How Foreign-Trade Enterprises Break the Tax-Supplement Predicament Triggered by an Abnormal Reply Letter

Recently, many foreigntrade enterprises have been denied export tax rebates by tax authorities at the taxrebate location due to abnormal reply letters issued by tax authorities of their upstream suppliers. Numerous foreigntrade enterprises are confronted with similar plights: their entire procurement and export processes are compliant, with full consistency in contract flow, invoice flow, capital flow and goods flow. Nevertheless, merely due to abnormal upstream reply letters, they are denied tax rebates, taxed as domestic sales and charged latepayment surcharges. Is such practice by tax authorities legally justified? This article analyzes the issue combined with practical cases and provides practical response suggestions for foreigntrade enterprises.

I. Case Introduction

Recently, ForeignTrade Enterprise A received a Tax Matter Notice issued by the tax authority at its taxrebate location. On 1 February 2026, Enterprise A filed an application for export tax rebates with the aforesaid tax authority, which then launched an auditbyletter investigation targeting Enterprise A’s upstream supplier. Subsequently, it obtained a reply letter stating that the subject supply transaction fell under the category of nonrefundable (taxexempt) invoice scenarios. Specifically, the goods name and quantity specified on the VAT special invoices under investigation were inconsistent with those recorded on delivery orders, warehouseout slips, relevant domestic transportation documents and other supporting documents of the investigated enterprise (excluding reasonable loss and spoilage of quantity).

On such grounds, pursuant to Item 4 of Article 57 of the Announcement of the State Taxation Administration on Issuing the Measures for the Administration of VAT and Consumption Tax Refunds (Exemptions) for Export Business (STA Announcement No. 5 of 2026) and Item 1 of Article 7 of the Announcement of the Ministry of Finance and the State Taxation Administration on VAT and Consumption Tax Policies for Export Business (MOFSTA Announcement No. 11 of 2026), the tax authority denied export tax refund (exemption) treatment for the subject transaction of Enterprise A. Meanwhile, in light of the verification conclusion from the taxrebatelocation tax authority, the competent tax substation of Enterprise A treated the subject export transaction as domestic sales, requiring the enterprise to revise its VAT tax return at the 13 % tax rate and pay the corresponding VAT tax arrears plus latepayment surcharges.

According to verification, the subject goods transaction chain ran as: Enterprise E → Enterprise D → Enterprise C → Enterprise B → Enterprise A → Foreign Buyer. After producing the goods, manufacturer Enterprise E sold them layerbylayer downstream, until Enterprise B supplied the goods to Enterprise A, which finally declared export to overseas destinations. The taxrebatelocation tax authority sent an investigation letter to the tax authority of Enterprise B; tax authorities at each subsequent level traced upward along the transaction chain and eventually issued an investigation letter to the tax authority of terminal manufacturer Enterprise E. Throughout the fullchain verification, the only irregularity was that Enterprise D failed to submit corresponding transportation documents to its competent tax authority. No substantive contradictions among supporting documents or inconsistencies between invoices and goods were identified. Nonetheless, this procedural defect was recorded in successive reply letters, which ultimately deprived Enterprise A of regular export tax rebates and subjected it to domesticsale taxation and latepayment surcharges. Based on this case, the following section analyzes three core issues concerning exportrelated auditbyletter investigations.

II. Legal Analysis of Three Core Issues in ExportOriented AuditbyLetter Investigations

(I) May Tax Authorities Trace AuditbyLetter Investigations Indefinitely along Transaction Chains?

Against the legislative background of the exporttaxrebate auditbyletter system, the system was designed to verify the authenticity of doubtful export transactions. Through crossregional taxauthority collaboration, it reviews upstream transactions, production and transportation links to guard against fraudulent exporttaxrebate activities. It does not authorize tax authorities to trace investigation letters indefinitely up the transaction chain.

Pursuant to Article 104 of the Working Norms for National Tax Authorities on Export Tax Refund (Exemption) Administration (Version 2.0) (Tax General Document〔2018〕No. 48): after receiving an investigation letter, a replylocation tax authority shall review the receipt status via the auditbyletter system and conduct verification in accordance with the following requirements before issuing a reply letter: (1) Analyze routine taxcollectionandadministration information of the goodssupplying enterprise, and assign no fewer than two tax officers to conduct onsite verification covering items listed in the investigation letter. Work papers shall be prepared and verification materials retained after onsite inspection. … (4) Where the replylocation tax authority finds that the export goods under verification are purchased or processed on commission by the supplying enterprise and doubts exist over transaction authenticity, it shall fill out the Letter for Investigating Circumstances of Purchased or CommissionProcessed Business in the auditbyletter system and send an investigation letter to the competent tax authority of its upstream enterprise. The upstream competent tax authority shall conduct verification as prescribed and issue a reply by completing the Reply Letter for Investigating Circumstances of Purchased or CommissionProcessed Business in the auditbyletter system.

Two conclusions can be drawn therefrom: first, the taxrebatelocation tax authority may not bypass the supplying enterprise’s tax authority and directly issue investigation letters to tax authorities further upstream in the transaction chain; instead, it shall follow the procedure of sequential letter dispatch and sequential reply. Second, upon receiving an investigation letter, the replylocation tax authority shall carry out onsite inspection of the supplying enterprise. If no authenticityrelated doubts are found for the subject transaction after verification, it shall not arbitrarily trace further upstream by issuing additional investigation letters.

Applied to the present case: the taxrebatelocation tax authority dispatched an investigation letter to Enterprise B’s tax authority. The latter shall conduct onsite verification targeting Enterprise B. If no doubts emerge regarding the exporttaxrebaterelevant transaction upon inspection, Enterprise B’s tax authority shall refrain from sending further letters to upstream entities; failure to do so constitutes procedural illegality.

(II) What Are the Categories of Reply Letters in AuditbyLetter Investigations?

Under the Working Norms for National Tax Authorities on Export Tax Refund (Exemption) Administration (Version 2.0) (Tax General Document〔2018〕No. 48), reply letters for exporttaxrebate auditbyletter investigations fall into four major categories, each triggering corresponding taxrebate handling rules:

Normal Business: This category indicates that after verification, the replylocation tax authority confirms genuine upstream transactions of the foreigntrade enterprise without taxrelated doubts. Subject to other examination results, the taxrebatelocation tax authority may process export tax refund (exemption) in accordance with law.

Verification Incomplete: Within 20 working days upon receipt of the verification letter, the replylocation tax authority shall truthfully, completely and properly fill in replyletter contents via the system. Where scheduled reply is impossible due to upwardchain investigationletter tracing, ongoing tax assessment or tax audit against the supplying enterprise and other special circumstances, a deferral statement specifying reasons and expected reply time shall be issued to the taxrebatelocation tax authority within the aforesaid 20workingday timeframe. Verification and reply shall be completed within 60 working days from deferral commencement. If verification cannot be finished even after 60 working days, relevant facts shall be truthfully stated in the reply letter.

Circumstances Disqualifying for Tax Refund (Exemption): For exporttransaction matters covered by such reply letters, the taxrebatelocation tax authority shall reject pending refund applications; recover already disbursed tax refunds; and impose domesticsale taxation where VAT taxation policies apply. The reply letter received by the taxrebatelocation tax authority in this case belongs to this category.

Suspension of Tax Refund (Exemption) Processing: This reply type applies when upstream enterprises are suspected of specialinvoiceissuance fraud or exporttaxrebate fraud and under ongoing taxauthority investigation without final disposition. The taxrebatelocation tax authority suspends exporttaxrebate processing. For refunds already granted, it may suspend taxrebate processing for other preapproved refundable amounts of the foreigntrade enterprise corresponding to the involved refund sum. If no other refundable amount exists or such amount is lower than the involved refund sum, the foreigntrade enterprise shall provide security for the shortfall. Tax refunds may be processed or security released only after relevant doubts are eliminated upon verification.

(III) May the TaxRebateLocation Tax Authority Directly Render a TaxRefundDenial Decision Solely on the Basis of an Abnormal Reply Letter?

In practice, besides the four standardized replyletter categories above, nonstandardized replies also occur. Some replylocation tax authorities merely describe upstreamtransaction doubts in narrative text, e.g., “no goodstransport track available”, “transport documents not submitted”, without selecting formal replyletter categories. In such circumstances, the author holds that the taxrebatelocation tax authority shall not directly deny tax rebates relying merely on such replies. Instead, it shall conduct supplementary verification and send a renewed investigation letter to the upstreamenterprise tax authority requiring confirmation on the described factual doubts.

In the instant case, the reply letter received by the taxrebatelocation tax authority fell under the category of “circumstances disqualifying for tax refund (exemption)”. Relying thereon, it denied exporttaxrebate eligibility for Enterprise A’s subject transaction, and the competent tax substation proceeded to recover tax payments and impose latepayment surcharges.

III. BreaktheDeadlock Strategies for This Case

First, argue improper application of law by tax authorities. The fullchain transactions in this case are genuine with fourflow consistency. The only defect is Enterprise D’s failure to submit corresponding transportation documents to tax authorities, while all other transaction vouchers and filing materials are complete, matched and mutually corroborative. Under Item 4 of Article 57 of STA Announcement No. 5 of 2026, the precondition for taxrefund denial is substantive inconsistency between VAT special invoices and delivery orders, warehouseout slips, transportation documents and other supporting documents. In this case, Enterprise D’s nonsubmission of transportation documents constitutes missing materials rather than “inconsistency” as prescribed by law.

Second, point out procedural illegality in the replyletter process. As elaborated above, upon receiving an investigation letter, the replylocation tax authority shall first conduct onsite inspection. Where no doubts are identified after onsite verification, it shall issue a “normal business” reply letter in accordance with law. Nevertheless, in practice, some replylocation tax authorities, out of prudent lawenforcement considerations, continue dispatching investigation letters targeting upstreamenterprise competent tax authorities even without detected factual doubts after onsite inspection. As a result, foreigntrade enterprises suffer prolonged nonrefund status or even domesticsale taxation, incurring severe economic losses.

Third, initiate statutory legal remedies. Enterprise A may pursue remedies against the Tax Matter Notice denying export tax rebates issued by the taxrebatelocation tax authority. While this instrument denies taxrebate eligibility, it does not directly impose tax collection. Hence, an administrative reconsideration application may be filed directly with the nexthigherlevel tax authority. By contrast, the taxsupplement and latepaymentsurcharge decision rendered by the competent tax substation is subject to the precondition of taxpayment precedent: Enterprise A shall first pay the tax amount or provide corresponding security before applying for administrative reconsideration against such taxcollection act. Although the two administrative acts are factually interdependent, they constitute independent administrative conduct and shall trigger separate remedy procedures.