Li & Fung wins tax battle
Bruce Rockowitz (top right), president of Li & Fung Trading Ltd, speaks at a press conference in Hong Kong in a 2010 file photo. Hong Kong’s High Court ruled on Monday that the company can reclaim HK$205 million in taxes for earnings. Ed Jones / AFP |
High Court: Firm can reclaim taxes generated from offshore earnings
Li & Fung Ltd, the biggest supplier of clothes, toys and furniture to retailers including Wal-Mart Stores Inc and Marks & Spencer Plc, can reclaim HK$205 million ($26 million) in taxes for earnings it says were generated offshore, Hong Kong’s High Court ruled on Monday.
Hong Kong only taxes earnings generated within the city. The activities of Li & Fung’s offshore affiliates directly led to commission paid by customers, Court of First Instance Judge A.T. Reyes said Monday in a ruling against the Hong Kong Inland Revenue Department’s appeal of a 2009 Board of Review decision that sided with the company.
Li & Fung argued that the government had assessed income between 1992 and 2002 that didn’t originate in the city.
“The fact that the expertise is here is what enables the local affiliates to carry on their business,” David Goldberg, a lawyer for the company, said at a court hearing on April 6. “It’s not the actual business.”
Another HK$1.6 billion in taxes that the Hong Kong-based company paid after 2002 are also in dispute.
The Inland Revenue Department will study the court’s decision, Terry Wong, a spokeswoman for Hong Kong’s Financial Services and Treasury Bureau, said in an e-mailed response to a query on whether the tax authority would appeal.
Shares of Li & Fung fell 0.8 percent to close at HK$39.45 in Hong Kong trading on Monday, taking its decline to 13 percent this year. The city’s benchmark Hang Seng Index advanced 3.5 percent in the period.
“The movement of the tax line is very impactful to earnings so this is a factor that we must watch carefully,” said Matthew Marsden, an analyst at Samsung Securities Co. “It has traditionally been very low and any threat to that would provide a negative shock to the market.”
Linus Yip, strategist from First Shanghai Securities said the ruling demonstrates that Li & Fung’s aggressive acquisition of overseas assets in the past eventually paid off.
“But to a company with a market value of almost HK$160 billion, this tax refund, even including the HK$1.6 billion in dispute, is not likely to make substantial changes to the company’s overall operational strategies,” said Yip.
Li & Fung completed 16 purchases and a number of outsourcing and licensing deals last year, some of which weren’t announced, its President Bruce Rockowitz said in March. Announced deals last year were worth at least $1.24 billion, according to data compiled by Bloomberg.
The outsourcer said it may buy logistics companies as it seeks to more than double core operating profit to $1.5 billion by 2013 after reporting 2010 net income that missed analyst estimates.
It is also considering companies in the health and beauty industries, according to Rockowitz.
Li & Fung last month reported that its net income rose 27 percent to HK$4.28 billion ($549 million) in 2010, missing all nine analyst estimates in a Bloomberg survey of an average forecast of HK$5.03 billion. Its stock slumped 9.1 percent March 25 after news of the result.
Bloomberg contributed to this story.
China Daily
(HK Edition 04/19/2011 page3)
http://www.chinadaily.com.cn/hkedition/2011-04/19/content_12349218.htm