Tax compliance in the context of live e-commerce
Tuesday 5 April 2022
Chloe (Cui) Chen
Dentons, Shenzhen
cui.chen@dentons.cn
As a typical representative of the platform economy, the webcasting industry has played an important role in the development of the digital economy and the emerging entertainment ecosystem in recent years. With the rapid development of the live e-commerce industry, webcasters have attached great importance to web traffic and sales, but have ignored compliance operations, especially tax compliance. In addition, some development zones and relevant departments have inconsistent practices for tax approval policies for emerging business types. All these issues highlight the tax-related risks of the live e-commerce industry.
Most of the tax risks arise from the nature of taxes paid by webcasters that do not conform to the legal relationship determined by the business model.
Business model of live e-commerce
In the live e-commerce industry chain, the following roles are generally involved: brand owners, such as e-commerce or offline merchants; content providers, such as webcasters; and distribution channels, including the Douyin, Kuaishou, JD.com, Taobao and Pinduoduo platforms. Merchants finally reach consumers through distribution channels. The following modes exist:
- Mode 1: webcasters provide sales services for brand merchants, merchants pay commission to webcasters according to a fixed proportion of sales, and the live broadcast platform shares the income of merchants and webcasters;
- Mode 2: space fee plus commission, in addition to the commission for selling goods; merchants must also pay an additional 'space fee' to webcasters with many fans; and
- Mode 3: merchants directly cooperate with the webcaster's brokerage company, which we call MCN, and MCN then pays the webcaster for labour services according to the cooperation agreement signed with the webcaster.
Tax liability of webcasters under different modes
If the webcaster sells goods on the platform as an individual or studio, there is a labour relationship with the platform. The platform should withhold and pay personal income tax for the webcaster according to the webcaster's labour remuneration, and the webcaster or their studio must pay VAT and additional taxes on their own.
If the webcaster cooperates with the platform through an MCN, tax is paid according to the nature of the contract signed with the MCN. If a labour contract is signed, the MCN withholds individual income tax according to the income from wages and salaries; otherwise, individual income tax is paid according to the income from labour services. Simultaneously, the webcaster pays VAT and additional taxes on their own.
Main features of existing tax-related illegal acts
For the purpose of tax evasion, some webcasters set up a number of shell companies without actual business operations, and use these companies to deal with counterparties through fictitious transactions to increase costs and reduce profits. For example, in 2021, a well-known webcaster followed the advice of a so-called 'tax expert' and allowed non-real business entities such as Shanghai XX Center and Beihai XX limited partnership, which had no real business, to issue service invoices to merchants that actually belonged to the personal service remuneration of the webcaster, but were transformed into the operating income of some corporate and some limited partnership.
According to Article 22 of the Administrative Measures of the People's Republic of China on Invoices (Amended in 2019),[1] issuing invoices for others that are inconsistent with actual business operations is a false act. According to the Criminal Law of the People's Republic of China (Amended in 2020)[2] and relevant judicial interpretations, individuals that falsely issue special VAT invoices of more than RMB 50,000, or falsely issue more than 100 ordinary VAT invoices or the false amount of RMB 400,000,[3] are suspected of criminal offences.
There is no doubt that the administrative risk[4] and criminal risk of false invoicing is the biggest tax risk that webcasters may face.
Is there any opportunity for tax planning in the context of tax compliance?
Given the background of the 'Four Phases of Golden Tax', with more non-tax business being regulated, more multi-channel information sharing and more multidimensional information verification, do webcasters still have an opportunity for tax planning? The answer is yes.
After comparative analysis, when the annual income of the webcaster is relatively high (assuming the level of tens of millions RMB per year), the income tax burden and risk in the form of a limited company are relatively low: (1) for a limited company, the webcaster bears limited liability as a shareholder, and the webcaster receives commission in the form of a company and issues invoices to merchants or MCN institutions, which can directly avoid the tax risk of false invoicing; (2) merchants or MCN institutions do not have to pay and withhold payments to an individual; (3) the entire business chain is supported by invoices, which also reduces the risk of tax evasion.
Under the premise of tax compliance, there are still many tax reduction and exemption policies available for the webcaster's limited company, such as:
- if the monthly income of a newly established company is less than RMB 150,000, it can be exempted from paying six per cent VAT after filing registration with the tax bureau;
- small and micro enterprises with assets of less than RMB 50m and less than 300 employees can apply to pay income tax at 2.5 per cent with a profit of less than RMB 1m;
- for companies whose annual revenue exceeds RMB 5m but are still small-scale taxpayers, VAT can be assessed and collected at a rate of three per cent;
- small and micro enterprises with assets of less than RMB 50m and less than 300 employees, with an annual profit of less than RMB 3m, are subject to income tax in stages: profit of less than RMB 1m is still paid at 2.5 per cent, and the rest at ten per cent;
- if income is more than RMB 5m per year and profit is more than RMB 3m per year, the tax incentives for small and micro enterprises cannot be enjoyed, but enterprises can still:
- make good use of the structure of subsidiaries and branches to optimise the overall tax cost; and
- make good use of the tax incentives of different industries and regions (on the premise of satisfying actual operations) to optimise the overall tax cost.
To summarise, webcasters should raise their awareness of legal risks, make good use of tax reduction and exemption policies and take social responsibility to create a good business image and set up a sustainable business model on the premise of legal compliance.
[1] Art 22 of the Administrative Measures of the People's Republic of China on Invoices (Amended in 2019): An invoice shall be issued truthfully pursuant to the stipulated time limit, sequence, and columns with all carbon copies in a one-off manner, and shall be affixed with the invoice's special seal.
Organisations and individuals shall not issue false invoices in the following manner:
- issue invoices for others or themselves that do not match the actual business transaction;
- allow others to issue invoices that do not match the actual business transaction for themselves; and
- introduce others to issue invoices that do not match the actual business transaction.
[2] Art 205 of the Criminal Law of the People's Republic of China (Amended in 2020) [Crime of False Issuance of Special Invoices for Value-added Tax or Invoices to Defraud Export Tax Rebate or to Offset Tax]: Whoever falsely makes out special invoices for VAT or any other invoices to defraud a tax refund for exports or to offset tax money shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention and shall be fined concurrently not less than RMB 20,000 but not more than RMB 200,000; if the amount of money involved is relatively large or if there are other serious circumstances, the individual shall be sentenced to fixed-term imprisonment of not less than three years but not more than ten years and shall be fined concurrently not less than RMB 50,000 but not more than RMB 500,000; and if the amount of money involved is huge, or if there are other especially serious circumstances, the individual shall be sentenced to fixed-term imprisonment of not less than ten years or life imprisonment and shall be fined concurrently not less than RMB 50,000 but not more than RMB 500,000 or be sentenced to confiscation of property.
Where an entity commits the offence mentioned in this article, it shall be fined, and the person who is directly in charge and other persons who are directly liable for the crime shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention; if the amount involved is relatively large or if there are other serious circumstances, they shall be sentenced to fixed-term imprisonment of not less than three years but not more than ten years; and if the amount involved is huge, or if there are other especially serious circumstances, they shall be sentenced to fixed-term imprisonment of not less than ten years or life imprisonment.
Falsely making out special invoices for VAT or any other invoices to defraud a tax refund for exports or to offset tax money refers to any act of falsely making out the said invoices for another, for oneself, or asking another to do so for oneself, or recommending another to do so.
Art 205 (A) [Crime of False Issuance of Invoices]: Whoever falsely issues any invoice other than those as mentioned in Art 205 of this law shall be sentenced to fixed-term imprisonment of not more than two years, criminal detention or public surveillance, and shall be fined concurrently if the circumstances are serious; or the individual shall be sentenced to fixed-term imprisonment of not less than two years but not more than seven years, and shall be fined concurrently if the circumstances are especially serious.
Where an entity commits the offence as provided for in the preceding paragraph, it shall be fined, and the person directly in charge and other directly liable persons shall be penalised according to the provision of the preceding paragraph.
[3] Art 2 of Supplementary Provisions to the Provisions (II) of the People's Procuratorate and the Ministry of Public Security on Standards for Filing and Prosecution of Criminal Cases under the Jurisdiction of Public Security Authorities: The following paragraph shall be added to Art 61 of the Filing and Prosecution Standards (II) as Art 61 (A): [Case of falsely issuing invoices (Art 205 (A) of the Criminal Law)] For anyone who falsely issues invoices other than those specified in Art 205 of the Criminal Law and is suspected of being involving in any of the following circumstances, the case shall be placed on the docket for legal action:
I where there are over 100 invoices falsely issued or the total amount of invoices falsely issued is over RMB 400,000;
II where, although the aforesaid criteria are not reached, the offender falsely issues invoices again after having been subject to administrative sanctions for falsely issuing invoices more than twice within five years; and
III any other circumstance of severe nature.
[4] Art 37 of the Administrative Measures of the People's Republic of China on Invoices (Amended in 2019): Persons who violate the provisions of the second paragraph of Art 22 of these measures in issuing false invoices shall be subject to confiscation of illegal income by the tax authorities; where the amount of false invoices is less than RMB10,000, a fine of not more than RMB 50,000 may be imposed; where the amount of false invoices exceeds RMB 10,000, a fine ranging from RMB 50,000 to RMB 500,000 shall be imposed; and where the case constitutes a criminal offence, criminal liability shall be pursued in accordance with the law.
Persons who issue invoices illegally on behalf of others shall be punished pursuant to the provisions of the preceding paragraph.
As a typical representative of the platform economy, the webcasting industry has played an important role in the development of the digital economy and the emerging entertainment ecosystem in recent years. With the rapid development of the live e-commerce industry, webcasters have attached great importance to web traffic and sales, but have ignored compliance operations, especially tax compliance. In addition, some development zones and relevant departments have inconsistent practices for tax approval policies for emerging business types. All these issues highlight the tax-related risks of the live e-commerce industry.