Under China's current tax system, there are 18 types of taxes, including value-added, consumption, corporate income and individual income. There are two approaches in China's discussions of a digital tax. One would seek to optimize the existing tax system by clarifying taxes related to the digital economy. The other would be to introduce a digital tax on top of the existing taxes.
In the first approach, the simplest way to increase digital tax revenue would be to strengthen tax collection and management for digital economy businesses. Tax revenue lost from digital platforms is mainly due to insufficient coverage of tax collection and management for small businesses on these platforms, such as Taobao merchants and WeChat stores running on the platforms of Alibaba Group Holding Ltd. and Tencent Holdings Ltd.
In the early stage of the digital economy's development, China's tax rules for digital service providers were not clear. In 2011, the Wuhan Bureau of the State Taxation Administration issued the first tax bill to a Taobao store. China's E-Commerce Law, which came into effect Jan. 1, 2019, clearly stipulates that "e-commerce operators shall fulfill their tax obligations and enjoy tax benefits in accordance with the law," laying a legal foundation for digital taxation.
Under the current tax system, tax collection from online stores is relatively mature, while taxation of individuals selling goods through livestreaming platforms is not fully covered, a PricewaterhouseCoopers (PwC) tax expert said.
Livestreaming e-commerce took off in China in 2019, creating celebrity livestreamers who have grown so adept as pitchmen that they can sometimes sell out the entire inventory of a product during a single sales session. Gross merchandise volume sold via livestreaming events more than tripled in 2019 to more than 400 billion yuan ($56.5 billion), according to a report by consulting firm Bain & Co.
Such celebrity livestreamers usually register as sole proprietorships to benefit from a lower tax rate, even though they hire hundreds of employees and operate as corporations. China doesn't collect corporate income tax for sole proprietors or individual-invested enterprises. Instead, taxes on the production and operation of sole proprietorship are levied as part of personal income taxes.
To attract investment, local governments collect taxes for these sole proprietorships using a verification method, rather than the stricter method of audit, resulting in effective tax rates even lower than the minimum of 3% applicable for individual income taxes.
Compared with sole proprietorship, internet platform enterprises comply with relatively stricter tax rules, but they still have the ability to benefit from tax planning. For example, an internet platform can set up a research and development unit and attribute its profit to the R&D unit, benefiting from a reduced 15% corporate tax rate for high- and new-technology enterprises, compared with a regular tax rate of 25%, according to the PwC tax expert.
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