On May 4, 2023, a total of eleven departments, including the General Administration of Market Supervision, the General Administration of Taxation, the General Administration of Customs, the Supreme Court, the Supreme Prosecutor and other departments, jointly issued the "Guiding Opinions on Further Strengthening the Supervision of the Medical Cosmetology Industry" (State Municipal Supervision and Cantonal Administration of the State Council 〔2023〕 No. 22), whose purpose is to strengthen the collaboration between the departments and to establish a cross-departmental mechanism for the comprehensive supervision and enforcement of the work. Compared to the eleven departments previously jointly issued the "Notice on Further Strengthening the Comprehensive Supervision and Law Enforcement of Medical Beauty" (State Health Office Supervision and Development [2020] No. 4) emphasizes the departmental responsibilities, but also emphasizes the departmental cooperation, in particular, the discovery of clues of violations of the law if it involves the supervision and responsibility of multiple departments, should be carried out to collaborate in the verification of the disposal, which means that there will be a "Tax + Police This means that there will be a situation of "tax+police", "tax+health", "tax+municipal supervision" and other joint law enforcement. Since the medical beauty industry has long been the hardest hit by tax-related violations, and even some listed enterprises may have tax evasion or false invoicing, the medical beauty industry must strengthen its own compliance construction under the strong regulation. This article summarizes the common tax-related risks of medical beauty enterprises in practice, and puts forward targeted compliance suggestions for the readers.

Risk 1: Taking advantage of consumers' habit of not asking for invoices to operate off the books and hide income

Case (I)
According to the disclosure of Suning Global Co., Ltd, a listed company, on September 23, 2022, its controlling subsidiary, Wuxi Suya Medical Beauty Hospital Co. The penalty was that Wuxi Company failed to account for part of the business payment received through the Quick Money Payment System and the Lakala Payment System, which resulted in a total under-declaration of business income of RMB25,123,984.69. Wuxi Company was required to recover the corresponding tax and late payment fees, and was also subject to a fine of double the enterprise income tax payable, which amounted to RMB4,883,476.78.

Case (II)

The First Inspection Bureau of Wenzhou Municipal Taxation Bureau carried out a tax inspection of Wenzhou Meiyugao Medical Beauty Outpatient Department Limited Liability Company through the "double random, one public" method. It was found that the party, during the period from January 2018 to December 2020, used the methods of hiding the revenue of medical beauty program and product sales revenue through personal account collection, network third-party platform collection as well as cash collection without accounting, etc., and made false declaration, and evaded 2.535 million yuan of tax. The tax authorities recovered the tax, imposed late payment fees and fines totaling 4.6871 million RMB according to the law.

Risk Interpretation: All direct-to-consumer industries are facing a "temptation", that is, natural persons do not have the habit of asking for VAT invoices, and there are no special requirements for the payment of the price. Therefore, enterprises can make consumers pay the price to the account of natural persons through channels such as Alipay and WeChat, thus declaring less business income. Service-oriented enterprises such as the medical beauty industry are more hidden because their main business is service, and there will not be too few sales and inventory backlogs, which are common in goods distribution enterprises. However, hiding income for a long period of time can lead to long losses, thus triggering the alertness of the tax authorities. The risks of hiding income are:

1. penalties in terms of VAT. Article 19 of the Measures for the Administration of Invoices stipulates that "Units and individuals selling goods, providing services and engaging in other business activities shall issue invoices to the payer when they receive payments for external business operations." Article 35 stipulates that if invoices should be issued but are not issued, the tax authorities shall order rectification and may impose a fine of less than 10,000 yuan.

2. Penalty for suspected tax evasion. Article 63 of the Tax Collection and Administration Law stipulates that it is tax evasion if a taxpayer overstates expenditures or omits or understates income in the books of account, and fails to pay or underpays the tax due. The tax, late payment fees and a fine of not less than fifty percent and not more than five times of the tax shall be recovered.

3. Criminal sanctions for suspected tax evasion. Article 201 of the Criminal Law stipulates that if a taxpayer adopts deception or concealment to make a false tax declaration or fails to make a declaration, avoids payment of a larger amount of tax, and fails to pay the tax, late payment fees and fines in accordance with the law, it constitutes the crime of tax evasion.

Compliance points: medical and aesthetic organizations should strengthen the compliance of funds receipt and payment and invoicing. Specifically, it is to do to:

1. the person in charge of the organization should establish a sense of compliance, truthfully pay the enterprise income tax and value-added tax, and avoid collecting money through private accounts.

2. to strengthen the training of employees, stipulating that they must collect money through the official account of the enterprise and issue invoices in a timely and proactive manner.

Risk 2: Payment of labor compensation and salary without required withholding and payment of personal income tax

Case

According to the administrative penalty disclosure of Dongtax [2022] No. 150, a medical beauty clinic in Dongguan had concealed the number of employees, failed to account for commission expenses in accordance with the regulations, and failed to withhold and pay individual income tax on income from labor remuneration, resulting in the failure to truthfully withhold and pay individual income tax of RMB 808,690.49 within the stipulated time limit, and imposed a fine of fifty percent.

Risk Interpretation: There is a common problem of failure to withhold individual tax in accordance with the regulations in the medical beauty industry. The root cause of this problem is that the medical beauty industry, as a service industry, has high wages and labor compensation for professional and technical personnel, and the corresponding taxes are also very high, which has given rise to the behavior of concealing wages or labor compensation in order to evade individual tax. In addition, the medical beauty industry has a serious commission problem, and much of the commission and other fees paid also fail to withhold personal tax. According to Article 69 of the Law of the People's Republic of China on Administration of Tax Collection, if the withholding agent should withhold but does not withhold, or should collect but does not collect the tax, the tax authorities shall impose a fine on the withholding agent of 50% to 3 times of the tax that should be withheld but not withheld, or should be collected but not collected.

Compliance point: Institutions should do a good job of paying salaries and expenses of executives and doctors, and eliminate gray expenses. First of all, we should do a good job of payroll and withholding of agency staff; secondly, for external experts, doctors, should be issued in accordance with the law and withholding of labor compensation; thirdly, some medical institutions will commission intermediaries to solicit customers, should be in accordance with the law to pay the intermediary fees and allow them to issue invoices, for the natural intermediary to do a good job of withholding work.

Risk 3: Channel medical beauty organizations can not be deducted gray expenditures, take false invoices and other illegal means

Case

A medical beauty organization belongs to channel medical beauty, i.e., it solicits customers and then refers and diverts them to other medical beauty organizations or even black medical beauty organizations that do not have medical qualifications. In order to obtain customers, the channel medical beauty needs to pay a high commission to the intermediary who solicits customers, and at the same time, there is a distribution of benefits with the diverted organizations. As the relevant fees are settled through natural person accounts, a large amount of gray costs are generated that cannot be properly accounted for, so the medical beauty organization offsets the costs by allowing others to falsely open ordinary VAT invoices for it.

Risk Interpretation: The new regulation on medical beauty issued by the eleven departments explicitly requires that customers should not be guided to unqualified medical beauty organizations, which is aimed at cracking down on some channels of medical beauty. At the same time, in accordance with the law to increase the "medical trust" "drug trust" disposition, investigate and deal with commercial bribery and other illegal behavior. In terms of taxation, the cost of corporate income tax deductions need to obtain legal and compliant deduction vouchers, otherwise no cost deduction, if there is commercial bribery and other behaviors, will allow medical institutions to bear an excessive tax burden. If the act of false opening is adopted to offset the cost, it will face a variety of liabilities such as tax evasion and false opening. In particular, according to one of the provisions of Article 205 of the Criminal Law, if the circumstances of false invoicing of other invoices are serious, the penalty shall be fixed-term imprisonment of less than 2 years; if the circumstances are particularly serious, the penalty shall be fixed-term imprisonment of 2 to 7 years. In this case, fraudulent issuance of general invoices also faces serious criminal liability.

Compliance point: In terms of tax compliance, it is essentially for medical beauty institutions to eliminate gray expenditures and commercial bribery, and to ensure that expenditures are legally compliant and obtain deduction vouchers in accordance with the law.

Risk 4: Deduction of advertising and business promotion expenses of medical aesthetic organizations according to the facts.

Case Study

In order to expand its clientele, a medical beauty organization launched a large advertising campaign on the Internet and in the field, and assigned a large number of business personnel to promote its business. When filing its tax return for the current year, it included all the advertising and business promotion expenses in its costs and deducted them. The tax authorities found upon investigation that its cost deduction exceeded the proportion and adjusted it.

Risk Interpretation: According to Article 44 of the Regulations for the Implementation of the Enterprise Income Tax Law, "The qualified advertising and business promotion expenses incurred by an enterprise shall be allowed to be deducted to the extent that they do not exceed 15% of the sales (business) income of the current year, unless otherwise provided for by the competent departments in charge of finance and taxation of the State Council, and the portion that exceeds such portion shall be allowed to be carried forward to be deducted in the subsequent tax years. " Medical beauty organizations are highly dependent on advertising to solicit customers, and their advertising expenses are high compared to other industries, especially the newly established medical beauty organizations will increase their advertising efforts. If medical beauty enterprises do not have a sufficient grasp of the tax law and fail to deduct and carry forward in accordance with the deduction ratio, it will lead to tax risks. In addition, there are some enterprises that, in order to avoid the above deduction ratio, classify some advertising and business promotion expenses under a different name as consulting fees, which may lead to the risk of tax evasion.

Compliance point: Medical aesthetic organizations should strengthen the study and follow-up of tax law provisions and keep abreast of the latest tax incentives to ensure the legal compliance of the application of tax law. If necessary, professionals should be hired to conduct corporate tax inspections to identify tax-related risks.

Risk 5: Categorizing all medical beauty services and products as VAT-exempt items

Case (I)

A medical beauty organization provided services of nose surgery to a client Wang Mou and recommended him to purchase post-operative sales care products, but Wang Mou was not satisfied with the surgical effect and reported that the organization did not issue VAT invoices in accordance with the law. Upon inspection, the tax authorities found that the medical beauty organization had categorized all the revenues from the medical beauty services carried out and the sale of care products as VAT-exempt items. The tax authorities considered that some of the products it sold were not directly related to medical services and were taxable items.

Case (II)

According to the disclosure of the administrative penalty decision No. 44 of Hangzhou Tax and Quiz [2022], Hangzhou *** Culture and Art Planning Co., Ltd. provided medical beauty program services to its customers, and accounted for VAT taxable items and tax-exempted items in its income separately, which is now impossible to differentiate, and it should declare its taxes in accordance with the provisions of the regulations.

Risk Interpretation: in Annex 3, Provisions on Transitional Policies for the Pilot Business Tax to Value-added Tax of the Circular on the Comprehensive Push to Launch the Pilot Business Tax to Value-added Tax (Cai Shui [2016] No. 36), it is stipulated that "I. The following items are exempted from value-added tax (VAT) (vii) medical services provided by medical institutions." Among them, specifically:

1. the main body level: medical institutions refer to those institutions that have been registered and obtained the License for Practice of Medical Institutions in accordance with the relevant regulations of the State Council and the Ministry of Health, as well as all kinds of medical institutions at all levels of the military and the armed police forces, including outpatient clinics.

2. Content level: Medical services are the services listed in the "National Medical Service Price Item Specification", as well as the services related to the provision of medicines, medical materials and instruments, ambulances, ward accommodation and meals.

3. Price level: The prices of services provided by medical institutions shall not be higher than the guiding prices of medical services set by the competent price authorities at or above the local (municipal) level in conjunction with the competent health authorities at the same level and other relevant departments, including the government guiding prices and the prices determined by negotiation between the supplying and demanding parties in accordance with the regulations, and so on.

In order to enjoy the tax exemption treatment, one of the above three tax exemption elements is indispensable. If a medical beauty organization does not obtain a Medical Practice License, it will not only not be exempted from tax, but will also face market supervision, health management and other aspects of the treatment; if the price and content of the services provided by the medical beauty organization are not in line with the "National Code of Medical Service Pricing Items", then it will not be able to enjoy the tax exemption treatment. In particular, the practice of Chinese medicine and beauty institutions will recommend consumers to buy beauty goods, such as medical services have nothing to do with, should be declared as sales of goods to pay value-added tax, otherwise, according to the "Tax Collection and Management Law Implementation Rules", Article 43 of the taxpayers enjoying tax reductions, tax exemptions, when the conditions of the change should be in accordance with the law to fulfill the tax obligations; not in accordance with the law to pay taxes, the tax authorities shall be recovered. If it is impossible to distinguish between exempted items and taxable items, the tax authorities may also recover the tax and late payment fees on the entire income.

Compliance Points: VAT compliance mainly lies in the declaration of VAT for deemed sales, mixed sales and part-time business in accordance with the law, and the distinction between tax-exempted items and taxable items in accordance with the law.

The behavior of deemed sales mainly focuses on the fact that medical and aesthetic institutions will give some gifts to customers or distribute the slow-selling products to employees in the form of employee benefits. At this time, the corresponding gifts and products should be transferred out of the tax.

Mixed sales behavior, refers to a sales behavior involves both services and goods. According to the current regulations, units engaged in the production, wholesale and retail of goods, mixed sales are taxed at the rate of the sale of goods; other units are taxed at the rate of the sale of services. Generally speaking, medical and aesthetic organizations are providing services as their main business, and if they sell products at the same time in the course of their service provision, the tax rate will be calculated according to the tax rate of services.

Concurrent sales refers to taxpayers who sell goods and services at the same time. Unlike mixed sales, the sale of goods in part-time business is a separate sales behavior and should be accounted for separately.

In addition, according to Article 41 of Annex 1 of Cai Shui [2016] No. 36, "Implementation Measures for the Pilot Scheme of Business Tax Conversion to Value-added Tax", taxpayers engaging in part-time operation of tax-exempted and taxable items shall account for them separately. If they fail to account for them separately, they shall not be exempted from tax but shall pay the full amount of VAT. Therefore, if a medical beauty organization has tax-exempt medical services, it must account for them separately in order to enjoy tax benefits.