Sino Grandness

[leeeta]

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?

[tiongkokgor]

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.
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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 ?    
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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.
______________________________________________________________________________________

[Boon]

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.
______________________________________________________________________________________

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:
(Yesterday, 03:10
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Hi Tiongkokgor,
 
Thanks for your answers.
 
The ballooning VAT is a fact.
 
Do you have a better explanation for it ?
 
Did I used the word “inflated VAT receivables” ? I remember someone else did.
 
“How do we know the present arrangement is not a good one? Is cheaper land not important?"
 
Yes, overall benefit is inclusive of land cost. Cheap or not cheap, it’s all relative?
 
Did I say the present arrangement is not a good one?
 
Did I say it is a good one?
 
Are you saying it is a good one?
 
I still do not understand why you were fearful of those questions?
 
Did I propose setting up 2 subsidiaries?
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[Boon]

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?

Hi leeta,
 
My statement is targeting more at crubs question 2, especially on the conditions of “all things considered”.
 
To me question 2 is more like a review.
 
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.
 
So far, we have approached our discussion from the perspective of VAT offsetting – it is far from conclusive.
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[crubs]

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. 

[Dividend Warrior]

After reading the last few pages of this thread, I still dun really understand the situation.

Is Sino Grandness facing some tax issues in China?

Confused.....

[Boon]

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]

[Young Investor]

Mr Boon,

Your statement:
"The problem wouldn’t even exist in the first place, if procurement is probably (you must have meant properly) structured, IMO."
made in connection with Sino setting new subsidiaries is clear -- Sino is no good.

You are now wondering "Who has been the clear winner? Tax authority / Management / Shareholder / CB holder/Debt holder ?" and has highlighted the RMB 676m paid in 6 years and 9 months.

Are you saying that government is the clear winner, in your opinion?  

You should have known that large companies engage tax specialists to do tax planning and compliance for them. Are you not pleased that Sino Grandness has paid large sums to government?

In the real world, there is such thing as win-win. Companies that are doing well pay more taxes to government, which then spend on improving infrastruture. Companies in turn enjoy the benefits, eg lower transportation cost on better road system, improved rail etc........

[Edited by moderator: Removed an inappropriate statement]

[weijian]

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]

This table pretty much sums up all! A few interesting observations:
- It is much of a coincidence that OCF before WCC is very similar to the sum of receivables + CAPEX
- 2 dividends were paid after IPO and subsequently stopped. Garden Fresh was launched in 2010 and could be a reason for stopping dividends after FY11. But SG seems to be going against the norm of IPO->growth->dividends (contrast what its equivalent China Minzhong, has done)
- Seems like everyone got a bite of the pie - Government got their taxes paid, bankers got their money back, suppliers are paid more promptly that is received (the amt of payables is 10x less than receivables) and also get new businesses in the form of CAPEX, EXCEPT the shareholders and CB holders thus far.

[crubs]

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. 

Hi Boon,

Combining your 2 statements "Without the financial statement of individual subsidiaries, it would hard to make a more meaningful assessment." and "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." are you essentially saying that you did a general assessment because you did not have details and that your assessment is not meaningful ?

Also, you listed factors needed to take into consideration when analysing Sino Grandness's VAT receivables but you were unable to answer them yourself and proceeded to make judgements. Basically, you did not do the research that you yourself said was needed and yet you proceed to make a judgement on Sino Grandness's VAT ? Your research methodology seems inconsistent.

My point is, one cannot be quick to pass judgement and suggest fraud if insufficient research is done. If there are questions or doubts, further and deeper research and probing is needed. 

There are many avenues for deeper research into this issue and Sino Grandness in general. Since you have said there is not enough information for meaningful assessment, may I suggest you attend their quarterly briefings, agms, contact their IR and consider their words before you come to a judgement.