The legal arsenal has made considerable progress in China over the past 20 years. The tax authorities have also improved their ability to collect taxes. Digitization has even accelerated the process. Owners of online shops on the Jindong or TMall sites have bitterly noticed this.
Many bosses have received a letter from the local tax authorities asking them for an additional settlement based on the sales figures registered with these platforms. An article on the website 中国基金报 reports that the Beijing government have already notified the adjustment to 2000 companies, which have to pay unpaid VAT and profit taxes.
These entrepreneurs find themselves trapped by their technique to stimulate sales of a product. Tactics “borderline” to promote an item or brand proliferate. For example, as early as 2017, in the face of fierce competition on the Internet, some were using fictitious sales (刷单) to get their products to move up the sales rankings, become best-sellers (爆款) and gain notoriety. For a false transaction, a purchase, a sale, a transaction, and a delivery are registered. In theory, this sale has to be declared, but as the controls were not strict, the entrepreneurs could continue their practice without any worries, even if the platforms forbid such fun. In department stores, brands also use a similar technique to keep their location in a department store when in their contract there is a minimum sale. At the end of the term, in case of low sales, the brand will be able to “make sales” to reach the required threshold. The Internet store owners have to pay their tax liability based on the recorded sales – fictitious or real! That hurts!
The fact that government revenues for the first five months of the year are down 14.9% may be related to the zeal of some local governments. We find the money where we can! In any case, the road to consolidation is open, even if it is a long one.
21 June 2020