From Zheng Shuang to Deng Lun, the entertainment industry has undoubtedly become a hotspot in the tax world over the past year. In the results announced by the General Administration of Taxation, "conversion of the nature of income" has become the most frequent term. So, what is "conversion of income"? Why does "switching the nature of income" constitute tax evasion? Where is the line between tax evasion and tax avoidance in the entertainment industry? This article will summarize and review the tax cases in the entertainment industry in the past year and answer these questions.

I. Six cases a year, why is the entertainment industry seeing an explosion of tax-related risks?

(I) the entertainment industry six tax case summary review

1、Shanghai tax bureau: Zheng Shuang through the "yin and yang contract", conversion of the nature of the income is not in accordance with the law and truthfully for tax declaration, back taxes and fines totaling 299 million yuan! 

On August 27, 2021, the first inspection bureau of Shanghai Taxation Bureau disclosed the results of the investigation of the tax case: after investigation, Zheng Shuang starred in the TV series "Sinister Spirit" in 2019, agreed with the producer that the payroll was 160 million yuan, and the actual acquisition of 156 million yuan, did not truthfully make tax declarations according to the law, tax evasion of 43,027,000 yuan, and other underpayment of taxes of 16,177,800 yuan. At the same time, it was found that Zheng Shuang had other acting income of 35.07 million yuan, tax evasion of 2,242,600 yuan, and other underpayment of taxes of 10,342,900 yuan. The above totaled that Zheng Shuang had not declared his personal income of 191 million yuan from 2019 to 2020 in accordance with the law, stole 45,269,600 yuan in taxes, and underpaid 26,527,700 yuan in other taxes.

Zheng Shuang's above behavior violates the requirements of the Central Propaganda Department, the Ministry of Culture and Tourism, the State Administration of Taxation, the State Administration of Radio and Television, the State Film Bureau and other departments since 2018 to strictly prohibit the film and television industry's "astronomical film remuneration", "yin and yang contract" and other requirements, and evades taxes. The subjective intent is obvious, seriously disturbing the order of tax collection and management, violating the relevant tax laws and regulations, and the tax department will be dealt with severely according to the law. The first inspection bureau of Shanghai tax bureau of Zheng Shuang recovered the tax, added late payment fees and imposed a fine totaling 299 million yuan.

2、Shanghai tax bureau: Zhang Heng helped Zheng Shuang to evade tax obligations and was fined 32.27 million yuan

On October 18, 2021, Shanghai Taxation Bureau First Inspection Bureau disclosed the results of the investigation of the tax case: After investigation, Zhang Heng, as Zheng Shuang's agent in "Sinister Spirit", was responsible for the signing of the relevant acting contract, negotiation of the film pay, contract splitting, collection of funds and other matters, and specific planning and drafting of the "Capital Increase Agreement", the establishment of the "Cover Company", the "Cover Company", the "Cover Company", the "Cover Company", the "Cover Company", the "Cover Company", and other matters. The company also planned and drafted a "capital increase agreement", set up a "cover company", covered up the "sky-high film remuneration", circumvented the supervision of the industry authorities, and helped Zheng Shuang evade her tax obligations.

The First Inspection Bureau of Shanghai Municipal Taxation Bureau, taking into account the facts of Zhang Heng's violation of the law as well as the relevant circumstances and other factors, imposed a fine of 32.27 million RMB, which is 0.75 times the amount of tax evaded by Zheng Shuang in the project of Sinister Spirit (43.027 million RMB).

3、Hangzhou Tax Bureau: Zhu Chenhui and Lin Shanshan set up sole proprietorship enterprises, fictitious business conversion of the nature of the income tax evasion, respectively, back taxes and fines of 65.55 million yuan and 27.67 million yuan

On November 22, 2021, the Inspection Bureau of Hangzhou Taxation Bureau disclosed the results of the investigation of the tax case: it was found that Zhu Chenhui and Lin Shanshan, during the period of 2019 to 2020, through the establishment of sole proprietorship enterprises in Shanghai, Guangxi, Jiangxi and other places, fictitious business will be obtained by the individual wages and salaries and remuneration for labor services income converted into the operating income of sole proprietorships, and evasion of personal income tax. The above behaviors of the two persons violated the relevant tax laws and regulations and disturbed the order of tax collection and management.

The Inspection Bureau of HCM City Taxation Bureau recovered tax, added late payment fees and proposed to impose a fine of one times totaling 65,553,100 yuan on Zhu Chenhui, and recovered tax, added late payment fees and proposed to impose a fine of one times totaling 27,672,500 yuan on Lin Shanshan. During the inspection, the tax department found that Li Zhiqiang was suspected of planning, implementing and assisting Zhu Chenhui and Lin Shanshan in tax evasion and interfering with the investigation of the tax authorities. At present, the tax department has filed a case against Li Zhiqiang for inspection and will deal with it separately according to the law.

4、Hangzhou tax bureau: Huang Wei concealed personal income, fictitious business conversion income nature of false declaration of tax evasion, back taxes and fines totaling 1.341 billion

December 20, 2021, Hangzhou Taxation Bureau Audit Bureau disclosed the results of the investigation of the tax case: after investigation, Huang Wei in the period from 2019 to 2020, through the concealment of personal income, fictitious business conversion income nature of false declaration and other ways of tax evasion of 643 million yuan, and other underpayment of taxes of 0.6 billion yuan.

In the course of tax investigation, Huang Wei was able to cooperate and take the initiative to pay 500 million yuan of back taxes, and at the same time took the initiative to report tax-related violations that the tax authorities had not yet grasped. Considering the above, the Inspection Bureau of Hangzhou Taxation Bureau of the State Administration of Taxation recovered taxes, imposed late payment fees and fines on Huang Wei, totaling 1.341 billion yuan. Among them, for the hidden income tax evasion but actively make up for the 500 million yuan and actively report the underpayment of tax of 0.31 billion yuan, impose 0.6 times the fine of 319 million yuan; for the hidden income tax evasion but did not take the initiative to make up for the tax of 0.27 billion yuan, impose a four-fold fine of 109 million yuan; for the fictitious business conversion income nature of tax evasion underpayment of 116 million yuan, impose a one-fold fine of 116 million yuan.

5、Guangzhou tax bureau: Ping Rong hidden live with goods commission income tax evasion, back taxes and fines totaling 62 million

On February 22, 2022, the Guangzhou Municipal Tax Bureau Inspection Bureau disclosed the results of the investigation of the tax case: it was found that Ping Rong had evaded personal income tax of 19,260,500 yuan from 2019 to 2020 by hiding the live streaming with commission income, and underpaid the relevant taxes by 14,572,000 yuan by failing to declare the other production and operation income in accordance with the law.

In the course of tax inspection, Ping Rong was able to actively cooperate with the inspection and take the initiative to pay back the tax. Considering the above, the Guangzhou Municipal Tax Bureau Inspection Bureau recovered the tax from Ping Rong, added late payment fees and imposed a fine of 0.6 times, totaling 62.003 million yuan.

6、Shanghai Tax Bureau: Deng Lun converted the nature of income tax evasion, back taxes and fines totaling 106 million yuan

On March 15, 2022, the fourth inspection bureau of the Shanghai Tax Bureau disclosed the results of the investigation of the tax case: it was found that Deng Lun, during the period from 2019 to 2020, converted the nature of income by fictitious business to make false declarations, and evaded the personal income tax of 47,658,200 yuan, and other underpaid personal income tax of 13,993,200 yuan.

In the course of tax inspection, Deng Lun was able to actively cooperate with the inspection and take the initiative to pay back taxes of RMB 44,550,300, and at the same time took the initiative to report tax-related violations that the tax authorities had not yet grasped. Considering the above, the Fourth Inspection Bureau of Shanghai Municipal Taxation Bureau recovered the tax, imposed late payment fees and imposed fines on Deng Lun, totaling 106 million yuan. Among them, it imposed a 0.5 times fine of 22,275,200 yuan on the 44,550,300 yuan of false declaration of tax evasion in the nature of fictitious business conversion income but took the initiative to self-investigate and make up for the tax; and imposed a 4 times fine of 12,431,600 yuan on the 3,107,900 yuan of false declaration of tax evasion in the nature of fictitious business conversion income but did not take the initiative to self-investigate and make up for the tax.

(II) Why the outbreak of tax-related risks in the entertainment industry

The successive outbreak of tax risks in the entertainment industry is by no means coincidental. As early as April 29, 2021, the Inspection Bureau of the State Administration of Taxation ("SAT") issued an article on the official website of the SAT, "The SAT carries out the spirit of the Opinions on Further Deepening the Reform of Taxation Levy and Administration, and requires: tax risk-oriented and precise implementation of tax supervision", and announced eight key areas and industries and five categories of tax-related risks for the inspection work of the tax system of the whole country in 2021 The article announced eight key areas and industries for the national tax system's inspection work in 2021, as well as five types of tax-related illegal behaviors, among which live broadcasting platforms are on the list. Tax-related violations such as concealing income, using "tax pits" and related transactions for malicious tax planning, and using new business models to evade tax have become high-risk behaviors that have attracted attention.

Among the aforementioned six cases, three cases, including Zhu Chenhui and Lin Shanshan, Huang Wei and Pingrong, were tax-related violations of live broadcasting platforms, reflecting the tax authorities' concern about tax-related issues of the new industry under the new situation that webcasting continues to be hot. Among the other 3 cases, if Zheng Shuang case and Zhang Heng case are mainly triggered by Zhang Heng's self-disclosure, the publicity of Deng Lun case reflects that the tax authorities have gradually recognized the pattern of tax evasion by celebrity artists and started to gather audit resources in this direction. Whether it is a new type of entertainment industry subject such as a band anchor, or a traditional entertainment subject such as a star artist, in the next one to two years will face more audits and inspections, and may even face special tax audits, the tax risk of the entertainment industry has been very severe.

II. How to realize the tax benefits of "switching the nature of income" and what kind of responsibility should be borne

(I) Paths for realizing tax benefits by "switching the nature of income"

In the six entertainment tax-related cases, concealment of income and "yin and yang contract" are common tax evasion behaviors, which have not triggered too much controversy, but "conversion of income nature" has become the focus of discussion in the industry. The affirmative school believes that the conversion of the nature of income violates the express provisions of the tax law, and obviously belongs to tax evasion; the negative school believes that if the nature of income is converted by changing the subject of the contract, the nature of the consideration, etc., it belongs to the scope of the free expression of the market subject, and does not violate the provisions of the tax law, and should not be dealt with and punished; there is a third viewpoint that the change of the nature of income belongs to the behavior of tax avoidance, and although it does not violate the provisions of the tax law, it does not violate the legislative intent, and should be applied. There is a third view that changing the nature of income is a tax avoidance behavior, although it does not violate the provisions of the tax law, but it is against the legislative intent and should be adjusted by applying the anti-avoidance provisions. Then, how to realize tax benefits by changing the nature of income?

In the entertainment industry, "switching the nature of income" mainly refers to the conversion of comprehensive income (including income from wages and salaries and remuneration for services) into business income for declaration, and at the same time, taking advantage of the preferential local approved levy for sole proprietorship enterprises to realize a significant reduction in tax rates. This issue was more extreme in the Zheng Shuang case, where the parties directly converted the film remuneration, which was income from labor remuneration, into an increase in the capital of the controlled enterprise, completely avoiding the tax obligation. Individually owned enterprises in the entertainment industry are mainly embodied in individual studios, enterprise management consulting centers, and marketing planning centers, whose main types of business are consulting services, cultural and creative services, and business auxiliary services, the specific scope of which includes: design services; advertising services; conference and exhibition services; services such as information, advice, planning, and consultancy services; business management services; brokerage and agency services; human resources services; security protection services, etc.

Intuitively, such enterprises are not directly engaged in live broadcasting, e-commerce and other businesses, however, due to the fact that such enterprises are generally asset-light, de-physicalized, and have intangible services, they are frequently used in practice to implement profit shifting. Generally speaking, such enterprises are affiliated enterprises established by star artists or e-commerce anchors, which directly sign service contracts with producers or live broadcasting platforms, and charge large fees in the name of providing various services to producers and live broadcasting platforms, so as to realize the transfer of film fees and live broadcasting commissions to these enterprises. These enterprises are usually registered in tax depressions and enjoy certain local tax incentives, including tax exemptions, approved levies and local financial rebates. Star artists' film remuneration, commission or salary from live broadcasting should be treated as comprehensive income and subject to personal income tax at a rate of 3%-45%. Through this operation, the remuneration is transferred to personal studios, enterprise management consulting centers and marketing planning centers, which have a very low comprehensive tax burden, so as to achieve the purpose of obtaining tax benefits.

(II) Boundary between tax evasion and tax avoidance in the entertainment industry from the perspective of "conversion of income nature".

From the point of view of tax law principles, the boundary between tax avoidance and tax evasion lies in whether or not it violates the express provisions of the tax law. Tax avoidance refers to the behavior that does not violate the express provisions of the tax law, but violates the purpose and original intention of the tax legislation, i.e., obtaining tax benefits by taking advantage of the loopholes of the tax law. Tax evasion, on the other hand, is the behavior of directly violating the provisions of the tax law and improperly obtaining tax benefits. For tax evasion behavior, the tax law and related laws clarify its legal responsibility. In terms of administrative responsibility, it mainly faces penalties such as tax reimbursement, late payment fees and fines, and in terms of criminal responsibility, it may be involved in crimes such as tax evasion and face criminal penalties. As for tax avoidance behavior, although it is against the original purpose of the tax law, but considering that this purpose is not explicitly stipulated in the law, which is an omission of the legislation (or based on other considerations, it is inconvenient to stipulate explicitly), taxpayers can not be required to bear responsibility for it. Therefore, tax avoidance behavior is generally dealt with by way of tax adjustment. In addition to the special tax adjustment methods such as transfer pricing, reservation pricing arrangement, cost-sharing agreement, capital weakening, controlled foreign company, etc., which are clearly stipulated in the law, there are also general anti-avoidance adjustment methods. For tax adjustment cases, taxpayers are only required to re-declare and adjust the payment of tax, add interest on special tax adjustments without adding late payment fees and fines, and without directly triggering criminal liability.

Whether the income obtained by anchors and celebrities is comprehensive income or business income is a matter of tax identification, but it is essentially a matter of income characterization. It is an express provision of the tax law that income obtained by a sole proprietorship is declared as operating income, and income obtained directly by a natural person is declared as comprehensive income. However, in practice, many people ignore the judgment of a prerequisite issue, that is, how to distinguish whether the income is obtained by the enterprise or by the individual? Some people think that if a business signs a contract and the money received is credited to the business books, then it is income obtained by the business. This view commits the error of legal formalism and is the root cause of the improper personal tax planning of some anchors, including Zhu Chenhui, Lin Shanshan and Huang Wei.

The issue of tax identification of income is not a purely tax law issue, but has to be reduced to the level of civil and commercial law. In terms of the underlying legal relationship, the commission obtained by the anchor engaged in live broadcasting with goods is the consideration received by the anchor through the provision of appearances, publicity, network promotion and other comprehensive marketing labor services to the commissioning party. This type of labor has obvious personal dependence, relying on the anchor's personal appearance, image, word of mouth and other elements. In other words, if it were not for the fact that the anchor himself or herself appeared on camera, promoted the goods through his or her unique words, and engaged in network promotion with his or her inherent behavioral pattern that was accepted and loved by the fans, the labor itself would not have been established, and the commissioner would not have cooperated with him or her. Therefore, in terms of economic substance, the anchor commission can only be the anchor personal marketing labor services to provide the consideration, not because of the contract signed by the main body, the money recorded in the books of accounts and other legal forms and change.

Civil law is the mother of all laws, for the legal characterization of economic behavior, the tax law must respect the preliminary judgment of civil and commercial law as the basic principle, there is no special reason should not make exceptions to the judgment. According to the previous discussion, the anchor commission can only be characterized as the personal labor income of the anchor in civil and commercial law, even if there is an enterprise, it should be reflected as a commission contract signed between the commissioner and the enterprise, and the enterprise then signs a labor or labor contract with the anchor, because the enterprise itself is unable to provide these services. Therefore, in tax law, the anchor commission should also be declared in accordance with the income from labor compensation. If the tax characterization of the income is changed through "planning" of the legal form, it should be treated as "false declaration". According to the provisions of the "Tax Collection and Management Law", false declaration is a typical tax evasion behavior, should bear the corresponding legal responsibility.

III. Tax-related Risk Analysis of Registered Individual Enterprises in the Cultural and Entertainment Industry

(I) Risk of policy change

According to the requirements of the principle of tax law, tax exemption and reduction need to be stipulated by laws enacted by the National People's Congress or administrative regulations issued by the State Council. At present, local tax exemption and reduction policies recognized by laws and administrative regulations are mainly distributed in the Guangdong-Hong Kong-Macao Greater Bay Area, Qianhai-Shenzhen-Hong Kong, Hengqin of Guangdong Province, Pingtan of Fujian Province, the Western Development Area, part of Xinjiang, and Hainan FTZ Port. Taking Hainan FTZ Port as an example, enterprises in encouraged industries registered and substantially operating in Hainan FTZ Port are subject to a reduced enterprise income tax rate of 15%. Here we need to pay attention to three points, one is the enterprise must be registered in Hainan Free Trade Port, the second is a substantial operation, can not be a shell enterprise, the third must belong to the encouragement of industrial enterprises, that is, Hainan Free Trade Port encouragement of industrial directory of industrial projects for the main business, and the main business income accounted for more than 60% of the total revenue of the enterprise. Approved levy and local financial rebates, in practice, the application of a very wide range, and due to the lack of guidance from the above law, has been a messy zone, there is no shortage of places to approved levy and financial rebates as a condition for attracting investment. In this regard, the State Administration of Taxation (SAT) has carried out a special clean-up action, although the final action was blocked and failed to eradicate the local tax incentives, but this kind of policy is still facing a great risk of uncertainty, and may be subject to centralized clean-up in the future.

(II) Risk of unclear boundaries between tax saving, tax avoidance and tax evasion

It is not possible to generalize whether the establishment of an individual enterprise is a tax-saving or tax-avoidance or tax evasion. If the individual enterprises established by stars and anchors do have consulting and marketing businesses that are not related to personal portraits and performances, and the underlying legal relationship is clearly reflected in the service contracts signed between the individual enterprises and the producers and live broadcasting platforms, and the services are provided in the name of the individual enterprises and the corresponding revenues are obtained, then it conforms to the current laws and regulations and belongs to the tax-saving and planning. However, if the underlying legal relationship is always that the star or anchor signs the contract and obtains the income in his/her personal name, and the participation of individual sole proprietor enterprise is only for the consideration of tax benefits, it belongs to the category of tax avoidance or tax evasion. If the enterprise does not provide services to the outside world, but only provides internal services to its affiliates, and the pricing of the services is obviously high and extremely unreasonable, then the main purpose of the establishment of these enterprises is to transfer profits, which belongs to the category of tax avoidance. If such enterprises do not actually operate and the content of the services themselves are false, they fall into the category of tax evasion. If the nature of the tax law is not properly grasped, it is easy to make the legal compliance of tax saving become tax avoidance or even tax evasion, which triggers risks.

(III) Write-off of individual sole proprietorships still involves tax risks

After the release of typical cases of cultural and entertainment tax evasion and avoidance, a large number of anchors have written off their studios and business management enterprises, and the behavior itself is suspected to be suspicious, which inevitably triggers the suspicion of the tax authorities. However, it should be noted that, with the deepening of tax civilization, the current principle of tax inspection is "no risk, no entry", unless there are clues of tax evasion, the tax authorities will not be selected as the subject of audit. If the tax evasion behavior is proved to be true, the underpayment and non-payment of tax may still be pursued. First of all, it should be clarified that the so-called write-off is actually a procedural matter, and its corresponding substantive matter is dissolution or bankruptcy. The prerequisite for write-off is the dissolution of the enterprise or the end of bankruptcy, and whether it is dissolution or bankruptcy, in the liquidation process, it is necessary to deal with the debts of the previous period. Underpaid and unpaid taxes, as tax debts, are of course also required to be involved in liquidation. Taking the example of a business dissolving itself for write-off, according to Article 19 of the Provisions of the Supreme People's Court on Several Issues Concerning the Application of the Company Law of the People's Republic of China (II): "The shareholders of a limited liability company, the directors and controlling shareholders of a joint stock limited company, and the actual controller of a company, after the dissolution of the company, maliciously dispose of the company's property to the creditors to cause losses, or Without liquidation in accordance with the law, with a false liquidation report to fraudulently obtain the company's registration authority for the cancellation of the registration of the legal person, the creditor claims that it is liable for the debts of the company, the people's court shall support it in accordance with the law." It can be seen that if an investor fraudulently obtains deregistration based on a false liquidation report, the tax authorities can claim underpayment or non-payment of tax from the investor through the civil remedial procedure.