Alibaba Group Holding Limited BABA recently reported lukewarm quarterly results, dragged by heavy investment.
The Chinese e-commerce giant is likely to face further pressure going forward, this time from another direction.
What Happened: Alibaba's effective tax rate may balloon to 20% in the September quarter, up from 8% a year ago, the company reportedly told investors during the post-earnings call, according to Bloomberg.
The sharp year-over-year jump Alibaba has hinted at is due to the fact the Chinese government has stopped treating some of its businesses as "key software enterprises" — a designation that denotes a preferential tax rate of 10%, the report said.
Alibaba also reportedly said most Chinese internet companies may no longer benefit from the 10% preferential tax.
Even as the standard tax rate applicable to corporations in China is 25%, high-tech companies enjoy a 15% tax rate, and those companies that are deemed as operating essential software have an even lower rate of 10%, the Bloomberg report said.
Related Link: How Alibaba's Cloud Business Stacks Up Against US Rivals
Why It's Important: Of late, Chinese regulators have begun cracking down on the country's high-profile tech and internet names.
The communist regime has not taken kindly to the way user data is being used for profit.
China's move is in line with the global trend of governments coming together to crack down on tech giants that evade taxes and use dominant market positions to curb competition.
Since the key software enterprises designation will be reviewed every year, Alibaba can still apply for regaining the status, Bloomberg said, citing an analyst. The company could also seek the designation for units such as its Cloud business, the report said.
At last check, Alibaba shares were down 1% at $197.27.
© 2022 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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