Alibaba’s split nationalities invite trouble
Alibaba’s multiple nationalities are an invitation to trouble. Taiwan has challenged the e-commerce company’s status as a non-Chinese company. The regulators could be forgiven for being confused. Chinese tax authorities regard Alibaba as a company with its main base in Hong Kong, licensing bodies see China, while investors see the Cayman Islands. The ambiguity may not always be beneficial.
Chinese companies require special approval in Taiwan and are subject to strict regulations. Alibaba got in years ago by using its Singaporean subsidiary. Now, Taipei authorities say it must pull back its operations and reapply as a Chinese company. The impact on Alibaba’s core business is likely to be small, but the company is appealing, saying it followed the rules.
Alibaba’s real nationality, like that of many Chinese companies, depends on who asks. In the mainland, the company argues it’s not a resident Chinese company so as to avoid a 25-per-cent tax on its worldwide income. The reason is that its “de facto management body,” accounts and board meeting minutes are physically outside China. By having a base in Hong Kong, Alibaba gets an extra perk from the Chinese taxman: a 5-per-cent witholding tax rate, compared with the 10 per cent it would pay elsewhere.
Yet, in other ways Alibaba is very much Chinese. It certainly answers to local regulators, as a recent public argument with the State Administration for Industry and Commerce over counterfeit goods showed. Under draft laws from the Ministry of Commerce, the Chinese nationality of Alibaba founder Jack Ma would make it count as a local investor. And according to current rules, Alibaba’s mainland auditors can’t hand over documents to U.S. regulators without China’s permission.
Where does that leave investors? They have bought into a Cayman Islands holding company overseeing a web of some 290 subsidiaries and entities held together by legal contracts and structures that some jurisdictions may recognize, but others may not. As the company expands, getting the best of different jurisdictions is attractive. But as regulators get up to speed, the elaborate structures could attract more unwanted attention.