Profit warning over tax payment hits Giordano

PUBLISHED : Tuesday, 13 February, 2007, 12:00am
UPDATED : Tuesday, 13 February, 2007, 12:00am

Shares of casual wear retailer Giordano International fell as much as 4 per cent yesterday following a profit warning after the mainland authorities demanded the company pay more tax.

The demand could cut full-year earnings by HK$70 million as Giordano had to pay back in one go the additional tax incurred from previous years, a source said, without indicating how many years were covered.

The Guangzhou Municipal Office of the State Administration of Taxation concluded after a review that the taxable income for Giordano's mainland operation should be adjusted upwards, the company said. Giordano said it would therefore increase its tax provision in its results for last year, without giving details.

The shares, which had declined for six of the previous seven trading days on slower than expected mainland sales growth, closed down 1.6 per cent at HK$3.69 yesterday after falling as low as HK$3.60. The stock has lost 12 per cent this month.

The tax ruling is related to Giordano's transfer pricing which covers royalty fees the company's mainland retail operation pays to its Hong Kong headquarters.

Transfer pricing was a common practice for companies operating in Hong Kong and the mainland to allow them to enjoy a lower tax payment, said PricewaterhouseCoopers senior tax partner Tim Lui Tim-leung. It now appeared the mainland authorities were checking those practices closely, he said.

'We will see some more Hong Kong companies affected by such tax reviews,' Mr Lui said. Foreign enterprises in the mainland are charged income tax at 33 per cent, double that paid in Hong Kong.

The tax authority ruled that the transfer pricing arrangement was too high, leading to higher expense for its mainland operations, a source said.

'The ruling also means Giordano's mainland retail operation will in future have to pay the royalty rate suggested by the mainland authorities,' the source said.

Merrill Lynch yesterday predicted Giordano's full-year earnings before interest and tax at HK$466 million, noting that the company had not quantified the tax impact.

Deutsche Bank predicted before the profit warning that Giordano's full-year earnings would be HK$313 million. DBS Vickers yesterday forecast HK$332 million but said the company had not provided figures on the additional tax.

Shares of Giordano, which has more than 1,700 outlets in Asia, slumped 9.2 per cent last week after it disclosed to investors slower than expected fourth-quarter sales growth in the mainland and a drop in sales in some cities.

Giordano's mainland sales grew in the mid-teen percentage points for the three months to December, sources said. Mainland sales rose 22 per cent in the previous three months, according to the company.