In the Wake of the Tax Scandal That Engulfed Chinese Actress Fan Bingbing, How Can Blockchain Technology Improve The Future of the Tax System?

Three months after Chinese television host Cui Yongyuan accused actress Fan Bingbing of tax evasion and leaked her fraudulent contracts, Fan Bingbing as China’s highest-paid actress was heavily punished and ordered to pay more than 800 million yuan ($116 million) in tax and fines. Tax evasion scandals in a variety of industries are exposed from time to time, with such frequency that the public is no longer caught by surprise. Fortunately, the blockchain technology that has gained momentum in recent years is expected to boost the government’s tax system. It can not only ensure authenticity but also allow transactions to be secure and trusted over a digital network.

Xinhua News Agency recently announced that according to the State Administration of Taxation, the investigation in regard to Fan Bingbing’s yin-yang contracts was concluded and charges had been verified. Yin-yang contracts are a common but illegal practice to avoid paying taxes, as the smaller contract is reported to the tax authorities as income, whereas the larger contract is unreported and becomes tax-free. Fan Bingbing manipulated this fraudulent dual contract system to facilitate tax dodge and evade personal income tax. As a result, she and companies she represents will be fined an amount totaling 800 million yuan ($116 million) in compliance with national laws and regulations, according to the Jiangsu Taxation Bureau of the State Administration of Taxation.

This is a massive tax fine. Fan Bingbing needs to complete her payment within the prescribed time limit in order to be spared from criminal prosecution. If she fails to pay her fine, Fan Bingbing will undergo a criminal trial and inevitable conviction. Will Fan Bingbing follow the path of Liu Xiaoqing, who was jailed in 2002 for evading 14 million yuan of tax payment despite her reputation as one of China’s most famous actresses? It’s just hard to imagine that high-profile actresses can fall from grace in the blink of an eye and be mired in tax evasion scandals.

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The controversy started with the film “Cell Phone 2.” In June this year, the outspoken TV presenter and producer Cui Yongyuan angrily stated that the director of “Cell Phone 2,” Feng Xiaogang, deliberately misrepresented him in the film and caused enormous distress to his family. Cui Yongyuan subsequently posted on Weibo that A-list actress Fan Bingbing had earned millions of dollars for just four days of work, along with screenshots of what appeared to be Fan Bingbing’s employment contract. The contract shows a massive sum being paid to Fan Bingbing and features unconventional terms that fit her requests. Yet, this contract is merely the smaller of two contracts and a deliberate creation that allows Fan to evade high taxes. As the news was quickly made known, a series of debates about the entertainment industry in China ensued.

The controversy was not finished yet. In July, Cui Yongyuan accused Huayi Brothers Media Corp. of using special contracts to evade tax. He further stated that he would hand over the contract detail of 585 cast members who had cooperated with Huayi Brothers to the State Administration of Taxation for investigation. At this point, it was no longer a simple fight between Cui Yongyuan and Huayi Brothers, but rather a fierce battle between Cui Yongyuan and the entire Chinese film industry.

Fan Bingbing, Feng Xiaogang, and Huayi Brothers merely represent the tip of the iceberg. In the Chinese entertainment industry, tax evasion is no longer an uncommon offense. Those insiders have seen the film industry’s dark side close up but choose to keep their knowledge hidden and unspoken. In fact, corrupt behaviors also exist in other industries.

Some countries have established social credit systems to collect information on all citizens and document their wrongdoings. As such, a citizen’s trustworthiness and personal conduct can be measured at any time. While this system allows the government to tackle a credit crisis in hindsight, it is unable to completely eliminate illicit behaviors such as tax evasion.

With its growing popularity, blockchain technology may be able to make up for the shortcomings of the current tax system by creating a single and fixed record of transactions. The distributed ledger, which cannot be falsified or forged, has the potential to completely eliminate tax evasion. The following content is excerpted from an article titled “How Can Blockchain Technology Strengthen Tax Control?” The authors are Dong Zhixue, Zhang Yijun, and Song Tao. Now let’s have a good read and think about what roles can blockchain play as well as its potential applications in the tax area.

The basic characteristics of blockchain technology and its potential applications in the tax area

  1. Key features of blockchain technology could potentially transform the tax industry

Blockchain is the next technology with paradigm-shifting potential. It can not only keep track of individual parts of a larger data structure but also increase security within the business-to-business space. Some fundamental components in the blockchain’s design include distributed ledger, consensus algorithms, and smart contracts. The basic characteristics of blockchain are decentralization, traceability and immutability. Those features allow blockchain to not only document transactions across many network nodes (any computer that connects to the bitcoin network is called a node), but also build an ever-growing ledger or a chain of data where all nodes are connected to every other nod. As such, blockchain technology enables a system of registers, all of which are connected through a validation mechanism. Regulatory and business entities are able to access centralized information flows and shared databases.

  1. Blockchain technology could potentially alter the relationship between tax authorities and taxpayers

Blockchain technology may allow tax authorities to make the following two achievements:

The first prospect is to build collaborative networks centered on tax authorities. Tax authorities bear the responsibility to help taxpayers manage and evaluate tax. Based upon this established relationship, tax authorities should launch a blockchain-based tax system with the following two networks.

  1. Direct business management network. It includes the internal business management network of tax authorities with a focus on the taxation process. In addition, it contains a business cooperation network with financial departments, banks and other external entities related to the taxation process. The former network relationship focuses on provincial, municipal and county level administrations. It aims to help taxpayers review and approve tax payments. On the other hand, the latter network relationship focuses on capital, data and logistics management. It aims to continuously remind taxpayers of the business process, data circulation and information flow.
  2. Indirect business collaboration network. Tax authorities should build a network centered on data and information use. For example, in the blockchain-based tax platform, tax authorities may grant data access to legal entities that are involved in the taxation process. These may include the Ministry of Finance of the People’s Republic of China, National Development and Reform Commission, National Bureau of Statistics of China, and Ministry of Land and Resources of the People’s Republic of China. Through secure data sharing, tax authorities may improve efficiency in areas such as report delivery, authenticity identification, data query and business verification while ensuring cross-functional collaboration.

The second prospect is to map out a tax activity diagram for each taxpayer.

The diagram will be drawn based on statistics collected about the taxpayer’s three payment lines: invoice flow, capital circulation and merchandise expenditure. Combining this taxpayer-focused diagram with collaborative networks centered on institutional tax authorities, regulators can get data updates from different tax sources and access the taxpayer’s real-time tax activities to build a streamlined supervision system.

Thanks to its real-time transaction verification feature and inherent transparency, the blockchain-based tax system can automatically document business flow and transaction data. Tax authorities can map out a business relationship diagram for each taxpayer by effectively identifying data and information on his or her business flow, transaction amount, product information, etc. This allows tax authorities to understand many business dimensions such as customer relationship and regulatory compliance in a timely and comprehensive manner.

The diagram should cover two areas: management relationship and business transaction. The management relationship diagram mainly displays and documents the relationship between taxpayers and financial institutions such as banks, courts, customs, etc. The business transaction diagram shows the relationship between taxpayers and their suppliers, customers, third-party service partners, etc. Thanks to this extensive and detailed diagram, tax authorities are able to identify the taxpayer’s capital flow and invoice flow in a timely manner. As a result, tax regulators can facilitate tax audit, improve the quality of VAT compliance, combat fraudulent tax activity, ensure honest reporting of tax information, reduce the cost of tax enforcement, etc.

The practical application of blockchain technology in tax business based on big data and artificial intelligence:

(1)The construction of a blockchain-based monitoring system to effectively regulate tax evasion and tax fraud

Each taxpayer will have a unique identification number, which is linked to a specific data set that covers the taxpayer’s business relationship, tax activity, payment frequency, etc. Given these statistics, regulators should build a mapping system based upon each taxpayer’s electronic invoices. This mapping system allows regulators to clearly identify the taxpayer’s transaction volume, amount, scale, etc. Moreover, it gives tax authorities the means to access the full spectrum of the taxpayer’s information and clarify his or her business relationships. Furthermore, the system facilitates joint management and expands the depth as well as the breadth of tax investigations. At the same time, thanks to the traceability and immutability of blockchain technology, the mapping system can potentially store electronic invoices in a distributed digital ledger while guaranteeing that the storage is unchangeable and unmistakable.

(2) The establishment of real-time risk identification model, automated warning system and response mechanism based on the taxpayer’s business data and behavior patterns.

By using data mining and deep learning algorithms, which adopt blockchain technology to ensure collective processing power and allow regulators to access a massive database, it is possible to detect and analyze the taxpayer’s tendency towards fraudulent behaviors at a very early stage. It is also feasible to construct a database by means of manual work to document behavioral characteristics that might lead to tax fraud. In fact, regulators should establish a model to fully record behavioral patterns that are suggestive of tax fraud. In certain cases, it is even helpful to prioritize the severity of behavioral patterns in terms of potential tax fraud and conduct a trend analysis in real time to accelerate early warning and risk identification.

The blockchain technology should also be adopted at the macro-management level thanks to its consensus mechanism (a blockchain has no “leader”. For blockchains to make decisions, they need to come to a consensus using this consensus mechanism). The system also allows timely notifications to relevant departments such as banks, courts customs, etc. This can lead to the formation of a multidimensional prevention and control system.

(3) The construction of a digital system to store the chain of evidence based on the taxpayer’s tax activity diagram

Thanks to the traceability and immutability of blockchain technology, the taxpayer’s operational data can be recorded separately and used as the basis for constructing a system that secures the chain of evidence. The system will focus on the following aspects:

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