China Scoop: Persecution of Taobao product promotion channel host Wei Ya casts a chill on Chinese business
Channel host fined US$206 million for alleged tax evasion.
View from China with an Austrian School of Economics Perspective
As discussed in our first post, despite the fact that China may well remain the world leader in terms of personal financial freedom, in terms of attractiveness to business, the situation is deteriorating. Of course, these days the situation in many countries is fairly dismal, but China is suffering from a particular plague of seemingly arbitrary business persecution affecting celebrities.
In 2020, the government began targeting the acting profession, with a number of prominent actors fined enormous amounts for tax evasion, the most prominent of these being Fan Bingbing. China has a separate tax regime for a number of professions, the acting profession being one of them. Actors are subject to a 20-45% tax on performance income, a tax effectively far higher than the limited payroll taxes which most Chinese employees pay. The tax authorities found that many actors had used fake contracts to reduce their tax burden. In theory this taxation level is comparable to the general payroll tax of 3-45%, but in reality it is far higher. Very few Chinese take salaries which fall into the 45% bracket applicable to sums over 960,000 yuan per year. Other compensation methods are used instead, for example by signing consulting contracts or making use of abundant preferential tax concessions available in China’s numerous special development zones. China does not require the submission of annual tax returns and unearned income in China is not taxed at all, so most forms of income are effectively taxed at levels much lower than the corresponding payroll tax. In this light, it is not hard to understand why many actors falsified contracts.
Nonetheless, while the arbitrariness of this targeting of a particular profession seems to set a poor precedent, in cases such as Fan Bingbing’s, at least the substance of the government’s case seems to have been correct. The same cannot be said of the next case.
This week it was revealed that as early as November 2020, the government had extended this persecution to China’s spectacularly successful online product promotion industry, targeting Wei Ya (薇娅), one of the top channel hosts on Alibaba’s Taobao e-commerce platform. On this year’s Singles Day (November 11th), her channel generated 8.5 billion yuan (US$1.33 billion) in sales. This industry is a fairly new one, but has experienced massive growth in the past several years. Taobao created a special program to help launch such businesses, and many have achieved impressive sales numbers. Total sales for 2021 are estimated to reach approximately 2 trillion yuan, or around US$315 billion, roughly 2% of China’s entire GDP. Using direct streaming, hosts introduce and promote specific products selected by their back office teams, usually in connection with limited quantities and special one-time promotional prices. Wei Ya’s back office team employs around 500 staff members, most of whom are involved in product selection and product testing.
Readers wishing to learn more about Wei Ya and her rise to fame can check out this 5-minute mini-documentary with English subtitles on Youtube (Youtube locator Ao5mpDhXOKo):
Yesterday Dec. 20th it was announced that Wei Ya would be personally fined 1.341 billion yuan, or around US$206 million, for tax evasion in 2019 and 2020. Why? Because the tax office decided to treat the income generated as Wei Ya’s personal “performance income”. The fact that Wei Ya could never generate that income without her 500-person staff was deemed irrelevant. Company costs (like the salaries for those 500 people) are then of course no longer deductible and all income is considered to be pure profit. To describe this position as ludicrous is an understatement.
In addition, Wei Ya’s Taobao, Weibo and Douyin channels were closed and she lost all of her 78 million+ followers. Presumably all of her 500 staff will lose their jobs. Her 92 million followers lost a source of interesting and attractively priced new products to try, while the thousands of manufacturers in Wei Ya’s waiting queue lost their place in line. Moreover, by banning Wei Ya’s future streaming programs, even the Hangzhou tax office lost out: Once you kill the golden goose, you get no more golden eggs. All in all a complete lose-lose situation.
The new tax regime did not as a complete surprise, however. Word had gotten out in advance. For 2021 Wei Ya already agreed to pay according to the new regime; what was under dispute was the period before November 2020. In order to save their channels, allegedly several other prominent hosts also ‘voluntarily’ offered to pay back taxes. Rumor has it that Li Jiaqi, another prominent channel host, paid 1.7 billion yuan.
Presumably this was the intended effect. In Chinese there is a saying about this: “杀鸡给猴看”, i.e. kill the chicken to scare the monkey. OK, the state has managed to reduce its enormous deficit by 0.0002%, but at what cost? Not only is the effect on the entire industry chilling, but this kind of arbitrary and arguably unfair treatment also impacts the confidence of the business world at large. These decisions will come at a price that is far higher than the tiny amount of money the state managed to extort from these companies.