Alibaba Group Holdings Ltd And Its Nationality Dilemma

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On Monday, Taiwan’s Investment Commission asked Alibaba to leave Taiwan within six months for violating Taiwanese investment rules. Taiwan considers mainland China as the biggest political and military threat. So, the mainland Chinese companies are subject to stricter regulations in Taiwan, and they require special approvals.

Alibaba’s nationality depends on who asks

The Chinese e-commerce giant entered Taiwanese market in 2008 through a Singapore-based subsidiary called Singapore E-commerce Private Ltd. But the online retailer’s filings for the historic U.S. IPO last year provided evidence of mainland Chinese control. So, the Taiwanese authorities asked it to pull back its operations and reapply as a mainland Chinese entity.

Taiwan has finally challenged the Jack Ma-led company’s status as a non-Chinese company, says Reuters Breakingviews columnist Robyn Mak. The Hangzhou-based company has multiple nationalities depending on who asks. Investors regard it as a Cayman Islands-based entity, Chinese taxman sees it as a firm with its main base in Hong Kong, but licensing bodies consider it a China-based e-commerce platform.

Alibaba gets an extra perk due to its Hong Kong base

In mainland China, Alibaba argues that it’s not a resident Chinese company to avoid a 25% tax on its global profits. It has a base in Hong Kong. As a result, Alibaba gets an extra perk from Chinese tax authorities: a 5% withholding tax rate, flat 50% less than 10% it would pay elsewhere. But it is a Chinese company in many aspects. Its founder Jack Ma is a Chinese national. The company answers to Chinese regulators, notes Mak.

Alibaba’s Chinese auditors can’t hand over any document to the U.S. regulators without Chinese government’s permission. Investors have simply purchased shares of a Cayman Islands-based holding company that oversees about 290 subsidiaries knit together by legal contracts. Robyn Mak says some countries may recognize its legal contracts and structures, but others may not. Alibaba’s nationalities and structures may invite more trouble regulators get up to speed.

Alibaba shares fell 2.63% to $81.77 at 10:14 AM EST on Tuesday.

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