Huge back taxes loom on state-controlled companies
Earnings to suffer once provisions are made, says expert
Profits of the nine state-owned firms that are facing back taxes will be hit this year as they need to set aside large provisions, according to an accounting expert.
Ernst & Young tax partner Joseph Lee Chin-wai, who has been based in Beijing for more than 12 years, said the provisions were necessary under international accounting rules.
'Since this is the first time that the mainland has asked for back taxes, it is not clear how this will be carried out as to the amount and the time frame for the payments,' Mr Lee said. But he pointed out: 'What we can be sure of is the bottom line of the nine companies will be severely affected.'
The nine companies, including Tsingtao Brewery and Maanshan Iron & Steel, were still paying a 15 per cent tax rate instead of the normal 33 per cent after the preferential policy expired, a government announcement said.
The government granted them the special rate in 1993 as a way of encouraging them to list overseas.
Mr Lee said the tax benefit expired at the end of 1995 but was extended to 1997. A tax notice issued in 1998 did not mention the special treatment.
'The accounting rule allowed us to keep the benefits as there was no declaration of a clear expiry date. As a result, all nine firms have not made any provisions,' Mr Lee said.
The companies' Hong Kong-listed shares lost between 0.67 per cent to 6.2 per cent yesterday after the news, although their mainland-listed A shares mostly rebounded from sharp losses on Thursday.
Sinopec Shanghai Petrochemical, Maanshan Iron & Steel, Dongfang Electrical Machinery and Sinopec Yizheng Chemical Fibre had the lowest average corporate tax rates of 11.7 per cent to 14.86 per cent over the past three years.
Those companies, along with Jiaoda Kunji High-tech, Beiren Printing, Guangzhou Shipyard, Tsingtao Brewery and Tianjin Capital Environmental, warned about a possible cut in the special rate in their annual reports but did not list potential back taxes as an earnings risk.
Mr Lee expected that they would lobby their regional governments, which are responsible for tax collection, to let them pay less than the actual shortfall or to repay in stages.
'It is unfair to let existing shareholders foot the bill for former shareholders,' said Beiren Printing spokesman Jiao Ruifeng.
A company secretary of another affected firm said the back taxes, if carried out, would harm Beijing's credibility.
'It would set a bad example to the world of how inconsistent the Chinese government is in terms of policy making,' he said.
None of the nine companies received any formal notification of the back taxes from the authorities in a tax document released on June 19.
'The authorities should send us formal notification,' said Yu Yan, company secretary of Jiaoda High-tech.
'We are seeking advice from our lawyers on the status of the document.'
Tsingtao and Guangzhou Shipyard said they were still evaluating the impact of the back taxes and would notify their shareholders when there was an update.