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.

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.