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  "documentTitle": "NQ Mobile (NQ)",
  "authorId": "51_Muddy_Waters",
  "authorName": "Carson C. Block",
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  "sourceTypeSlug": "short_seller",
  "sourceTypeLabel": "Short seller",
  "presentationDate": "2013-10-24 00:00:00",
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  "notes": "The slide presents a forensic accounting argument regarding potential financial fraud by NQ Mobile.",
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      "text": "Omitting a tax preference from the prospectus is much less likely when the company's financials are genuine.",
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      "text": "NQ's SEC disclosures and SAIC financials show that NQ is shifting impermissibly high amounts of income from NQ's variable interest entity (\"VIE\") to NQ Beijing in order to avoid paying income tax. NQ claims that NQ Beijing was exempt from corporate income tax in 2011, while the VIE paid corporate income tax at 15%. Under NQ's onshore corporate structure, the vast majority of NQ Beijing's 2011 revenue consisted of sales to the VIE. The year before (2010), NQ Beijing only booked RMB 1.5 million in revenue, so the VIE would not have been shifting revenue to it until 2011.",
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      "text": "Omitting from NQ's 2011 prospectus a purported income tax preference for NQ Beijing. In the prospectus, NQ stated that NQ Beijing \"was subject to the prevailing income tax rate of 25% on taxable income for the years ended 2008, 2009, and 2010.\" However, in the 2011 20-F filed only 10 months later, NQ stated that NQ Beijing \"was qualified as a software enterprise under the New CIT Law, which was entitled to enjoy preferential income tax treatment of income tax exemption for the first two years when it became profitable, followed by three years of preferential income tax rate of 12.5% up to 2015...Therefore, NetQin Beijing was not required pay any income tax for the years ended December 31, 2009, 2010, and 2011.\" Omitting a tax preference from the prospectus is much less likely when the company's financials are genuine.",
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      "kind": "paragraph",
      "text": "PRC GAAP mandates that the VAT credit or refund be recognized as Non-Operating Income. However, NQ Beijing had no such income in either 2011 or 2012. If NQ Beijing's SAIC financials were not fraudulent, they would show at least a few million RMB in Non-Operating Income in each year. Per a newsletter posted by the Haidian Tax Bureau (the tax bureau that receives taxes from NQ Beijing), cumulative VAT refunds to approximately 2,000 Haidian software companies in 2011 exceeded RMB 380 million (an average of about RMB 200,000 per company).",
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      "text": "The effective VAT for in-house developed software is 3% of sales, which consists of the 17% statutory VAT NQ pays on its software sales, netted against a) VAT it paid on its inputs, which are generally very low for software companies, and b) a credit or refund from the tax bureau sufficient to ensure the effective VAT is 3%. Again, NQ Beijing's SAIC financials show that its domestic revenue was RMB 113.6 million and RMB 154.7 million in 2011 and 2012, respectively.",
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      "kind": "paragraph",
      "text": "qualify for this income tax preference, at least 35% of NQ Beijing's revenue would have to come from software sales. At least half of the software sold must be developed in-house.",
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      "text": "By purporting to shift about two-thirds of the VIE's revenue to NQ Beijing in 2011, NQ lowered the VIE's gross margin from 62% in 2010 to 17% in 2011. Purportedly as a result of this shift, the VIE paid only RMB 106,000 in income taxes in 2011, which was",
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      "text": "84-88: Citations to tax bureau newsletters and SEC filings (20-F).",
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