Briefing: Finance ministry accuses Xiaomi, Suning of tax evasion

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China Fingers Xiaomi, Suning.Com for Tax Dodges – Yicai Global

What happened: China’s Ministry of Finance (MOF) has flagged a group of listed companies for accounting errors, including smartphone maker Xiaomi, retailing giant Suning.com and online video portal Le.com. The regulator’s audit, which covered calendar year 2017, also highlighted key features of the internet sector, including its asset-light business model, the prevalence of interwoven equity and bond investments, separation of management structures from legal entities, and the lack of geographical limits of operations. As a result, several internet firms are funneling profits overseas and thereby evading taxes, the ministry claimed in a statement. In response, Xiaomi said it had already rectified the errors outlined in the report, and denied the allegation that it was transferring profits. Suning blamed poor company practices for the accounting errors.

Why it’s important: China’s internet is on the rise, becoming a major driver for the country’s economy. In the first eight months of this year, internet and related businesses have generated RMB 595.5 billion in revenue, up 20.7% year on year. Opinions are mixed as to how the sector should be treated in terms of tax policy, according to reports in local media citing expert Li Xuhong. Some think looser taxation policies should be adopted for the internet industry, while it is still in the take-off phase, Li said. Others believe the same standards should be applied across sectors to guarantee taxation equality, Li added. MOF’s move to point out some common problems in internet companies may indicate a tightening of taxation policy aimed at the industry.