Alibaba Group Holding Ltd (阿里巴巴) has warned investors that years-long government tax breaks for the Internet industry would start to dwindle, adding billions of US dollars in costs for China’s largest corporations as Beijing extends its campaign to rein in the sector.
China’s No.1 e-commerce company told some investors during post-earnings calls this week that the government stopped treating some of its businesses as so-called Key Software Enterprises (KSE) — a designation that conferred a preferential 10 percent tax rate, people familiar with the matter said.
The Tmall (天貓) operator forecasts an effective tax rate of 20 percent for the September quarter, up from just 8 percent a year ago, the people said, asking not to be identified discussing private conversations.
Photo: Bloomberg
However, Alibaba said that most Internet companies would likely no longer enjoy the 10 percent rate, they added.
The move reflects Beijing’s tightening regulatory approach toward its largest tech companies from Alibaba to Tencent Holdings Ltd (騰訊) and Meituan (美團), which have come under fire for using their troves of data to enrich investors at the expenses of users.
On Thursday, the state-backed newspaper Securities Times said in an op-ed that China should scrap tax breaks to gaming companies, because now they are big enough to thrive on their own.
“Because the preferential tax rates related to KSE are subject to annual review by the relevant tax authorities in China, there is always risk that companies that apply would not be granted the tax benefit,” Citigroup analyst Alicia Yap wrote in a research note yesterday. “The argument basis sounds reasonable given a tightening regulatory environment and recent anti-trust investigation and fines on the Internet sector.”
China’s effort to free up more tax revenue reflects a global trend. A tax deal struck between the world’s richest countries this year brought global governments a step closer toward clawing back some power from technology giants that have used century-old regimes to build up wealth eclipsing the economies of most nations.
The Chinese government has over the years handed out a wide range of tax incentives and financial aids to its now giant Internet sector. While the standard corporate income tax rate is 25 percent, those who qualify as high-tech enterprises enjoy a 15 percent rate and an even-more generous 10 percent rate is awarded to those deemed to operate essential software.
The removal of such incentives demonstrates Beijing’s willingness to go after private enterprises to address social inequities and rein in powerful interests. Its campaign against big tech is now entering its 10th month, a roller-coaster ordeal that is prompting nervous investors to ponder the longer-term ramification of a crackdown that quickly spread from Jack Ma’s twin giants of Ant Group Co (螞蟻集團) and Alibaba to others like Tencent and gig-economy leaders Meituan and Didi Global Inc (滴滴).
The loss of the preferential tax status at its core marketplaces like Taobao (淘寶) and Tmall could mean Alibaba would miss out on a tax benefit of about 11 billion yuan (US$1.7 billion) for this fiscal year, Bocom International Holdings Co analyst Connie Gu estimated.
For the September quarter last year, Alibaba recognized tax credits of about 6.1 billion yuan after tax authorities renewed the KSE status for some subsidiaries, it said in its earnings statement at the time.
That tax benefit meant Alibaba paid an 18 percent effective tax rate for fiscal 2021, during which it swallowed a record US$2.8 billion antitrust penalty.
The company told investors its effective tax rate for fiscal 2022 could rise to 23 percent to 25 percent, the people said, adding that some businesses will continue to enjoy the 15 percent rate for high-tech enterprises.
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