the State Taxation Administration on Strictly Strengthening the Administration of Tax Refunds (Exemptions) for Export Goods Purchased in Chaoshan Area, Guangdong Province (Guo Shui Han [2000] No. 51, expired).

In 2006, addressing common practical issues such as low response rates, delayed replies, and vague or non-standard reply contents, and to adapt to new export tax refund policies and management system requirements, the STA issued the Measures for the Administration of Tax Inquiries for Export Goods (Guo Shui Fa [2006] No. 165, expired). This document emphatically stressed that tax authorities at all levels must attach great importance to inquiry and verification work and standardize the inquiry procedures.

In 2010, combined with the new development trends of the foreign trade industry and the new means and characteristics of illegal activities defrauding export tax refunds, the STA updated the rules again and issued the Administrative Measures for Tax Inquiries for Export Goods (STA Announcement 2010 No. 11, expired). This document made comprehensive and systematic provisions on the procedures for the tax authority at the refund location to send inquiries, the tax authority at the reply location to verify and reply, and the tax authority at the refund location to handle the case upon receiving the reply, marking a significant upgrade and improvement of China's export tax refund inquiry system.

Currently, the prevailing normative documents governing China's export tax refund inquiry system are the three versions of norms successively issued by the STA, namely the National Tax Authorities' Export Tax Refund (Exemption) Management Work Norms (Version 1.0) (Shui Zong Fa [2014] No. 155), the National Tax Authorities' Export Tax Refund (Exemption) Management Work Norms (Version 1.1) (Shui Zong Fa [2015] No. 162), and the National Tax Authorities' Export Tax Refund (Exemption) Management Work Norms (Version 2.0) (Shui Zong Fa [2018] No. 48) (hereinafter referred to as the "Work Norms").

Generally speaking, the export tax refund inquiry system refers to the process where the tax authority at the refund location, needing to audit the authenticity of export goods with suspicious points, requests through cross-regional inquiry that the competent tax authority of the upstream enterprise investigate and reply regarding the enterprise's production, transportation, and transaction links. This assists in ascertaining the authenticity and legality of the export business, thereby preventing and cracking down on export tax refund fraud.

II. Types of Inquiry Replies and Their Impact on Foreign Trade Enterprises

According to the Work Norms, export tax refund inquiry replies are mainly divided into four categories; different reply results correspond to different refund disposal methods, which significantly impact the export tax refund rights and interests of foreign trade enterprises.  Specifically:

Type 1: "Normal Business". It should be noted that a normal reply result does not mean the refunding tax authority must immediately process the export tax refund. If the refunding tax authority, based on the enterprise's declaration materials and business details, believes that the export business still possesses unresolved suspicious points or requires further supplementary verification, it may still temporarily suspend the export tax refund.

Type 2: "Verification Not Yet Completed". The replying tax authority shall, within 20 working days from the date of receiving the verification inquiry, truthfully, completely, and standardly fill in the relevant contents according to the reply format in the inquiry system. If, due to special circumstances such as the need to trace inquiries to upstream enterprises or the supplying enterprise currently undergoing tax assessment or tax inspection, the reply cannot be made on time, it must issue an extension explanation to the refunding tax authority within 20 working days, specifying the reasons for the extension and the estimated reply time, and must complete the verification and reply within 60 working days from the extension date; if the verification still cannot be completed within 60 working days, the situation must be truthfully explained in the reply. In practice, if the upstream supplier of the foreign trade enterprise is also a trading enterprise, the replying tax authority needs to further send an inquiry to the tax authority of its upstream supplier (i.e., the supplier of that trading enterprise) for verification, until it traces back to the source manufacturing enterprise.  This may result in the replying tax authority being unable to complete the verification within 60 working days, and the replying tax authority will again extend the reply time until the verification is clear. If it remains unclear after a 60-day extension, the replying tax authority may continue to roll over the extension. Under this circumstance, the refunding tax authority may temporarily suspend the export tax refund for a long period, and concurrently, it will not issue a written decision of temporary suspension or denial of refund to the foreign trade enterprise, which will cause the foreign trade enterprise's right to a tax refund to be suspended indefinitely and its funds to be continuously occupied.

Type 3: "Existence of Circumstances Not Qualifying for Refund (Exemption)". If the upstream enterprise of the foreign trade enterprise has been verified as being involved in illegal and criminal acts such as tax fraud or false invoicing, the replying tax authority will select this type of reply. For the export business involved in the reply, the refunding tax authority shall not process the refund if it has not yet done so; if the refund has already been processed, it shall recover the refunded tax amount; if the value-added tax collection policy applies, it shall be taxed as domestic sales.

Type 4: "Temporary Suspension of Refund (Exemption)". If the upstream enterprise of the foreign trade enterprise is suspected of falsely issuing special VAT invoices or defrauding export tax refunds, and a case has been filed by the tax authority but not yet concluded, the replying tax authority will select this type of reply.  The refunding tax authority will temporarily suspend the export tax refund; for export tax refunds that have already been processed, it will temporarily suspend the export tax refund for the foreign trade enterprise's other approved refundable tax amounts up to the involved refunded amount. If there are no other refundable tax amounts or the refundable tax amount is less than the involved refunded amount, the foreign trade enterprise shall provide a guarantee for the difference. Only after the corresponding suspicious points are verified and eliminated can the refunding tax authority process the refund or release the guarantee.

Furthermore, in practice, in addition to the above four standard reply types, there are also non-standard reply situations where some replying tax authorities do not check standard reply types but merely provide textual descriptions of upstream business suspicious points, such as "no cargo transportation trajectory" or "abnormal transaction flow." Such vague replies lack a clear basis for disposal and may directly lead to the refunding tax authority being unable to process the tax refund normally.

III. What are the Remedies for Foreign Trade Enterprises?

1. Active Communication with Tax Authorities

On the one hand, foreign trade enterprises need to comprehensively compile the full-chain materials of the export business involved, including purchase contracts, payment vouchers, cargo transportation documents, customs declarations, export invoices, logistics receipt orders, inventory ledgers, etc., to form a complete and closed evidentiary chain of authenticity. They should proactively and actively communicate with the refunding tax authority, fully proving that their export business is genuine, compliant, and free of tax fraud risks, striving to have the tax authority process the tax refund based on the facts. On the other hand, they must actively contact upstream enterprises, follow up on the verification progress of the replying tax authority, and urge upstream enterprises to proactively cooperate with tax investigations and actively explain and eliminate business suspicious points. When necessary, the enterprise can directly interface with the replying tax authority to verify issues such as lagging inquiries and disputed suspicious points; for circumstances involving overdue replies or extensions of verification without justifiable reasons, they can legally urge the tax authorities to conclude the reply process on schedule.

2. Request Upstream Enterprises to Bear Liability for Compensation

If, due to faults of the upstream enterprise such as inconsistencies between goods and invoices, false transactions, false invoicing, or failure to truthfully cooperate with the verification, the foreign trade enterprise is unable to obtain normal tax refunds or the export tax refunds are recovered, the foreign trade enterprise may claim civil compensation from the upstream enterprise and seek recovery of all economic losses based on the compliance clauses and breach of contract liability stipulations in the signed sales contracts or cooperation agreements. For example, in a sales contract dispute between a trading company in Henan and an industrial company in Shenzhen, the export tax refund applied for by the Henan trading company was rejected by the refunding tax authority on the grounds that the VAT invoice for the transaction did not match the actual facts of the transaction.  The court held that the Shenzhen industrial company provided the replying tax authority with an amount inconsistent with the actual transaction acknowledged by both parties, resulting in the Henan trading company's inability to obtain a tax refund. The Shenzhen industrial company breached the obligation of good faith, caused losses to the Henan trading company, and should bear liability for breach of contract, compensating the Henan trading company for the loss of the unobtained tax refund.

3. Apply for Administrative Reconsideration or Institute Administrative Litigation

First, if the refunding tax authority, due to the replying tax authority's long-term failure to reply and continuous extension of verification, temporarily suspends the tax refund for an extended period without justifiable reasons, and has not issued any document or clear conclusion to the foreign trade enterprise, this act may constitute administrative omission (nonfeasance). The foreign trade enterprise may, in accordance with the law, apply for administrative reconsideration or institute administrative litigation against this omission, requesting the refunding tax authority to perform its tax refund audit duties in accordance with the law and conclude the business within a specified time limit. Conversely, if the refunding tax authority orally indicates a temporary suspension of the tax refund or issues a tax document for temporary suspension, the foreign trade enterprise may initiate administrative remedial procedures against such an administrative act. We believe that the right to an export tax refund is a legitimate right enjoyed by export enterprises; when this right is adversely affected by the temporary suspension of a tax refund by tax authorities, export enterprises have the right to apply for reconsideration or institute administrative litigation.

Second, the sending and replying of inquiries between the refunding tax authority and the replying tax authority are classified as internal working documents of tax authorities, which generally are not actionable. However, if the refunding tax authority exclusively relies on the content of the reply to make specific external administrative acts such as a decision denying the tax refund or recovering already refunded tax amounts, such decisions have a direct and actual impact on the tax refund rights and interests of the foreign trade enterprise and therefore fall within the scope of acceptance for administrative reconsideration and administrative litigation.

IV. Conclusion

Currently, the problem of hindered export tax refunds caused by abnormal inquiries has become a high-incidence risk in the foreign trade industry, directly affecting enterprises' capital circulation and normal operations. In this regard, the vast number of foreign trade enterprises should attach great importance to this issue. Beforehand, they must strictly conduct due diligence on the qualifications of upstream suppliers, prudently screen cooperative entities, and clearly stipulate liabilities for breach of contract and compensation clauses corresponding to tax flaws and abnormal inquiries in purchase and sales contracts. During the process, they should standardize the full-process management of export business and retain complete records of transactions, logistics, capital flows, and invoice flows to prevent triggering inquiry suspicious points from the source. Afterwards, if the tax refund is temporarily suspended due to abnormal inquiries, they must proactively communicate with the tax authorities, advance the verification progress of the inquiry, and for complex and difficult situations, request the assistance of tax lawyers to safeguard their legitimate export tax refund rights and interests.