Editor's Note: Flexible employment platforms play an important role in promoting employment and protecting people's livelihood. However, the special features of flexible employment platforms' business model and tax policies make the platforms' tax-related risks quite high, and the tax authorities have become more and more stringent in scrutinizing the authenticity of flexible employment services. Under the upgrading of technical means and the tightening of supervision, false invoicing by flexible employment platforms will surely lead to tax risks. However, even if the business is real, the tax authorities may deny the authenticity of the business if the evidence is not properly retained. Against this background, how should flexible employment platforms adhere to the authenticity of their business and cope with the strong regulation of the industry? In this article, we will take this as a clue to understand the tax-related status quo of the flexible labor industry and the solutions to deal with it.

I. Business Model Analysis: Traveling between Employing Enterprises and Laborers

(i) Business 1: Solving the problem of freelancers' inability to issue invoices

Under the direct docking model between labor-using enterprises and freelancers, labor-using enterprises often face difficulties in obtaining invoices for employment costs, coupled with the spillover effect of unfinished tax risks of freelancers, resulting in higher tax costs and risks for enterprises. The rise of flexible employment platforms aims to solve the above problems. The platform issues VAT invoices to labor-using units in its own name, or after obtaining the qualification of tax authorities' commissioned collection and issuance on behalf of labor-using units, to satisfy the tax needs of enterprises to obtain inputs and offset costs, and also to assist freelancers in completing individual tax declarations to ensure tax compliance. To corroborate the business substance of invoicing, the platform also provides business witnessing services, monitoring and recording the service process and delivery of results with the help of digital tools, such as online records, real-time positioning and on-site images, to ensure the unity of the flow of funds, business and invoices, and to strengthen the verification of business authenticity.

(ii) Business 2: Providing tax planning services for high net worth individuals

Along with economic prosperity and rising incomes, some high-net-worth and high-income groups (double-high-income individuals) have developed strong tax-avoidance motives. Relying on its tax advantages and information resources, the flexible employment platform provides tax planning services for double-high-income earners. In the specific operation, the double-high-income people register individual business or sole proprietorship in the tax-preferential park, and sign service contracts with their original employers, so as to transform the labor relationship into business cooperation, and realize the transformation of “wages and salaries” to “business income”, and reduce the tax rate from the maximum of 45% to the approved tax rate in the park. The tax rate of up to 45% is reduced to a lower level approved by the Park. The platform acts as an intermediary, assisting in registration, tax payment and invoicing, charging service fees, and in some cases splitting income to avoid progressive tax rates. After the conversion of the nature of income, the mode of remuneration payment of the employing enterprises is also adjusted, from direct payroll payment to payment of labor service fees to self-employed businessmen or sole proprietorships of double-high-income persons, and obtaining invoices to complete the cost deduction.

(iii) Business 3: Changing the traditional employment mode and optimizing the cost of labor for enterprises

Under the framework of flexible employment, the relationship between enterprises and workers has undergone a change from traditional employment to diversified cooperation, with the “employer-employee” bond in the legal sense being replaced by new forms of cooperation such as labor contracts and outsourcing agreements. The core of this change lies in the transformation of the nature of the contract, which allows enterprises to avoid the welfare and protection obligations of the traditional employment relationship, such as social security, provident fund, subsidies, etc., effectively reducing the cost of employment and enhancing the financial flexibility of enterprises. Under the new model, labor-using enterprises no longer pay compensation directly in the form of wages, but instead pay labor outsourcing or dispatch service providers through service fees, and labor-using enterprises must obtain invoices from the platform if they want to deduct costs for enterprise income tax purposes.

Ⅱ. Tax risk analysis: The Wound of Business Authenticity in Flexible Employment Platforms

After combing through the cases of flexible employment platforms that have gone down in flames due to tax issues, we found that the core reasons for their downfalls all point to the fact that they cannot prove the authenticity of their business. The services provided by flexible employment platforms in real terms may not be sufficient to prove the business authenticity due to insufficient trace retention and be recognized as false invoicing; there are also some flexible employment platforms that intentionally take advantage of the rules of tax incentives and use false invoices to evade tax without real business.

(Ⅰ) Business transactions are genuine, but the retained evidence is insufficient to prove the authenticity

1. The existence of advance payment between labor-using enterprises and spiritual workers triggers the suspicion of fund return.

In practice, although the return of funds is often linked to the false invoicing, but not all cases of return constitute a violation of the law. In the field of flexible labor, the return of funds often occurs from informal cash transactions or private account transfers, which is the result of the pursuit of instant compensation settlement by flexible workers. As platform settlements take some time, and when freelancers perform specific labor or services and demand immediate payment, the employing enterprise may pay first through private account transfers. However, during the settlement process between the enterprise and the platform, in order to maintain compliance, the enterprise needs to pay the same amount to the platform, which then transfers the same amount to the personal account, creating the appearance of advancing and returning funds, and creating the illusion of “money flowing back”.

Although the above operation is based on actual business needs, this mode of advance is very easy to mislead the tax authorities and make them doubt the authenticity of the business, especially in the absence of sufficient evidence to prove the background of the transaction. The tax authorities may regard such fund flows as an attempt to cover up false invoicing, thus questioning the platform and even determining that the platform has violated the law in terms of false invoicing.

2.Employing enterprises contacting spiritual workers on their own, arousing suspicion of proxy invoicing

As mentioned above, in practice, many employers have originally established working contacts with specific service providers, but in view of the limitations of invoicing by individual service providers, enterprises turn to flexible employment platforms to establish relationships with individual service providers. Although this mode of employment is not directly illegal for tax purposes, given the direct connection between the service provider and the employer, the transfer of funds and invoicing through the intermediary of the platform will easily arouse the suspicion of the tax authorities on the substance of the contract and the compliance of the invoices. Specifically, tax authorities may focus on the following points when scrutinizing such transactions:

1. Substance of the contract: whether the contract truly reflects the working relationship between the service provider and the employer, and whether it is used only as a means of obtaining invoices or whether there is any suspicion of transforming the nature of the personal service provider's income;

2. Background of invoicing: examine whether the invoicing is based on the real delivery of services or whether it is merely a formal requirement to satisfy the need to match accounts;

3. Reasonableness of the flow of funds: analyze the flow path of funds from the employer to the platform and then to the personal service provider, and determine whether there is any unreasonable or circular movement of funds.

3. Flexible workers provide sensitive business for enterprises, arousing suspicion of false invoicing

In reality, incidents of false invoices issued by flexible employment platforms frequently occur in business areas such as sales, marketing and conference organization, and these transactions have become the focus of close attention by tax authorities due to their inherent flexibility and potential opacity. In the face of the above sensitive businesses, tax authorities have adopted a more prudent approach in assessing the authenticity of invoices. During the assessment process, the tax authorities will scrutinize all relevant evidence, including but not limited to online system records provided by the platform, punch card sign-in data, and photos taken on site. However, these digital evidences, in isolation, are often difficult to fully prove the actual occurrence of the business, especially in the absence of detailed transaction background, proof of service delivery or third-party witnesses, and the tax authorities may doubt the authenticity of the business and thus deny its legitimacy.

(Ⅱ) False business transactions, flexible employment platforms help false invoicing and tax evasion

1. Flexible employment platforms provide false witnesses for sensitive businesses and become helpers of false invoicing

Businesses such as promotion, sales and conference activities have become a high incidence of false VAT invoicing due to their characteristics. The contents of promotion and sales services are diversified and difficult to be standardized, which provides room for the operation of inflated service items or exaggerated service scope. The cost composition of conference activities is complicated, including venue rental, catering, accommodation and many other expenses, and often involves a large number of cash transactions, which provides room for hiding the real costs and fictitious expenditures.

In view of the specificity of the above business areas, some flexible employment platforms may adopt the practice of creating false business traces in an attempt to help enterprises fictionalize the input tax amount in order to cater to the demand of enterprises to reduce their tax burden. For example, fictitious activities such as advertising, market research, brand promotion, etc. to create false sales results, fabricated services such as conference organization, booth rental, event planning, etc., fictitious matters such as employee dispatch, talent outsourcing, training services, etc., and forged dispatch agreements, attendance records and training certificates. However, once this kind of behavior is subjected to strict auditing by tax authorities, the forged evidence will be easily detected. For example, illogical transaction records, unreasonable expense reimbursements, and invoices that are not in line with the actual business. Once the evidence is found to be falsified, invoices issued based on such purely false business will certainly be recognized as false invoicing, which will lead to enterprises facing huge fines, back taxes and late payment fees, and even criminal risks.

2. Tax planning services are suspected of converting the nature of income and splitting income, and become aiding and abetting tax evasion.

As mentioned above, in order to reduce the tax burden, individuals, by setting up individual business, change the “wages and salary income”, which was originally subject to a maximum tax rate of 45%, to “business income” under the more lenient approved tax policy. Although the services provided by the individual do occur, the invoice issued by the individual may deviate in form from the actual situation. This practice, while ostensibly complying with the current tax law, may be interpreted by public authorities as tax evasion, such as converting the nature of the income, and thus suspected of tax evasion, in accordance with the principle of substantive taxation. Meanwhile, in order to ensure that the total amount of invoicing of a single entity does not exceed the threshold for enjoying tax benefits, the originally complete business income may be artificially dispersed into the names of a number of different sole proprietorships or individual industrial and commercial enterprises, which manifests itself as allowing other nominal subjects to issue invoices on behalf of the other, or utilizing the information advantage of the flexible employment platform to fictionalize the subject of the transaction for the purpose of invoicing. These nominal counterparties may exist only formally and lack substantive commercial interaction. In such cases, there is a potential intent to artificially adjust the attributes of the income and to split the income in order to attempt tax avoidance.

In the event that an individual who has converted his or her income is held liable for tax, the flexible employment platform, as an intermediary service provider, may easily be considered as a co-conspirator and thus be held jointly and severally liable. According to Article 98 of the Implementation Rules of the Tax Collection and Administration Law, if a tax agent violates the law and causes tax evasion, the taxpayer shall be liable for back taxes and late payment fees, while the tax agent shall be fined at a rate of at least 50% and not more than three times of the taxpayer's unpaid or underpaid taxes.

3. Providing cost optimization services to enterprises through false invoicing and falling into the risk of false invoicing

In reality, some flexible employment platforms claim that they can help enterprises realize compliant accounting without invoices and reduce the risk and cost of employment, but in reality, they are violently making false invoices or taking advantage of tax depressions to fraudulently obtain tax rebates in the absence of a real business transaction background. In addition, cases of false invoicing by flexible employment platforms in collusion with enterprises also occur from time to time. For example, some salespersons may collude with enterprises and freelancers to conduct false invoicing and other irregularities in order to pursue performance.

Against the backdrop of the full rollout of technical means such as digital invoicing, false invoicing by violence or false invoicing by fictionalizing the facts of the transaction will be difficult to sustain. In the absence of real business, no matter for what purpose the flexible employment platform issues false invoices, whether due to misleading or malicious invoicing by the employing enterprises, as long as any link in the chain is problematic, the tax risk will quickly spread along the upstream and downstream of the industry chain.

(III) Summary

The business of flexible employment platforms has high tax-related risks, and in the course of operation, it often encounters difficulties in verifying the authenticity of transactions. When reviewing, the tax authorities may doubt whether the transactions on the platform are real, especially when there is insufficient evidence of transaction records and service delivery, or when there are anomalies such as the return of funds or the splitting of business, the invoices issued by the platform are very likely to be recognized as false invoicing. Once recognized as false invoicing by the tax bureau, the flexible employment platform will face extremely severe tax risks. Even if the platform takes measures to pay back the tax afterwards, it is often difficult to completely resolve the chain reaction brought about by this, and may be accompanied by high fines, late payment fees, and even criminal investigations.

III. Response to the risk of suspected false invoicing and tax evasion in flexible employment platforms

(Ⅰ) Administrative and Criminal Response Strategies for Suspected False Invoicing

In handling such cases in practice, the author mainly starts from the following aspects in order to help flexible employment platform to defend and restore the actual situation of business:

First, combining the relevant policy documents of the State Administration of Taxation, the Ministry of Finance, and the Ministry of Human Resources and Social Security, as well as the business models of other flexible employment platforms in practice, to argue that the business model involved in the case of this platform is reasonable, to eliminate the doubts of the case-handling authorities, and to dispel their prejudice against similar businesses;

Secondly, to help the platform summarize the information on the authenticity of the business, and through the experience summarized in the course of handling cases over a long period of time, to summarize the evidence materials for the aspects of payment of funds, meaning of liaison, and conduct of business, which are of particular concern to the case-handling authorities, to illustrate the authenticity and legitimacy of the conduct of the business, and to argue that the business does not constitute a fictitious opening;

Thirdly, it cuts down on the responsible subject, and by discussing the responsibility between different subjects, it proposes that the business or the existence of false opening behavior is caused by individual employees and customers, and the person in charge of the platform should not bear the corresponding criminal responsibility.

(II) Administrative and Criminal Response Strategies for Suspected Tax Theft and Evasion

In practice, if the flexible employment platform and its double-high-income group clients and enterprise clients are suspected of administrative and criminal risks of tax evasion and tax evasion due to suspected white entry, conversion of the nature of income, and false invoicing, the author mainly exerts the professional level of tax lawyers and combines the business materials to discuss the legality and rationality of the relevant business model in the light of the constitutive elements of tax evasion in administrative law and tax evasion in criminal law, as well as the characteristics of the tax treatment of EIT and IIT, and discusses the following aspects. , discussing the legality and reasonableness of the relevant business model, and launching the discussion in the following aspects:

First, in terms of tax obligation, it is argued that a certain capital inflow of double-high-income individuals and enterprises is of other nature, which does not constitute income and therefore does not fall within the scope of tax obligation;

Second, in terms of tax rate application, it is argued that based on the real business model adjustment, it is legal for double-high persons to apply the operating income, or for enterprises to apply the approved levy policy;

Thirdly, in respect of the business model, some of the case-handling authorities will deny the authenticity of certain flexible employment business and argue on the basis of this that the purpose of building the model between the platform and the client is tax evasion. By combining the relevant tax policy documents, the authorities can be persuaded that the business has authenticity and legality, and that the business model is not falsely constructed for tax evasion or constitutes tax avoidance rather than tax evasion.

In short, if flexible employment platforms face tax audits and criminal investigations, they should actively introduce professional tax law forces to help enterprises resolve risks. Due to the special nature of flexible labor business and tax treatment, some staff of the case-handling authorities may have deviations in policy understanding, and there is an urgent need for professionals to “remove the falsehoods and save the truths” and clarify the business substance in order to help enterprises get rid of administrative and criminal risks.

Ⅳ.The way to isolate tax risks of flexible employment platforms

(I) Retaining Evidence to Ensure Business Authenticity

Under the flexible employment platform, the platform shoulders the responsibility of retaining business traces to ensure the authenticity of transactions. In the face of the increasingly strict regulatory environment of the tax authorities, flexible employment platforms must strictly abide by the authenticity of the business and do a good job of evidence retention to avoid falling into the legal risk of false invoicing. For example, platforms should collect and properly store all relevant evidence materials, including but not limited to service agreements, work orders, service logs, project reports, payment records, invoices, communication records, and any documents that can prove the delivery and receipt of services. Make full use of modern information technology, such as blockchain and time-stamping, where conditions permit, to ensure the tamperability and integrity of evidence.

(ii) Bear in mind the tax red line and strictly abide by business authenticity

Judging from both the supervision efforts of relevant departments and the speed of upgrading technical means, in the foreseeable future, the review of business authenticity of flexible employment platforms will be stricter, and the crackdown on tax offenses and crimes will be more vigorous. The platform should firmly uphold the principle of business authenticity, refuse to participate in any false invoicing or other forms of illegal tax operations, and ensure that every transaction is based on real service demand and delivery. In addition, a rigorous internal management system can be built to ensure that, even in the event of risks of fraudulent invoicing brought about by collusion between internal employees and external entities, the key management personnel of the platform are able to rely on detailed approval records to clearly demonstrate that their decisions and actions are in strict compliance with the internal regulations of the enterprise, and that they are unaware of any operation or fraudulent behavior that violates the laws and regulations, and have not been involved in any conspiracy.

(iii) Actively seek professional tax lawyers to resolve tax-related disputes

Looking ahead, the state's supervision of flexible employment platforms will undoubtedly increase gradually, and many platforms are facing different degrees of tax risk challenges. In view of the above, flexible employment platforms should introduce the intervention of professional tax lawyers as early as possible when encountering tax disputes, especially when involving complex legal procedures such as tax audit, administrative reconsideration and even criminal proceedings, in order to effectively deal with potential legal risks.