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 On Wednesday, a six-month lock-up period for the recently New
York-listed stock expired, allowing insiders who bought 437 million
shares prior to the IPO to sell their stock, though 100 million of
them are subject to trading restrictions that apply to employees
until the company reports results in May.
The total lock-up represents roughly 18 percent of Alibaba's shares,
which if sold would fetch just over $37 billion at Friday's closing
price.
Although Alibaba did not disclose the identity of the shareholders
subject to the lock-up, many will be taxable in China, where most of
its 22,000 people are employed, and its share scheme is subject to a
number of controls that will help ensure China gets its tax.
Current and former employees hold around 26.7 percent of the
company, having built up holdings through stock options and other
incentives since 1999, according to a Reuters report from June using
IPO securities filings.
Those subject to the expiring lock-up will have obtained their
shares at different times and costs, so the gains figure is unknown,
but the tax is expected to reach billions of dollars for China's
State Administration of Taxation (SAT).
While tax on employee compensation is withheld by employers, tax on
share sales must be declared by employees, meaning it's typically
harder for the authorities to track.
It is not uncommon for employees participating in Chinese company
stock incentive schemes to transfer their shares to offshore trusts
in the Cayman or British Virgin Islands to avoid tax, according to a
person who helps create such structures.
But Alibaba's newly minted millionaires won't escape the gaze of the
tax inspector, said a Beijing-based accountant.
"Because it was such a large IPO, the tax bureau will for sure be
monitoring that."
PREPPED AND POISED
Jacky Chu, a partner in the China tax practice at PwC, said the SAT
was very familiar with this kind of stock option arrangement and
would be poised to act.
"The tax officials are smart enough to know that there should be
money coming in, and over the last few years the SAT has been
targeting equity income,” he said.
A spokesman for Alibaba said employees were responsible for
reporting share sale gains to the tax authorities, but the company
had registered its stock incentive plan with the State
Administration of Foreign Exchange (SAFE), which controls how much
money goes in and out of China.
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It added that Alibaba "withholds capital gain tax from proceeds of
share sales that can be repatriated back to China" through a channel
stipulated by SAFE.
Although the United States does not generally tax non-resident
foreigners on profits from the sale of U.S.-listed shares, China
taxes Chinese residents 20 percent on capital gains, wherever made.
While the potential tax windfall is tiny relative to China's total
fiscal revenue of 14 trillion yuan ($2.26 trillion) last year, it
reflects the government's more rigorous stance on tax.
According to U.S. securities filings, Alibaba employees who
participated in the company's stock incentive schemes and who are
Chinese citizens or year-long residents were required to register
with SAFE once the company went public.
"Failure to complete the SAFE registrations may subject them to
fines and legal sanctions and may also limit the ability to make
payment under our equity incentive plans or receive dividends or
sales proceeds," the document said.
SAFE did not respond to requests for comment. The SAT would not
comment on Alibaba but confirmed overseas gains by Chinese residents
are subject to 20 percent tax.
A larger lock-up of more than a billion shares held by insiders
including founder Jack Ma and Yahoo! Inc <YHOO.O> expires in
September.
($1 = 6.1954 Chinese yuan renminbi)
(Additional reporting by Deena Yao, Denny Thomas and Elzio Barreto
in Hong Kong, and by the Shanghai and Beijing Newsrooms; Editing by
Will Waterman)
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