{ "docId": "019dd923-622c-750b-8b96-0238cb402647", "docSlug": "0900eea60013", "documentTitle": "New Oriental Education & Technology Group (EDU)", "authorId": "51_Muddy_Waters", "authorName": "Carson Block", "documentKindSlug": "research-note", "documentKindLabel": "Research note", "sourceTypeSlug": "short_seller", "sourceTypeLabel": "Short seller", "presentationDate": "2012-07-18 00:00:00", "orientation": "portrait", "aspectRatio": 0.7070758, "pageNumber": 13, "pageCount": 97, "prevPage": 12, "nextPage": 14, "slideType": "expose_contradiction", "function": "expose_contradiction", "density": "dense", "nDataPoints": 0, "notes": "The slide argues that EDU is subject to EIT based on tax regulations and direct inquiries, contradicting their financial reporting.", "elementsJson": [ "paragraph", "footnote" ], "metadataConfidence": 1, "imagePath": null, "slideHref": "/slides/019dd923-622c-750b-8b96-0238cb402647/13", "deckHref": "/decks/019dd923-622c-750b-8b96-0238cb402647", "deckJsonHref": "/decks/019dd923-622c-750b-8b96-0238cb402647.json", "deckAnchorHref": "/decks/019dd923-622c-750b-8b96-0238cb402647#slide-13", "components": [ { "bbox": { "h": 0.04, "w": 0.82, "x": 0.09, "y": 0.64 }, "kind": "callout", "text": "However BJ Operation's Financials Purport to be Those of a School with EIT Exemption During 2009 – 2011, These are Fraudulent Financials", "attrs": null, "subkind": "primary", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "54f195fa-b3dd-4b2d-96ad-48b423c75786", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.11, "w": 0.82, "x": 0.09, "y": 0.24 }, "kind": "paragraph", "text": "The Ministry of Finance (\"MOF\") reiterated this policy in a 2008 reply to the Chinese People's Political Consultative Congress. The MOF stated that NRRRs receive the same tax treatment as government-funded schools in that NRRRs' income from tuition for officially recognized diploma programs would be exempt from EIT. We provide a Chinese version and English translation of the MOF reply in the Appendix. EDU's schools are therefore all subject to EIT on their tuition and course material revenue.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "0caf89a0-6b11-4a40-a6aa-a3a0e5547de1", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.03, "w": 0.82, "x": 0.09, "y": 0.6 }, "kind": "paragraph", "text": "Finally, an EDU employee who works in franchising told a potential franchisee that all EDU company-owned schools pay EIT.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "36e2c0cc-f922-4dce-b240-e8891bc9af4d", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.05, "w": 0.82, "x": 0.09, "y": 0.69 }, "kind": "paragraph", "text": "NRRR schools must file audited financials annually with both the MOE and CAB. NRRR schools use a different accounting system than do business entities, and a brief explanation is necessary to understand BJ Operation's financial statements.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "70c69422-8477-4094-aff5-ac53cee2f78c", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.15, "w": 0.82, "x": 0.09, "y": 0.08 }, "kind": "paragraph", "text": "The regulation Caishui 2004 [39], which was promulgated in 2004 and is still effective, enumerates the categories of educational institutions eligible for tax preferences. The regulation mainly provides for tax preferences for schools that award officially recognized diplomas and their offshoots (e.g., training programs that such schools run). Caishui 2004 [39] does not provide for any tax preferences for schools providing non-diploma education in foreign language or test preparation (or any other EDU program). We provide a translation of Caishui 2004 [39] in the Appendix. Therefore, despite having NRRR classification, EDU's tuition income would still be deemed for-profit and subject to EIT.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "a56c5f4c-ab9d-48bb-bf22-bec6e4d14088", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.08, "w": 0.82, "x": 0.09, "y": 0.75 }, "kind": "paragraph", "text": "Because NRRR schools technically belong to the state, there is no Shareholders' Equity account. Rather, the equivalent account is Net Assets. NRRR schools do not record Net Income – the equivalent account is Changes in Net Assets. The NRRR school accounting system does not have a separate account for taxes – instead, taxes (including EIT) are included in the Other Expenses account. The fraudulent CAB income statement for the years 2009 – 2011 is below.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "cb703ed5-3ca0-4f4c-8492-1e4bba2cbf0d", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.11, "w": 0.82, "x": 0.09, "y": 0.48 }, "kind": "paragraph", "text": "Tax officials confirmed to us that BJ Operation pays EIT. We first inquired whether or not an investor could establish a school there that provides courses similar to those EDU provides and receive an EIT exemption. The tax bureau responded that the EIT exemption would not be available because it is only available to schools that award officially-recognized diplomas. We then brought up EDU, saying that EDU has such an exemption. The tax official stated that EDU pays taxes.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "dfca781e-00f1-405f-8a72-aa96c2f71268", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.11, "w": 0.82, "x": 0.09, "y": 0.36 }, "kind": "paragraph", "text": "The BJ Operation pays EIT. It is possible that in some smaller, remote cities EDU has negotiated special tax treatment (in contravention of the law). Major cities, such as Beijing and Shanghai, almost never grant such special treatment. We have confirmed that Beijing has not granted an EIT exemption to the BJ Operation. First, the Beijing tax bureau publishes lists of entities granted exemptions. The URLS for those lists are in the Appendix. No EDU entity is among the entities listed.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "ffd9bf3f-bfd8-4504-9d6d-9df8d50f72ec", "frameworkName": null, "frameworkSlug": null } ], "metrics": [], "tools": [], "frameworks": [ { "name": "fraud-exposure", "slug": null, "matchId": "43658672-3d89-4fc1-9603-67e7fd1c6b28", "evidence": "The slide explicitly labels the financials as 'Fraudulent' and provides evidence of tax non-compliance.", "confidence": 0.9 } ], "arcBeats": [ { "to": 20, "from": 5, "beatId": "e3846e8e-4c09-4695-9dc4-32ebd1a71686", "arcName": "Overcoming the Monster", "arcSlug": "overcoming-monster", "beatName": "The Alleged Fraud", "beatSlug": "overcoming-monster-the-monster", "evidence": "The report presents evidence of alleged financial misreporting and fraud", "position": 1, "confidence": 0.8, "parentBeatName": "Hook", "parentBeatSlug": "hook" } ], "loops": [ { "to": 15, "from": 5, "name": "Pattern Hunter", "slug": "02-pattern-hunter", "bestFor": "Time-pressed audiences, building consensus, when data is strong", "matchId": "f9d9d6a5-d4d5-419d-a67e-2765be94ba81", "evidence": "The report searches for and finds patterns of alleged financial misreporting", "position": 0, "objective": "To identify patterns of financial misreporting", "structure": "Evidence A -> Evidence B -> Evidence C -> Pattern/Conclusion", "confidence": 0.7, "description": "Group multiple pieces of evidence that together point to a pattern or conclusion" } ], "imagePathAlt": null, "thumbSrc": null, "thumbSrcAlt": null, "locked": true }