China Influencer Crackdown Exposes Loophole Used to Hide Wealth

(Bloomberg) -- An intensifying crackdown in China on the country’s ballooning live-streaming industry is exposing the loophole that had allowed online influencers to dodge millions of dollars in taxes. 

On Monday, the State Taxation Administration fined Viya, a top live-streamer, $210 million, and accused her of concealing personal income and making false declarations in 2019 and 2020. Last month, authorities also fined two live-streamers in Hangzhou nearly $15 million in total for illegally booking employment income as business income.

The punishments mark an escalation in President Xi Jinping’s campaign against illegal sources of income as part of China’s “common prosperity” drive that aims to narrow the wealth gap. Celebrities have been targeted by tax authorities, as the drive to redistribute income dovetails with a broader clampdown on the entertainment industry for promoting “improper” idol culture. 

Tax authorities asked celebrities to report their wrongdoings to seek lighter punishment in September after announcing new tax checks on them. More than 1,000 live-streamers and workers in other new industries have voluntarily paid back taxes since then.

The live-streamers were found to have set up multiple sole proprietorships to take advantage of favorable tax policies that experts say could bring their effective tax rate down to the single digits. By setting up multiple sole proprietorships and partnership enterprises, and inventing businesses that did not exist, Viya turned income from labor remuneration into operating income, according to the tax administration.

The most high-profile Chinese celebrity to be ensnared in the broader tax crackdown is top actress Fan Bingbing, who, along with her affiliated companies, were ordered to pay about 884 million yuan ($139 million) in back taxes and fines in 2018. Fan, who disappeared from public view for months, had been using multiple contracts to obscure her income to tax authorities, a practice that had been common in the Chinese entertainment industry. 

“As long as there are different tax rates, there will be people taking advantage of loopholes,” said Zhu Tian, professor of economics at China Europe International Business School and author of “Catching Up To America.” “Whether you are working for someone else or yourself, in principle, the taxation method should be the same.”

Favorable policies

One tax loophole that is widely used by sole proprietorships or small businesses was created with the intention of benefiting these enterprises, which are seen as a key driver of economic development and job creation.

Many small businesses in China have difficulty producing all the receipts they need to prove their operating expenses to tax authorities, which are needed to calculate the taxes owed. Tax offices also have a tough time auditing expense claims. Under what’s called a verification tax collection system, some tax offices instead set a profit percentage for sole proprietorships based on a profit margin estimate, which covers all small businesses in a certain industry in that jurisdiction. 

A cafe that earned 1 million yuan one year in sales that is assumed to have a 10% profit margin would therefore be taxed on 100,000 yuan of profit. 

In contrast, audit tax collection involves a more rigorous process of checking revenue and expense accounts to determine the taxable income. 

Each tax jurisdiction uses a different set of profit margin rates, and different jurisdictions compete with one another to attract more businesses to register in their locale. 

“The main way to evade individual income tax for some live-streamers and celebrities is to take advantage of the verification collection method for the sole proprietorship enterprise to reduce individual income tax,” said Jiao Ruijin, a member of the Chinese Tax Institute under the State Administration of Taxation. 

It’s not clear from the government allegations how the live-streamers who were fined were being taxed. 

“The tax bureau should levy taxes by checking the true conditions of the accounts, rather than through the verification process,” Zhu said. 

Viya, also known as Huang Wei, issued an apology just after the punishment was announced, saying on her Twitter-like Weibo account that she felt “deeply guilty” and would pay the fines by the deadline. 

Note: Wages in the table show net employment income and excludes individual contributions to welfare programs.

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With assistance from Bloomberg