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Taxing Times for Chinese Online Regulators

Globally, live-streaming video platforms have experienced explosive growth over the last 12 months. Nowhere has this been more evident than on the Chinese mainland, where many of the country's online giants are keen to secure their share of huge profits related to the trend.

According to a recent survey by the Shenzhen-based investment consultancy Askci, there are now at least 116 live-streaming apps serving the mainland market. The same research also showed that, as of the end of June 2016, some 325 million people in China had accessed a live-streaming service – equivalent to 45.8 per cent of the country's total number of Internet users.

At present, live-streaming services operate under one of three models. One of them is Live Streaming + Gifts Giving, which sees high-profile hosts employed to attract users through various activities, including singing, dancing, chatting, dining, fitness exercises and a range of other online entertainment. Viewers are then urged to buy virtual gifts for their favourite hosts, which are shared between the host and the live-streaming platform. The most successful proponents of this particular model include YY Live (www.yy.com) and Liufangjian (www.6.cn).

Streaming Models

Under the Live Streaming + Games model, the live-streaming of online games and the provision of an interactive e-sports service perfectly complement each other. The market leaders in this sector include douyu.tv, zhanqi.tv and huya.com. While the Live Streaming + E-commerce model uses live-streaming as a form of product promotion. This particular model has been championed by taobao.com and mogujie.com.

Driven by expectations of huge profits, many leading mainland digital businesses have since introduced their own live-streaming services, often turning to celebrity endorsements to kick-start their channels. When launching its Xiaomi Mi Max live-streaming facility, for instance, qzone.QQ.com secured the services of Qiao Shan, the star of the 2016 hit mainland rom-com Some Like It Hot. His subsequent live stream attracted a peak viewership of 11.4 million.

Similarly, working in conjunction with miaopai.com, the launch of Sina Weibo's live-streaming service was endorsed by several well-known movie stars. To date, Weibo's live live-streaming service has been accessed more than 100 million times. As an offshoot, many celebrities now turn to live-streaming services to directly engage with their respective fan bases.

Despite – and, perhaps, partly on account of – the popularity and profitability of live-streaming services, there are several emerging issues considered potentially damaging to the sector. Most obvious is the problem of homogeneity, with many competing services offering, essentially, identical facilities and content. There is also the question of inappropriate content – with some service providers streaming overly sexual or violent content or ones that are politically contentious in nature. Finally, there is the issue of taxation, with the taxable income of online hosts, in particular, considered difficult to calculate.

New Guidelines

While the problem of homogeneity is being left to service providers to address, authorities have intervened in matters of inappropriate content and taxation. In the case of content, three government departments have issued clear requirements for managing live-streaming services.

In September 2016, the State Administration of Press, Publication, Radio, Film and Television issued new guidelines that spell out the management requirements and responsibilities for operators of online audio and visual live-streaming services.

Last November, this was followed by an update from the Cyberspace Administration of China, which called for all video hosts to register under their real names, while threatening to blacklist individuals who violated acceptable practices.

The following month, the Ministry of Culture issued a directive requiring all online games to be vetted and approved before streaming activities could be initiated.

Inter-provincial Taxation

In terms of tax assessment, a circular from the Taxation Bureau of Chaoyang, the central district of Beijing, outlined the scale of the problem facing financial authorities: "As a consequence of the booming Internet celebrity economy, the transaction methods adopted by many companies in the sector are both flexible and diversified. Such transactions can be carried out free from geographical constraints, with companies tending to migrate to those regions offering the most preferential tax regimes. This makes it difficult to determine where tax should be levied.

"While addressing the problem of an online celebrity who live-streams on several platforms and generates income in multiple locations, taxation authorities now have to make a greater effort to conduct joint investigations on an inter-provincial basis."

The matter is complicated still further by the fact that the income of online celebrities is not restricted solely to gifts and can also include revenue from advertising and offline commercial performances. As a result, in order to correctly assess the income tax due from online celebrities, many tax departments are now scrutinising their management companies in the locations where they are actually based.

Poised for Expansion

Such issues are seen as likely to grow in significance, given widespread expectations that the sector is poised for further expansion, an idea supported by a recent report on the prospects of China's online live-streaming industry jointly commissioned by the Policy and Economics Research Institute (part of the China Academy of Information and Communications Technology) and Wangsu Science and Technology, a Shanghai-based provider of online business solutions.

Taking the index of the first quarter of 2016 as the base – ie 100 – the positive industry sentiment indices of the second and third quarters were 149 and 237 respectively, up 49 per cent and 59.06 per cent quarter-on-quarter. As well as predicting that the live-streaming + model is set to take-off over the coming years, the report also identifies several sectors that will particularly benefit, most notably variety shows, education, medical, finance and e-commerce.

For more China market opportunities, please visit: http://research.hktdc.com

Content provided by Hong Kong Trade Development Council
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