ValueBuddies.com : Value Investing Forum - Singapore, Hong Kong, U.S.

(31-01-2016, 08:07 PM)Hi Boon,Your post no. 1132 questioned about "ballooning VAT receivables" seems to suggest that VAT receivables may be inflated.   Your posts from post no.1167 onwards suggested that Sino Grandness management had not done a good job on the tax structuring of its subsidiary companies.  It must be the first time you read that Sino set up local subsidiary to enjoy benefits from local government. Your reaction was:"how much grants have been received by Sino Grandness in relation to the amount of income tax it had paid so far totaling RMB 676 m from FY2009 to 9M2015? Has the benefits (under current set-up of entities) justified the “amount of income tax paid” and “VAT cash flow strain suffered” by Sino Grandness so far? From the perspective of cash flow beneficiary, the China tax authorities seem to be the winner and the shareholders of Sino Grandness the loser. This is not a win-win deal, is it?  One should not be dismissive. How do we know the present arrangement is not a good one? Is cheaper land not important?  Frankly, your proposal does not require the setting up of 2 subsidiaries. Just get an operating subsi (say Sichuan Beverage) to go to Hubei to build and operate. If the simple idea from you is indeed superior than setting up local subsi, I am sure tax specialists in China would have recommended it. Wrote: [ -> ]

(31-01-2016, 03:10 PM)tiongkokgor Wrote: [ -> ]

(31-01-2016, 01:23 PM)Hi Boon, as an advocate for serious research and from your posts and links to professional guides on China tax, I presumed you had read and understood China tax.I have worked for finance in Singapore and China. VAT and tax system of China is many times more complicated than Singapore\s. And I am no expert on tax matters and the companies I worked for, always engaged tax specialists to advise on the appropriate tax structures. Sino Grandness may have been advised on the structuring of its subsidiary companies too.It is therefore understandable that you have made some mistakes ( caused some confusions) and fellow forummers have pointed them out so that these mistakes can be learning lessons for all visitors to this forum.Frankly speaking, your questions caused some fear in me if left unanswered but fortunately there are other gurus who have nullified the fear quite convincingly. Wrote: [ -> ]

(30-01-2016, 10:44 PM)Young Investor Wrote: [ -> ]Hi BoonHi Young Investor,
 
Coming back to your question:
 
Can a project company transfer its input VAT to an operating subsidiary?
 
Get the operating subsidiary to procure the plant and equipment. The project company just do the building structure. There will be no transfer of input VAT involved.

The problem wouldn’t even exist in the first place, if procurement is probably structured, IMO.
________________________________________________________________________________________________________________________________________

Sino Grandness has explained to shareholders before that local government will provide benefits (such as cheaper land, government grants) only if a local subsidiary is set up to pay local income tax on profits generated. 

Your suggestion will not work.

Hi Young Investor,
 
By the way, how much grants have been received by Sino Grandness in relation to the amount of income tax it had paid so far totaling RMB 676 m from FY2009 to 9M2015?
 
Does it imply that if one is not prepared to accept the benefits (of cheap land and government grants) one does not have to set up a local subsidiary to pay local income tax? After all, branches are tax entities as well.
 
Is your statement “Your suggestion will not work.” applies to where Sino had set-up operations or are you saying it is not going to work in the whole of China?
 
Has the benefits (under current set-up of entities) justified the “amount of income tax paid” and “VAT cash flow strain suffered” by Sino Grandness so far?
 
From the perspective of cash flow beneficiary, the China tax authorities seem to be the winner and the shareholders of Sino Grandness the loser. This is not a win-win deal, is it? 

When and where was this being explained and has it been recorded or published ?    
_____________________________________________________________________________________________________________________________________

Hi Tiongkokgor,
 
It is good to hear from another advocate of serious research and thanks for your interesting comments.
 
Unfortunately, I find your comments lacking in specifics and therefore it would be very much appreciated if you could:
 
1)  Clarify if you are saying or implying that I have make mistakes in interpreting Chinese tax rule based on my understanding of Singapore tax rule?
2)  Can you please quote a question which I have posted that had caused you most fear – what were you fearing for ? And what subsequent answer provided by other buddies that helped nullified your fear?   
 
Thanks.
______________________________________________________________________________________

(01-02-2016, 08:09 PM)tiongkokgor Wrote: [ -> ]

(31-01-2016, 08:07 PM)Hi Boon,Your post no. 1132 questioned about "ballooning VAT receivables" seems to suggest that VAT receivables may be inflated.   Your posts from post no.1167 onwards suggested that Sino Grandness management had not done a good job on the tax structuring of its subsidiary companies.  It must be the first time you read that Sino set up local subsidiary to enjoy benefits from local government.  Your reaction was:"how much grants have been received by Sino Grandness in relation to the amount of income tax it had paid so far totaling RMB 676 m from FY2009 to 9M2015? Has the benefits (under current set-up of entities) justified the “amount of income tax paid” and “VAT cash flow strain suffered” by Sino Grandness so far? From the perspective of cash flow beneficiary, the China tax authorities seem to be the winner and the shareholders of Sino Grandness the loser. This is not a win-win deal, is it?  One should not be dismissive. How do we know the present arrangement is not a good one? Is cheaper land not important?  Frankly, your proposal does not require the setting up of 2 subsidiaries. Just get an operating subsi (say Sichuan Beverage) to go to Hubei to build and operate. If the simple idea from you is indeed superior than setting up local subsi, I am sure tax specialists in China would have recommended it. Wrote: [ -> ]

(31-01-2016, 03:10 PM)tiongkokgor Wrote: [ -> ]

(31-01-2016, 01:23 PM)Hi Boon, as an advocate for serious research and from your posts and links to professional guides on China tax, I presumed you had read and understood China tax.I have worked for finance in Singapore and China. VAT and tax system of China is many times more complicated than Singapore\s. And I am no expert on tax matters and the companies I worked for, always engaged tax specialists to advise on the appropriate tax structures. Sino Grandness may have been advised on the structuring of its subsidiary companies too.It is therefore understandable that you have made some mistakes ( caused some confusions) and fellow forummers have pointed them out so that these mistakes can be learning lessons for all visitors to this forum.Frankly speaking, your questions caused some fear in me if left unanswered but fortunately there are other gurus who have nullified the fear quite convincingly. Wrote: [ -> ]

(30-01-2016, 10:44 PM)Young Investor Wrote: [ -> ]Hi BoonHi Young Investor,
 
Coming back to your question:
 
Can a project company transfer its input VAT to an operating subsidiary?
 
Get the operating subsidiary to procure the plant and equipment. The project company just do the building structure. There will be no transfer of input VAT involved.

The problem wouldn’t even exist in the first place, if procurement is probably structured, IMO.
________________________________________________________________________________________________________________________________________

Sino Grandness has explained to shareholders before that local government will provide benefits (such as cheaper land, government grants) only if a local subsidiary is set up to pay local income tax on profits generated. 

Your suggestion will not work.

Hi Young Investor,
 
By the way, how much grants have been received by Sino Grandness in relation to the amount of income tax it had paid so far totaling RMB 676 m from FY2009 to 9M2015?
 
Does it imply that if one is not prepared to accept the benefits (of cheap land and government grants) one does not have to set up a local subsidiary to pay local income tax? After all, branches are tax entities as well.
 
Is your statement “Your suggestion will not work.” applies to where Sino had set-up operations or are you saying it is not going to work in the whole of China?
 
Has the benefits (under current set-up of entities) justified the “amount of income tax paid” and “VAT cash flow strain suffered” by Sino Grandness so far?
 
From the perspective of cash flow beneficiary, the China tax authorities seem to be the winner and the shareholders of Sino Grandness the loser. This is not a win-win deal, is it? 

When and where was this being explained and has it been recorded or published ?    
_____________________________________________________________________________________________________________________________________

Hi Tiongkokgor,
 
It is good to hear from another advocate of serious research and thanks for your interesting comments.
 
Unfortunately, I find your comments lacking in specifics and therefore it would be very much appreciated if you could:
 
1)  Clarify if you are saying or implying that I have make mistakes in interpreting Chinese tax rule based on my understanding of Singapore tax rule?
2)  Can you please quote a question which I have posted that had caused you most fear – what were you fearing for ? And what subsequent answer provided by other buddies that helped nullified your fear?   
 
Thanks.
______________________________________________________________________________________

(01-02-2016, 06:38 PM)leeeta Wrote: [ -> ]Hi Boon


You have now said:

"Without the financial statement of individual subsidiaries, it would hard to make a more meaningful assessment."
How do you then know the decision to set up a local subsidiary in Hubei is not a good one, if you do not have the info?

(01-02-2016, 03:31 PM)Boon Wrote: [ -> ]Hi Young Investor,
 
I will come back to you on the issue of “dumb and incapable of assessing benefits” later.
 
Hi leeta,
Your latest question is related to that of “crubs”.
 
Hi crubs,
 
What we have are the consolidated financial statements of the group. Without the financial statement of individual subsidiaries, it would hard to make a more meaningful assessment.
 
Also I noticed that there is subsidiary (Shenzhen Grandness Industry People’s – Groups Co., Ltd.) that specialize in sales. I do not know how marketing costs are allocated among the subsidiaries.
 
Broadly, here are some of the major factors to consider.
 
Business structure
Legal risks
Tax obligations and implications
Tax planning
Operating risks
Registered capital requirement
Capital structure
Source of capital – SAFE registration
Thin capitalization.
Losses carried forward
PPE depreciation profile – building vs machinery
Leasing alternative.
Profit repatriation
Withholding tax
Dividend policy – source of profit
Exit strategy –
Operating efficiency
Inter-relationship between various taxes.
Government incentives
 
A simple example of income tax saving achievable during construction/ development phase is to outsource development activities to an overseas related party (say in Hong Kong). The Hong Kong entity would be subject to HK tax rate at 16.5% percent, which may be more 
than offset by the Enterprise Income Tax (EIT) benefits of incurring the costs by the subsidiary itself (at 25 %).
 
I don’t know if outsourcing of marketing activities fall under such scheme for Sino. It used to work for of real estate developers.
 
There could be other possibilities to be exploited depending on the objective or target.


One extreme is to structure them into functional groups:
 
Development management service
Building structure
Plant and machinery
Production
Distribution/transportation
Marketing
_______________________________________________________________________________________________________ 

(02-02-2016, 08:20 AM)Boon Wrote: [ -> ]I wouldn’t use the word "dumb", perhaps  “more clever”.
 
After nearly 7 years, who has been “more clever” in assessing benefits?
 
Who has been the clear winner?
 
Tax authority / Management / Shareholder / CB holder/Debt holder ?


[Image: t8ovv5.jpg]

(01-02-2016, 11:24 PM)crubs Wrote: [ -> ]

(01-02-2016, 03:31 PM)Boon Wrote: [ -> ]Hi Young Investor,
 
I will come back to you on the issue of “dumb and incapable of assessing benefits” later.
 
Hi leeta,
Your latest question is related to that of “crubs”.
 
Hi crubs,
 
What we have are the consolidated financial statements of the group. Without the financial statement of individual subsidiaries, it would hard to make a more meaningful assessment.
 
Also I noticed that there is subsidiary (Shenzhen Grandness Industry People’s – Groups Co., Ltd.) that specialize in sales. I do not know how marketing costs are allocated among the subsidiaries.
 
Broadly, here are some of the major factors to consider.
 
Business structure
Legal risks
Tax obligations and implications
Tax planning
Operating risks
Registered capital requirement
Capital structure
Source of capital – SAFE registration
Thin capitalization.
Losses carried forward
PPE depreciation profile – building vs machinery
Leasing alternative.
Profit repatriation
Withholding tax
Dividend policy – source of profit
Exit strategy –
Operating efficiency
Inter-relationship between various taxes.
Government incentives
 
A simple example of income tax saving achievable during construction/ development phase is to outsource development activities to an overseas related party (say in Hong Kong). The Hong Kong entity would be subject to HK tax rate at 16.5% percent, which may be more 
than offset by the Enterprise Income Tax (EIT) benefits of incurring the costs by the subsidiary itself (at 25 %).
 
I don’t know if outsourcing of marketing activities fall under such scheme for Sino. It used to work for of real estate developers.
 
There could be other possibilities to be exploited depending on the objective or target.


One extreme is to structure them into functional groups:
 
Development management service
Building structure
Plant and machinery
Production
Distribution/transportation
Marketing
_______________________________________________________________________________________________________ 

Hi Boon,

I am confused.

Your reply to me was : "Without the financial statement of individual subsidiaries, it would hard to make a more meaningful assessment."

Your reply to leeeta was : "Without specific details, a general assessment still could be carried out, taken into consideration of factors I have listed before. But the target or objective must a clear."

That aside, I assume that you have done a general assessment of Sino Grandness's VAT offsetting based on the factors that you've mentioned. Could you share your assessment of Sino Grandness based on each individual factor that you've mentioned ? 

Business structure

Legal risks

Tax obligations and implications

Tax planning 

Operating risks

Registered capital requirement

Capital structure 

Source of capital – SAFE registration

Thin capitalization.

Losses carried forward

PPE depreciation profile – building vs machinery

Leasing alternative.

Profit repatriation 

Withholding tax

Dividend policy – source of profit

Exit strategy – 

Operating efficiency

Inter-relationship between various taxes. 
Government incentives

Explaining how you used each factor to assess Sino Grandness VAT offsetting can help us understand why you said it is far from conclusive and expressed doubt in other forumer's reasons.