Analysis and Suggestions of tax-related clauses of Contracts (1) : tax identity, contract price and tax amount

Recently, the author received the consultation of a unit customer, the customer as the subject of bidding, has completed the bidding process of a construction service project, and selected company A as the winning bidder, and the two sides signed a formal contract according to the bidding results. In the terms of the contract and the previous bidding documents and tender documents, it is clearly stipulated that the VAT rate applicable to the construction service is 9%. However, in the actual business implementation stage, Company A proposed that it could not provide a special VAT invoice with a 9% tax rate as agreed, and could only issue an invoice with a 1% tax rate. In view of the clear expression of the tax rate requirements in the bidding documents and the corresponding provisions in the contract terms after winning the bid, Company A's action not only constitutes a direct breach of the contract terms, but also violates the relevant provisions of the bidding law.

According to the description of “only 1% can be issued” provided by Company A, Company A should now be a small-scale VAT taxpayer. However, if it is already a general taxpayer, the current tax policy does not support its return to small scale [1], even if its annual taxable sales in the last 12 months are less than $5 million. Therefore, I am afraid that in the process of bidding and contract signing, the client made some mistakes in the examination of the tax identity and valorem tax terms of the contract parties.

So how can we avoid similar mistakes?

The tax identity of the parties to the contract shall be clear

There are two dimensions here, value-added tax and corporate income tax.

In terms of value-added tax, it is the issue of ordinary taxpayers and small-scale taxpayers. The standard for small-scale VAT taxpayers is annual taxable sales of 5 million yuan or less. If the cumulative taxable sales amount exceeds 5 million yuan for 12 consecutive months, the general taxpayer registration shall be handled; After the registration takes effect, the tax payable shall be calculated in accordance with the general VAT method. In the example mentioned in the introduction of this article, Company A “can only issue 1%” invoice, which is the use of the preferential policy of 1% for small-scale taxpayers who apply 3% levy rate.

When we sign a contract, we must first examine whether the other party is a general taxpayer and a small-scale taxpayer, and then it is the valence tax and what kind of invoice is issued/collected, and whether it can be deducted.

Corporate income tax is a question of whether a resident enterprise or a non-resident enterprise. If the other party is a non-resident enterprise, it may involve the requirements of withholding, actual tax burden bearing and submitting relevant information to the tax authorities. For the avoidance of doubt, these terms should be specified in the agreement between the parties.

The price including tax or excluding tax should be indicated

As we all know, VAT is an extra tax. Article 14 of the Rules for the Implementation of the Provisional Regulations on Value-added Tax stipulates that if a general taxpayer sells goods or taxable services and adopts the combined pricing method of sales and output tax, the sales amount shall be calculated in accordance with the following formula: sales amount = sales including tax ÷ (1+ tax rate). In other words, the sales price obtained by the seller consists of two parts: the sales amount and the tax.

Except for some cases (such as the aforementioned enterprise income tax of non-resident enterprises, individual income tax under the “remuneration income”, etc.) may involve other taxes, in general, the “tax” in the contract “tax included price” of daily economic exchanges refers to value-added tax.

In particular, the author emphasizes that when signing a contract, the parties must clearly indicate in the relevant clauses of the price whether the price includes or does not include tax. If the parties do not agree on whether the price includes tax in the contract or the agreement is unclear, according to the provisions of Article 510 of the Civil Code, it should be determined in accordance with the relevant terms of the contract or trading habits, which may have different understandings in judicial practice, resulting in unstable factors for the performance of the contract.

Including tax, excluding tax, which is cost-effective?

If you are A general taxpayer company A, planning to purchase a batch of goods from company B, Company B will give you two options: ① the price is 10,000 yuan, only a receipt, not invoicing; ② The price shall be 11,300 yuan including tax, and the corresponding VAT special invoice shall be issued. Which would you choose?

Plan ① seems to save A lot of money, but because A company did not obtain the special invoice for the purchase, it could not deduct the input tax of 1300 yuan, which is equivalent to paying VAT of 1300 yuan more. In addition, due to the lack of legal deduction vouchers, the purchase cannot be deducted from the account of Company A and cannot be deducted before tax, so the corresponding enterprise income tax may be overpaid [2]. For Company B, although no invoice has been issued, it is still obliged to pay VAT on the sale of the goods. But if the sale is not recorded at all, there is a risk of tax evasion.

In scheme 2, Company A obtains the corresponding special invoice and can deduct the input on the VAT according to law; In the enterprise income tax, it can also be deducted before tax.

In a word, legal compliance is the most cost-effective.

However, differences in the trading positions of the purchaser and the seller, as well as the anticipated changes in tax rates, do affect the contractual agreement as to whether the price includes tax.

If the contract price is signed at a tax-inclusive price, then a reduction in the tax rate (levy rate) is encountered. In this case, the purchaser may be at a loss - paying the price at a high tax rate, but receiving a low tax invoice; The seller may take advantage of the relative advantage. In recent ten years, China's value-added tax rate (taking general goods as an example) has indeed dropped from 17% to 16%, and then to the current 13%. The rise and fall of the tax rate (levy rate) has the opposite effect on the purchasing and selling enterprises. Whether to sign a contract including tax price needs the parties to look at it from their own point of view, and there is no absolute whether it is cost-effective.

Although in the end the parties still want to autonomy, but for large contracts, tax issues are often involved in the whole body. Especially for contracts with a long cooperation cycle, both buyers and sellers want the stability of future transactions and long-term cooperation with each other.

Therefore, the author suggests that the following clauses could be added: “In the process of contract performance, if the VAT rate/levy rate changes due to changes in relevant laws and regulations or tax policies, for the part of the contract that has not been performed, the tax inclusive price/total contract price of the original object shall be recalculated according to the new tax rate on the basis of the unchanged price, and the supplementary agreement shall not be signed separately.”

However, changes in the applicable tax rates due to subjective factors such as the tax status or tax payment method of the parties to the contract are excluded from the above provisions. The author suggests that it should be clearly stipulated that in the performance of the contract, both parties shall not arbitrarily change their tax status or tax payment method, and if the other party loses (usually the deductible input tax is reduced), corresponding compensation should be given.

For non-long-term contracts, both parties can also agree on a clear applicable tax rate/levy rate and tax payment method, so that it is clear, easy to worry and trouble.

In the scenario of a hammer sale, if the two sides negotiate the applicable tax price, the author suggests that the amount of the tax price can be directly agreed, and the specific composition is indicated, that is, how much the price excluding tax and the VAT output tax included are respectively. According to the Stamp Act implemented in 2022, the taxable contract is calculated on the basis of the amount listed in the contract, excluding the specified VAT tax. That way, maybe you can save stamp duty on the way.

Out-of-price costs should also be agreed

Article 12 of the Rules for the Implementation of the Provisional Regulations on Value-added Tax provides that: Out-of-price expenses include handling fees, subsidies, funds, collection fees, return of profits, incentive fees, liquidated damages, late payment fees, interest on deferred payments, compensation, collection fees, advances on behalf of the buyer, packaging fees, packaging rental fees, storage fees, quality fees, transportation and handling fees and other out-of-price charges of various nature. In short, the amount of out-of-price expenses relates to various out-of-price charges that may occur in the procurement process, and the “sales” in the value-added tax law refers to the total price and out-of-price expenses obtained by the occurrence of taxable behavior. Therefore, the author suggests that it should be stipulated clearly in the contract and whether the amount of out-of-price expenses includes VAT.

Finally, to sum up, don't ignore tax issues when making a contract, don't be afraid of trouble, take some time to think about it. How can it be more cost-effective, how can it avoid future wrangling, and how can it maintain long-term stability of cooperation? To solve these three “how”, it may be necessary to “set the universe with one tax”.

Footnote:

[1]. In 2018 and 2020, the State Administration of Taxation had a policy on the conversion of units and individuals registered as VAT general taxpayers to small-scale taxpayers, but these policies expired at the end of 2018 and 2020, respectively. For details, see Announcements No. 33 (2018) and No. 9 (2020).

[2] .Regardless of other factors, small micro-profit enterprises: 10000×5% = 500 yuan, general enterprises (non-high-tech enterprises, no other preferential tax treatment such as western development) : 10000×25% = 2,500 yuan