Editor's Note:Export tax rebates are an important tax incentive implemented by the state to encourage exports and enhance the international competitiveness of domestic products. However, in practice, some export enterprises are denied export tax refund (or exemption) treatment because their upstream suppliers trigger the tax authority’s “letter inquiry” (函调) mechanism, and the reply to such inquiry is deemed “abnormal.” As a result, the tax authority may require the enterprise to treat the export as deemed domestic sales, and to pay value-added tax (VAT) and related surcharges accordingly.

Through case analysis, this article examines the different outcomes of the inquiry mechanism and the varying risk implications. It also proposes response strategies for export enterprises to safeguard their legitimate rights and interests.

I. Case Introduction: A Single “Abnormal Inquiry Notice” Puts an Enterprise in a Tax Reassessment Dilemma

On September 28, 2025, an export enterprise received a Notice of Tax Matters issued by its competent tax authority. The notice stated that certain export goods of the enterprise were determined not to be eligible for export tax refund (or exemption). The company was required to declare and pay the relevant VAT and surcharges within 10 days of receiving the notice. Failure to comply within the deadline would result in handling in accordance with the provisions of the Tax Collection and Administration Law of the People’s Republic of China.

Upon verification, the root cause of this determination was that the tax authority had sent an inquiry letter to the tax authority supervising the upstream supplier, a furniture company. The reply stated that the invoices involved fell under circumstances where tax refund (or exemption) should not be granted, specifically:

1. The VAT special invoices under investigation were false or forged;
2. The supplier claimed to sell self-produced goods, but its production equipment and tools were incapable of producing such goods.

The legal basis cited was Article 5(9) of the Announcement of the State Administration of Taxation on Issues Concerning the Administrative Measures for VAT and Consumption Tax on Exported Goods and Services (SAT Announcement No. 12 of 2013).

According to this provision, if the competent tax authority of the exporter determines that the supplier’s production equipment and tools are incapable of producing the allegedly self-produced goods, the related export goods shall not qualify for export tax refund (or exemption) and instead shall be subject to VAT as domestic sales. On this basis, the tax authority required the enterprise to make supplementary tax payments.

This case reflects a growing regulatory trend in export tax rebate administration: risks originating in the upstream supply chain may be transmitted downstream to foreign trade enterprises. “Problematic invoices” or negative findings regarding the production capacity of upstream suppliers may place otherwise compliant trading companies at risk of tax reassessment or even legal liability.

II. Different Inquiry Reply Outcomes Lead to Different Risk Levels

During export tax rebate review, the “letter inquiry” mechanism is an important regulatory tool used by tax authorities. When suspicious export transactions are identified, the tax authority at the place of tax refund sends an inquiry letter to the tax authority supervising the upstream production enterprise to verify the authenticity of production, transactions, and transportation.

According to the Operational Guidelines for Export Tax Refund (Exemption) Administration of Tax Authorities Nationwide (Version 2.0) (SAT Document No. 48 [2018]), the tax authority receiving the inquiry may issue four types of replies, each leading to different consequences:

1. “Normal Business”

If the business is verified to be legitimate, the reply will state “normal business.”
Upon receiving such a reply and considering other verification results, the tax authority at the place of refund may process the export tax refund (or exemption) in accordance with regulations.

2. “Verification Not Yet Completed”

If the verification cannot be completed within 60 days, the reply will state “verification not yet completed.”
In this case, the tax authority handling the refund will temporarily suspend the refund process until a follow-up reply is issued.

3. “Circumstances Where Refund (Exemption) Should Not Be Granted”

If tax-related violations or crimes are identified, the reply will indicate “circumstances where refund (or exemption) should not be granted.”

In such cases:

• Export tax refunds shall not be granted if not yet processed;
• Refunds already granted must be recovered;
• If the transaction should be subject to VAT, it shall be treated as domestic sales;
• If suspected tax fraud is involved, administrative or criminal liability may be pursued.

4. “Suspension of Refund Processing”

If suspected tax violations exist but are not yet confirmed, the reply may state “refund processing suspended.”

In this situation:

• The tax authority temporarily halts the refund process;
• If refunds have already been approved, other pending refunds of the enterprise may also be temporarily withheld;
• The enterprise may provide guarantees for the difference where necessary;
• Once the suspicion is cleared, refunds may proceed or guarantees may be released; if violations are confirmed, legal action will follow.

In practice, if the upstream manufacturer fails to cooperate with the investigation, has deregistered, or cannot be contacted, the export enterprise may face long-term suspension or even permanent denial of refunds. More seriously, if the inquiry reveals suspected illegal activities such as issuing false VAT invoices, the administrative and criminal risks may be transmitted directly to the foreign trade enterprise. In such cases, the tax authority may refer the matter to inspection departments, potentially leading to administrative penalties or criminal proceedings.

III. Response Strategies for Export Enterprises Facing Inquiry Risks

When confronted with a tax authority’s inquiry regarding export tax refunds, enterprises should formulate response strategies from three perspectives: facts, law, and principles, in order to effectively mitigate risks and safeguard their legitimate rights and interests.

1. Fact-Finding: Ensuring Transaction Authenticity and Document Consistency

In communications with tax authorities, enterprises should proactively explain the specific operational process of the business, including the background, purpose, and commercial rationale of the transaction. For special trade arrangements or complex business models, detailed explanations can help tax authorities understand the substance of the transaction, thereby reducing risks arising from misunderstandings or information asymmetry.

On the one hand, enterprises should conduct a comprehensive review of documents based on each customs declaration, ensuring their completeness and authenticity. These documents include, but are not limited to:

• Contracts
• Invoices
• Packing lists
• Bills of lading
• Export customs declarations
• Export tax refund declaration forms

Information across these documents—such as product names, quantities, amounts, and specifications—should be consistent to avoid triggering inquiries.

On the other hand, enterprises should organize evidence according to each transaction. This involves documenting the entire process of each export transaction, including procurement, production, sales, transportation, customs clearance, and tax refund claims. By aligning supporting evidence with the transaction process, enterprises can clearly demonstrate the authenticity of each transaction.

2. Legal Arguments: Upholding the Principles of “Favoring the Taxpayer” and “Presumption of Innocence”

Tax authorities should not determine tax fraud solely based on internal inquiry replies.

Although inquiry replies may contain conclusions such as “the invoice is falsely issued,” these conclusions merely provide investigative leads. The tax refund authority cannot rely solely on such replies to determine that false invoicing occurred or that export tax refund fraud has been committed.

The fundamental requirement for export tax refunds is the actual export of genuine goods. If, after review, the tax authority cannot produce evidence overturning the materials submitted by the enterprise, it should, based on the principle favoring the taxpayer, recognize that the enterprise’s materials are complete and authentic and grant the export tax refund.

In practice, responding tax authorities often face tight deadlines and difficulties verifying upstream production enterprises. To avoid state tax losses and mitigate responsibility, they may adopt overly stringent standards when issuing replies. However, such practices may undermine taxpayer rights and violate the principle of presumption of honesty for taxpayers.

3. Principle of Protection of Legitimate Expectations: Addressing “Repeated Inquiries” and Changing Conclusions

Under administrative law, if an administrative counterpart reasonably relies on an administrative authority’s prior act and takes action based on that reliance, and the authority later revokes or changes the act causing losses, compensation should be provided.

The principle of protection of legitimate expectations is particularly relevant in cases of repeated inquiries. Once a tax authority has approved a refund, taxpayers have sufficient reason to trust that the authority’s verification and investigation were adequate and that their refund claim complied with export tax refund regulations.

If the responding authority initially replies “normal business” after verification, but later changes the conclusion to “circumstances where refund should not be granted,” such conduct may violate the principle of protection of legitimate expectations.

Conclusion

When facing the risk of “deemed domestic sales” triggered by abnormal inquiry replies, export enterprises may respond from three angles: fact clarification, legal defense, and protection of legitimate expectations.

By strengthening factual foundations—ensuring transaction authenticity and document consistency—enterprises can establish credible evidence. Through legal defenses emphasizing the principle favoring taxpayers, they can challenge overly rigid administrative conclusions. By invoking the principle of legitimate expectation, they can resist arbitrary changes in administrative actions.

At the same time, enterprises should strengthen supply chain risk management and carefully select trading partners to reduce the likelihood of inquiry risks arising at the source.