For a whole week, the Chinese-speaking internet was hooked on the divorce scandal of goody-two-shoes but actually serial adulterer and regular prostitution customer Wang Leehom. (Don’t believe me? Politicians blamed the low turnout and subsequent failure of the Taiwanese referendums on it.) But then he was miraculously saved from further public wrath by an even bigger scandal … China’s top e-commerce livestreamer Viya’s historic, jaw-dropping $210mm ($1.34Bn RMB) fine for tax evasion.
Here are the facts of the case:
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From 2019 to 2020 (seemingly just through October), Viya evaded $100mm in taxes by hiding and swapping incomes (the same thing fellow livestreamers Cherie and Sunny were in trouble for just a month ago, although they owed just $15mm total), and simply didn’t pay another $10mm or so in taxes
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Basically, Viya should have been paying a personal tax rate of 45% for her income bracket (which she apparently began to in November 2020). Or alternatively, a few tax analysts have said she could theoretically be paying via a corporate structure of ~35%. (I’m not sure of the veracity of this latter statement.) Instead, she was paying an effective tax rate of something like 0.8-3% by illegally dividing her income into numerous fake shell sole proprietorship companies in special tax jurisdictions (such as Chongming island in Shanghai) and then (probably) engaging in faked transactions.
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The extra $100mm in fines came from the fact that she cooperated with the investigation and proactively paid about $78mm in evaded taxes, so this part was only given a fine of 60% ($47mm). However, the parts that she didn’t proactively turn in were given a penalty of 4x, and there were other parts that were less minor that were given a penalty of 1x.
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Don’t think she wasn’t warned though … she was apparently repeatedly warned by the authorities and failed to fully correct her misbehavior (the implication being that she did correct some).
The public’s reaction?
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This is a crazy amount of money. 90% of A-share listed companies don’t even make this much money in a year!
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She does not deserve the many honors the government had bestowed upon her, especially the ones involving virtues, honesty and poverty alleviation.
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Basically … people are pissed and don’t want to see her on the internet again. A large portion believe that she should be banned forever from making money in the virtual economy.
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A minority do think that the current level of “complete erasure” from the internet is problematic and there should be more formal laws and procedures established, not just a complete ban every time a scandal of any type happens. Do note that some of these erasures are very severe, for example, sometimes a celebrity’s entire work is deleted from the internet, which is very unfair to their innocent collaborators.
Here are the implications for other livestreamers:
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The joke is that all the real influencers are in line at the Hangzhou tax authority, and that only fake ones are traveling right now. What we do know is that Xinhua has said that the tax bureau has given livestreamers and other new economy participants some time to turn themselves in and make up their missing taxes, and that at least a thousand have already done so. That’s a tiny percentage of the 1.2mm people employed in livestreaming e-commerce, though of course not all of them are business owners in the position to commit tax crimes.
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While Viya’s case might have been obvious, many others who are under investigation were probably revealed as problematic by the government’s nationally integrated new tax software system, Golden Tax System (GTS) Version 4.0, which was officially implemented August 2021. Basically, records have been highly digitized since v 3.0 (which was launched in 2016) but 4.0 connects with bank accounts, corporate registration systems, etc. providing the tax authorities with a complete view of all kinds of tax-related transactions and of course layering some artificial intelligence. The hope is, of course, that people just wise up and realize complying is their only option.
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We already know that the government has been using technology to fish out tax evaders. It’s just that after the celebrity scandals of Zheng Shuang (2021) and Fan Bingbing (2018), who were fined $46mm and $129mm respectively, and the explicit push for “rich people to pay their share” as one of the conditions of Common Prosperity, there’s probably more where Viya came from.
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But mainly, I’m concerned about the effect on the livestreaming ecommerce industry and its top 3 players, Douyin, Kuaishou and Alibaba.
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Depending on how extensive the tax evasion is (and there is every reason to believe it is very extensive) and how many cases will be made public (the public is not soothed by Viya’s apology), this could be very damaging to the entire industry in the short term.
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Buyers were with Viya because she could get massive discounts (even vs. global brands such as L’Oreal) due to her large audience, which was built up over years. This is not immediately replicable, not all livestreamers are able to offer the same deals! Of course, the immediate beneficiary is probably #2 Austin, but that’s assuming he isn’t in trouble himself, which he has said he isn’t, but hey Viya said the same thing of herself last month …
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Overall trust in livestreamers could be impacted, although I think this is probably minimal. The personal affinity was real, but it was usually not the top factor for most buyers — prices were.
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It’s obviously especially damaging to Alibaba, who had built her up to be their #1 star. Viya accounted for ~10% of total Alibaba livestreaming GMV in 2020 and was looking even stronger this year. Now, this GMV won’t be totally lost of course, but the industry probably won’t get the crazy headlines and hype it did before (especially if Austin falls) because …
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… No one is actually trying to recreate another Viya.
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Viya (and Austin) are simply too powerful and take away too much of the economics from the rest of the livestreamers, and this kind of inequality is unsustainable.
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They were also a unique product of their time — created when Alibaba was trying to divert traffic to the livestreaming business and get it jumpstarted. Now that folks don’t need to be incentivized (as much) as creators, merchants, or buyers, the platforms will probably not want to give up this much power to the influencer.
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Remember, Douyin tried to get Austin and almost succeeded in 2020, until Alibaba had to offer him a “deal he couldn’t refuse.” And Kuaishou is constantly talked about as “being held hostage by its top influencers.”
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And as we can see … the platforms and creators are tied to each other. When creators fall, the platforms’ reputations take a hit too. Less so with these tax evasions and more so with scandals involving fake products, false promotions, etc.
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The trend now is for platforms like Alibaba to promote brand livestreams instead (already 60% of streams). The goal is to have the brands, who are their ultimate customers, make livestreaming a part of their integrated e-commerce strategy, instead of a way to drive traffic to their Taobao stores, as many are doing now.
Now … maybe that’s a good thing.
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There’s always been a question in China tech of, just how sustainable is livestreaming e-commerce, really? When you have someone like Viya honestly making BILLIONS of RMB without taking any sort of cashflow risk … (I mean, sure she has hundreds of employees now, but the initial investment was literally a selfie light and a smartphone?) this doesn’t seem right economically. It seems like a thing that will be corrected. Is this the (unexpected) correction we’re seeing?
Finally, and this is what actually drove me to look deeply into Viya’s specifics in the first place … what does her case (and Cherie / Sunny’s) tell us about the reliability of reported livestreaming GMV? Let’s see:
Viya 2018 GMV: $400mm
2019 GMV: Supposedly over $1.5Bn
2020 GMV: $5Bn but given that she did $500mm for 11/11’s first presale alone, let’s say that the first 10 months are just $4Bn
So we’re talking about reported GMV of something around $5.5Bn maybe for the full year 2019 and first ten months of 2020 (where her $110mm tax evasion occurred).
If $110mm represents the 40% taxes she didn’t pay, then her actual earnings were $275mm. And since the typical cut is 20% and she also charges a fee for each product to be featured (up to $30K per), let’s round down a little to $250mm (supposing $20mm listing fees, I have no idea if that’s too low or too high) which means she’s selling $1.3Bn of merchandise, net.
That’s actually quite different from the reported estimates of $5Bn+ above. Like 20% of reported.
Cherie’s fine was about 1/10th of Viya’s and her reported GMV is often around there as well so we would get the same number if we used the same math. In Cherie’s case, she was indeed only paying about 3% in taxes (when it should be 45%).
So … all those sky high GMV numbers you see, maybe take it with a large lump of salt. I always knew you had to at least cut it in half, but it looks like you might have to halve that too. And remember too that Viya’s numbers are highly scrutinized so they should be more reliable than smaller influencers. But they still seem greatly inflated!
Hope that was interesting.
