Many businesses used to think that "collecting and paying" was just a simple accounting operation. The money collected by the business and then transferred back to a third party is of course not revenue. However, the practice of tax management shows that the story is not so simple.
A recent official letter of the Department of Taxation on labor outsourcing activities continues to clarify the boundary between collection, payment on behalf of and taxable revenue[1]. According to this guideline, the amount of money transferred by the employer to the enterprise for the enterprise to pay salaries, bonuses, insurances and trade union funds to employees can be considered as collection and payment on behalf of the enterprise if the enterprise operates in accordance with the labor outsourcing model as prescribed by law. On the contrary, if the legal conditions of this activity are not met, such amounts cannot be separated as collections and payments on behalf of the taxable revenue.
What makes many businesses confused is that the current tax law does not develop a full definition of "collection and payment"
Although the above situation only arises in the field of labor outsourcing, the difficulties that businesses encounter are common in many different industries. Logistics, e-commerce, real estate, commercial agents, building management, insurance or technology platforms all regularly incur money received or spent on behalf of customers. Just one error in determining the nature of these funds can also lead to arrears of value-added tax, corporate income tax, invoice penalties, and late payment interest.
Collecting and paying on behalf is not an "accounting concept"
What makes many businesses confused is that the current tax law does not develop a full definition of "collection and payment". Instead, the regulations only mention some specific cases that are not required to declare, calculate and pay VAT or guide through each situation that arises.
This leads to the fact that many businesses implicitly think that every amount of money that does not bring profits will be considered collection and payment. In fact, the tax authority's approach is different.
What the tax authorities are interested in first of all is not whether the business is profitable or not, but whether the business is providing services for itself or only acting as an intermediary on behalf of another entity to make payments. In other words, the legal nature of the transaction is always more important than the name that the parties put in the contract.
Boundaries lie in the rights and obligations of businesses
In practice, it is possible to imagine a relatively simple test. If the enterprise only pays on behalf of the customer to a third party, is not entitled to decide on the use of the money, does not enjoy economic benefits from that money and has sufficient documents proving the payment, it is highly likely that this is a collection and payment on behalf of the customer.
On the contrary, if the business has the full right to decide on the use of the money, actively provide services to customers or the money is actually part of the value of the service that the business is selling, it is very difficult to consider this as a collection on behalf of the business.
Therefore, the two sums of money have the same value but the legal nature can be completely different.
Why do businesses often misdetermine?
The first difficulty comes from the fact that the contract is not built in the right nature.
Many contracts only generally state that the enterprise "collects" or "pays on behalf of" but does not clearly stipulate that the enterprise acts as a representative, the scope of representation, who the right to decide belongs to and which party ultimately bears the responsibility for payment.
When a tax inspection occurs, just the phrase "package service fee" in the contract can cause the entire revenue to be considered revenue.
The second difficulty lies in documentation.
Many businesses only keep money transfer documents without fully saving documents proving that the customer has authorized payment or the original invoice of the service provider. At that time, it is very difficult to prove that the business is only an intermediary.
The third difficulty comes from the way cash flow is organized.
Many businesses combine revenues and revenues on behalf of the same invoice or the same accounting item. After months or years, it is almost impossible to separate each item when the tax authorities check it.
Disputed areas
Logistics activities are a good example. Forwarders often collect many amounts such as port fees, container storage fees, customs fees or amounts paid on behalf of customers. If the contract clearly shows that these are the amounts that must be paid by the customer and the business only advances or pays on behalf of the business, these amounts usually have a basis to be considered collected. On the contrary, if all costs are included in a logistics service price, the tax authority can completely consider this as the revenue of the business.
In the real estate sector, building management businesses often collect electricity, water, cleaning fees, garbage disposal fees, security fees, or other contributions. Whether these amounts are revenues or just revenues depend greatly on whether the business collects on behalf of itself or on behalf of the service provider.
For e-commerce and digital platforms, the story is even more complicated. An exchange can collect money from the buyer and then transfer it back to the seller after deducting the service fee. In this case, not all cash flows through the exchange's account are the exchange's revenue.
Similarly, businesses providing e-wallets, payment gateways or ride-hailing platforms also regularly receive very large cash flows, but the actual revenue is only the service fee that the business enjoys.
If revenues and revenues are not clearly separated, accounting figures, taxable revenues and invoice obligations can all be skewed.
Although accounting regulation and tax regulation are not exactly the same, the mindset of considering the nature of the transaction rather than the form is becoming increasingly consistent
What does the official letter of the Department of Taxation show?
What is noteworthy in the guidance of the Department of Taxation does not lie in the conclusion that the employee's salary or insurance is considered to be a collection on behalf of the employee.
The more important point is that the Department of Taxation sets a prerequisite: enterprises must really operate in accordance with the labor outsourcing model in accordance with the provisions of the Labor Code and guiding documents. In other words, before considering taxes, the tax authorities check the legal nature of the transaction beforehand. If the nature of the transaction is not correct, the whole argument about collection and payment on behalf of the transaction is almost meaningless.
This is an increasingly obvious management trend in tax inspection activities today. The tax authority not only reads the invoice but also considers the contract, business process, cash flow and actual rights and obligations of the parties to determine the nature of the transaction.
Perspective from international practice
This approach is also quite similar to international standards.
According to IFRS 15, enterprises need to determine whether they are the principal or just a tax agent. If the business is principal, revenue is recorded on the entire transaction value. If the business is only an agent, the revenue only includes the commission or fee to be enjoyed.
The determination of a principal or an agent does not depend on whether the cash flow passes through the business account, but on who controls the goods or services before they are transferred to the customer.
Although accounting regulation and tax regulation are not exactly the same, the mindset of considering the nature of the transaction rather than the form is becoming increasingly consistent.
What do businesses need to do?
In the context of increasingly diversified business activities, it is no longer enough to write only one line "collect and pay on behalf of the contract" in the contract to minimize risks.
Enterprises should review the entire transaction process, clearly define their legal role in each type of contract, separate the cash flow collected on behalf of the revenue, develop documents proving the payment authorization and ensure that the invoicing is in accordance with the nature of each amount.
More importantly, businesses need to evaluate transactions from the time of designing the business model instead of waiting for the tax authority to check before considering the classification.
Conclusion
The money that passes through the bank account of the business is not necessarily revenue. However, the amount of money called "collection and payment" is also not sure to be accepted by the tax authorities as collection and payment. What is decisive is not in the naming of the parties, but in the legal nature of the transaction, the actual rights and obligations of the business, as well as the system of contracts, invoices and supporting documents.
The new official letter of the Department of Taxation only deals with one specific case in labor outsourcing activities. However, the message that this document sends to the business community has a much broader meaning: in modern tax administration, the nature of the transaction is always more important than the form of expression. The sooner an enterprise correctly identifies the boundary between revenue and revenue and payment, the more it will reduce tax, accounting and invoice risks in the business process.
