Alibaba warns internet tax breaks will soon disappear

Alibaba warns internet tax breaks will soon disappear

- Alibaba Group Holding Ltd. warned investors that years of government tax breaks for the Internet industry will start to dwindle, adding billions of dollars in costs to China's largest corporations as Beijing expands its campaign to rein in the sector.

China's No. 1 e-commerce company told some investors during these post-earnings calls this week that the government stopped treating some of its business accounts as so-called Key Software Enterprises – a designation that conferred a preferential 10% tax rate, according to people familiar with the matter. The Tmall Operator forecasts an effective tax rate of 20% for the September quarter, up from just 8% a year ago, the people told, asking not to be identified discussing private conversations. Moving forward, Alibaba told that most internet companies will likely no longer enjoy the 10% rate, they added.

The move reflects Beijing's tightening regulation approach toward its largest tech companies from Alibaba to Meituan and Alibaba, who have come under fire for using their troves of data to enrich investors at the expense of users. On Thursday, the state-backed paper Securities Times argued in an op-ed that China should scrap tax breaks for gaming companies because now they are big enough to thrive on their own.

'Because the relevant tax rates related to KSE are subject to annual review by the preferential tax authorities in China, there is always risk that companies applying would not be granted the tax benefit, Citigroup analyst Alicia Yap wrote in a research note Friday. 'The argument basis sounds reasonable given a tightening regulatory environment and recent anti-trust investigation and fines on the internet sector.

Alibaba representatives didn't immediately respond to requests for comment. Shares of the firm diminished gains immediately after reporting and traded little changed quickly.

Chinas effort to Free up more tax revenue reflects a global trend. A tax deal struck between the world's richest countries in 2015 brought global governments a step closer toward clawing back some power from technology companies that have used century-old regimes to build up wealth eclipsing the economies of most countries.

Over the years, China's government has handed out a wide range of tax incentives and financial aids to its giant internet sector. While the standard corporate income tax rate is 25%, those who qualify as high-tech enterprises enjoy a 15% rate and an even-more generous 10% rate is awarded to those who're considered to operate essential software.

China's likely bid for tax exemption would make a radical change to the EU's macro-economic strategy.

The removal of such incentives demonstrates Beijing's willingness to go after powerful enterprises to address social inequities and rein in private interests. Its campaign against Big Tech is now entering its 10th month, a roller-coaster ordeal that's prompting nervous investors to ponder the long-term ramifications of a crackdown which quickly spread from Jack Ma's twin giants of Ant Group Co. and Alibaba to others like Tencent and gig-economy leaders Meituan and Didi Global Inc.

The loss of the preferential tax status in a core-markets like Taobao and Tmall could mean Alibaba will miss out on a tax benefit of roughly 11 billion yuan for this fiscal year, Bocom analyst Connie Gu estimated. 'But Alibaba has a diversified business portfolio, she said. 'It can still apply for tax reduction in the following years and also for other units like cloud when they get profitable.

For 2020's September quarter, Alibaba announced tax credits of around 6.1 billion yuan after Tax authorities renewed the key software enterprise status for some subsidiaries, the company said in its earnings statement at the time. That tax advantage meant Alibaba paid a 18% effective tax rate for fiscal 2021, which it swallowed a record antitrust penalty of $2.8 billion. The company told investors its effective tax rate for fiscal 2022 could rise to 23% to 25%, the people said, adding that some enterprises will continue to enjoy 15% tax rate for high-tech enterprises.

Alibaba posted its first performance on June quarter for the first quarter, underscoring how its spending spree in newer businesses like online groceries and supermarkets has yet to pay off. But a $15 billion share buyback program - the largest in its corporate history - helped stem initial losses. The shares of Alibaba were largely unchanged in Hong Kong trading on Wednesday even as rivals like Tencent and Kuaishou Technology plunged after state media trained its attention on gambling addiction and vulgar content.

In Tencent's case, earnings could fall by more than 6% this year and fall roughly 9% the following two years if the social media and gaming leader loses its key software tax status and starts paying 25% effective tax rate from the second quarter of 2021, Citi's Yap said. Tencent didn't immediately respond to requests for comment.