Flexible labor platforms have always been accompanied by various types of tax-related risks in their practical development, which have more or less hindered the healthy development of the platforms. Specifically, the risks can be categorized into three types: the risk of false invoicing; the risk of helping tax evasion; and the risk of failing to withhold taxes in accordance with the law. Recently, the Supreme People's Court responded to the "Proposal on Further Improving the Rule of Law on New Employment Patterns" put forward by members of the Chinese People's Political Consultative Conference (CPPCC) during this year's National People's Congress. The reply put forward the reference standard of "dependent + elemental", which provides a reference for distinguishing remuneration for labor services from business income. In addition, this paper analyzes the current observed cases of platform fraudulent opening, with a view to providing a direction for the tax compliance of spiritual labor platforms and helping the healthy development of new employment patterns.

I. Supreme Court proposes "dependent + elemental" reference standard to clarify the nature of spiritual workers' income

(I) Risks of platforms: disputes over the nature of the income earned by the workers and penalties for failing to withhold and pay income tax in accordance with the law.

As a new form of employment, flexible labor platforms have been fully developed, and the central and local governments have issued policies and regulations to guide their healthy development. However, due to its innovative and flexible mode, the legal relationship between the labor force and the platform is considered to be somewhat ambiguous, which increases the risk of tax treatment.

According to the Individual Income Tax Law and its implementing regulations, for all types of incomes obtained by individuals, except for business incomes, the payer withholds and pays the individual income tax on behalf of the individual. Therefore, if the remuneration issued by the platform to an individual belongs to labor remuneration income, the platform shall fulfill the withholding and payment obligation; on the contrary, if it is business income, the withholding and payment obligation shall not be fulfilled, and the individual shall carry out the remittance of business income on his/her own.

Due to the overlap between labor income and business income (e.g., "the income obtained by an individual by engaging in schooling, medical care, consulting and other paid service activities in accordance with the law"), the platform enterprises are unable to accurately differentiate between them. Some platform enterprises believe that the funds paid to spiritual workers are business income and do not withhold and pay on behalf of them, thus being fined by the tax authorities in accordance with Article 69 of the Tax Collection and Management Law at a rate of not less than 50% and not more than three times the amount of tax that should have been withheld or not collected.

For this reason, some platforms use the legal appearance of "whether or not to set up an individual industrial and commercial household or a sole proprietorship enterprise" as the basis for judgment. The income obtained by the spiritual workers who are registered as self-employed or sole proprietors is recognized as business income and is not subject to withholding. However, this criterion was denied by the reply of the General Administration of Taxation. In practice, there are also tax bureaus that believe that even if they are self-employed, the services they provide belong to labor services, and the platform should withhold and pay individual income tax according to the remuneration for labor services.

(II) SAT: Determining the Nature of Income Obtained by Spiritual Workers by "Economic Substance"

In its reply to Proposal No. 8765 of the Third Session of the Thirteenth National People's Congress, the State Administration of Taxation ("SAT") is of the view that it is necessary to determine whether the income obtained by a spiritual worker is taxable as business income based on the economic substance of the labor services provided or business operation carried out by the taxpayer on the platform, rather than simply looking at the display platform on which the individual's labor is relied upon. Although the spiritual workers are not registered as individual industrial and commercial enterprises, if they are engaged in production and business activities on the platform, the income they obtain also belongs to the taxable item of "business income".

Although the SAT has clarified the principle of "economic substance", which is a guidance for local tax bureaus in determining the nature of the income of workers in new forms of employment, the reply firstly denies the principle of "economic substance" in determining the income of workers in new forms of employment. However, the reply firstly denies the method of determining whether a worker is a registered self-employed person or a sole proprietor, and does not specify the specific method. Due to the ambiguity of taxation, the principle of "economic substance" is uncertain, and the application of tax policies to flexible labor platforms is still uncertain. Due to the ambiguity in taxation and the uncertainty of the "economic substance" principle, the application of tax policies to flexible labor platforms remains highly uncertain, with high legal risks.

(III) CPPCC Proposal: Suggesting to Unify the Adjudication Standard and Accurately Determine "Economic Substance

During the two sessions of this year, members of the National Committee of the Chinese People's Political Consultative Conference (CPPCC) put forward the following proposal: accurately determining the nature of the income of workers in new forms of employment, whether it is income from business or income from remuneration for labor services, is one of the key points in safeguarding the lawful rights and interests of this group of people and matching them with a reasonable tax policy, and it is recommended that judicial interpretations be issued to accurately determine the substance of the economic activities of workers in new forms of employment. This proposal is of great significance in refining the abstract principle of "economic substance" into a rule for the acquisition of income by spiritual workers.

(IV) Response from the Supreme Court: Determining the legal relationship by "subordination + elemental" and distinguishing the nature of workers' income

According to the news, on July 20, the Supreme People's Court, in consultation with the Ministry of Human Resources and Social Security, the State Administration of Taxation and the State Administration for Market Supervision, responded to the above CPPCC proposal. The Supreme Court pointed out that the nature of a worker's income should be clearly differentiated through the legal relationship of employment. That is, if it is recognized as a labor relationship, then it is income from labor remuneration; if it is recognized as a civil relationship between equal market entities, then it may be business income.

Whether or not a worker is registered as an individual industrial or commercial enterprise is an external manifestation and does not constitute a substantive obstacle to the determination of labor relations. In determining the legal relationship, priority is given to the fact of employment, and the "subordination + elemental" approach to determining the labour relationship is adopted, combining elements such as the degree of autonomy of the worker's decisions on working hours and workload in the actual employment of the platform, and comprehensively analysing the personality subordination, economic subordination and organizational subordination between the worker and the enterprise.

Therefore, in the activities of flexible employment, the nature of the income obtained by a spiritual worker is first judged by whether or not the employment relationship between him/her and the employing organization is of a subordinate nature. If the employment relationship is one of subordination, it is recognized as remuneration for labour. If the relationship is not subordinate, but is a civil relationship of equality, then the content of the service will be used to determine whether it is business income. For example, the General Administration clearly stipulates that advertisements and performances relying on the shape of the taxpayer belong to the income from remuneration for labor services.

(V) Summary

The CPPCC proposal and the replies of the State Administration of Taxation and the Supreme Court provide an operable guideline for the practice to accurately determine whether the income obtained by a spiritual worker should be subject to the low tax rate of business income tax. That is to say, if a spiritual worker is engaged in a certain labor, he/she is unable to decide the working hours and workload by himself/herself, and still needs to obey the management system, etc., and is subject to constraints, he/she has a strong subordination, and even if he/she is registered as an individual industrial/commercial enterprise, the income he/she receives cannot be subject to the business income tax item.

II. Observation by Case: Other Tax-Related Risk Manifestations and Analysis of the Spiritual Worker Platform

Through the above policy guideline, the tax risk of incorrect application of personal income tax on Lingong Platform will be greatly reduced. However, in addition to the above, the following tax-related risks still exist in the platform.

(I) The platform has been transferred to the judicial authorities for false invoicing on its own initiative.

First, Practical case: the false invoicing of the labor division treasure platform was listed as a major tax violation and transferred to the judiciary in accordance with the law.

Recently, according to the information publication column of the major tax violation and breach of trust subject of Jiangsu Provincial Tax Bureau, the Division of Labor Bao (Suqian) Network Technology Co., Ltd. issued a total of 255 VAT invoices for others (for itself) that did not correspond to the actual operation of the business situation between 2018 and 2021, amounting to nearly 23 million, and was fined 500,000 yuan as an administrative penalty by the tax authorities and transferred to the judiciary in accordance with the law The tax authorities imposed an administrative penalty of 500,000 yuan and transferred to the judicial organs according to the law.

Risk analysis: administrative and criminal risks of false invoicing are extremely high.

Due to the insufficient deduction of VAT input tax, some of the spiritual labor platforms let others falsely issue VAT invoices for themselves to achieve the unlawful purpose of reducing their own tax burden.

Or, in order to earn the undue benefit of "invoicing fee", they utilize the enterprises under their control to issue invoices to the outside world in a large scale. This may happen in the following scenario: some labor-using enterprises have finished the labor matters with the spiritual workers, but due to the lack of VAT invoices, the labor-using enterprises find the spiritual platform and ask the platform to publish false labor information, make false payments and a series of other materials for the enterprises, so as to cover up the fact of false employment and then issue false VAT invoices.

The above notified cases may be due to their own lack of input invoices or for others to open falsely, but in either case, they are illegal tax behavior, not only face administrative penalties, and even constitute a crime and be criminal sanctions.

From the cases notified this year, a number of spiritual work platforms have been investigated and dealt with for this type of behavior.

(II) The spiritual labor platform is used by the labor-using enterprises to issue false invoices to the outside world.

First, Practical Case: Spiritual Labor Platform Suspected of Helping Criminals with Fraudulent Invoicing

Recently, the Shanghai High Court announced a use of flexible labor platform false invoicing for the company to reduce costs, personnel manager was sentenced to imprisonment in the case (2023) Shanghai 0113 criminal 729. Defendant Changmou in Shanghai, a company engaged in personnel work during the period, in order to reduce the company's operating costs, for employees, technicians split wages and tax avoidance, in the name of flexible labor, so that a company back to pay salaries, for the company engaged in the value-added tax invoice value-added tax invoices totaling more than 7 million yuan.

Because the case did not disclose in detail the flexible labor platform involved in the case, but the author believes that if the spirit of the labor platform was blinded by the company involved in the invoice issued in good faith, there is room for argument.

Second, risk analysis: actively claiming that they do not subjectively have the intention of false invoicing

As a matter of fact, in practice, there are few cases in which the labor platform is used by the employing company to issue invoices in good faith.

Some newly-established spiritual labor platforms have difficulties in verifying the authenticity of transactions due to unsound tax compliance and high business mobility, and are deceived by the joint efforts of employing enterprises and laborers to commit the act of false invoicing. However, it did not subjectively have the intention to issue false invoices, nor did it obtain undue benefits from false invoices, and thus did not satisfy the constitutive elements of the crime of false invoicing. In this regard, active communication with the Procuratorate should be made to obtain a decision not to prosecute.

(III) Abuse of authorized levy policy to help spiritual workers evade taxes

First, Practical Case: Tax Evasion by Spiritual Workers Platform for High Net Worth Individuals

According to the author's understanding and the inquiries received, there are also individual spiritual worker platforms that have been penalized for helping high net worth individuals evade taxes. The basic situation is: after the flexible labor platform released reasonable tax avoidance information on the internet, a high net worth person contacted the platform to let it issue a reasonable tax avoidance plan. As the high net worth person's income was too high, the platform helped him to split his income and registered an individual business or a sole proprietorship enterprise in several places to enjoy the approved tax collection policy. At present, the person has been filed for tax audit, and the platform is suspected of helping the person to evade tax.

Second, risk Analysis: Avoiding Splitting Income and Converting Income for Tax Evasion

In order to attract investment and promote the development of the local economy, some regions have introduced an authorized levy policy. However, it has been misused by some spiritual work platforms. In order to raise expenses, some spiritual work platforms publicize the approved levy policy of the park and help some high-income people to come up with ideas and register individual industrial and commercial enterprises or sole proprietorships on behalf of them, which in turn makes the high-income people satisfy the approved levy policy and greatly reduces the tax burden. This is because: according to the provisions of the Individual Income Tax Law, wages, salaries and remuneration for labor services are subject to the comprehensive income tax item, and the tax rate is in the range of 3%-45%. Under normal circumstances, high-income people should be in accordance with the 3%-45% tax rate range to pay personal income tax, but through the spirit of the platform "planning", high-income people in accordance with the approved levy policy, you can enjoy a very low tax rate.

At present, this kind of tax evasion method has been investigated and dealt with by the tax authorities, and the spiritual platform also bears the corresponding responsibility. However, it is worth mentioning that according to Article 5 of the Measures for the Supervision of Tax-Related Professional Services (for Trial Implementation), tax-related professional service organizations can engage in tax planning business, i.e., to provide tax planning and tax solutions for the operation and investment activities of taxpayers and withholding agents in compliance with tax laws and regulations and relevant provisions. Therefore, the Spiritual Worker Platform can make plans for natural persons in advance in compliance with the tax laws and regulations. For example, it can assist the natural person to register an individual household in the park in advance, and have actual office space and staff in the park, etc., so that the natural person can sign a contract through the individual household and actually fulfill the contract when conducting business. Such behavior should not be recognized as helping taxpayers to evade taxes.

III. Tax Compliance: Self-examination and self-correction to eliminate tax-related violations

In the development of compliance, the state constantly updates and improves its policies to facilitate the healthy development of spiritual work platforms. Therefore, Lingong platform should pay more attention to tax compliance, in order to show the true color of gold after the big wave of sand.

(I) Regular tax health check to prevent tax risks

In fact, the tax risks involved in the spiritual work platform can be summarized into three categories: one is the risk of false opening; the second is the risk of tax evasion; and the third is the risk of failure to withhold taxes in accordance with the law. Therefore, Spiritual Engineering Platform carries out regular tax health checks around the three types of risks, and at the same time, makes effective and targeted rectification to avoid the recurrence of such behavior. In addition, it should also strengthen the learning of tax policies, for example, the response of the Supreme Court mentioned in the opening paragraph can help the Spiritual Worker Platform to understand the policies more deeply, avoid applying the wrong tax items, and prevent tax risks.

(II) Stick to the bottom line of business authenticity and build a complete chain of evidence

Business authenticity is the most basic requirement for a spiritual platform to conduct business. However, it may be due to its own scale, profitability and other reasons that the tax compliance system is not sound, leading to the occurrence of fraudulent use of false invoicing. Therefore, it is recommended that spiritual work platforms keep materials that can prove the authenticity of their business. For example, work results, business contracts, bank transfer vouchers, etc. At the same time, it should also improve its own internal control system and form an effective mechanism for risk identification, assessment and response.

(III) Effective communication with tax authorities and active response to tax audits

If the Lingong platform is audited by the tax authorities due to tax-related behavior, it should be checked as soon as possible. Firstly, from the source of business, check whether there is any non-compliance in the business process, etc. Secondly, for the contract, invoice and fund flow, check whether there is any inconsistency between the invoice issued and the actual situation, whether there is any inconsistency in the product name, amount, etc., whether there is any over-issuance or under-issuance, and whether there is any return of funds. Finally, if there are non-compliant tax behaviors, actively rectify the situation, pay back taxes and strive for the lightest treatment.