Vipshop reported profit up 189 percent and a tax bill more than twice its operating income, and RMB1.56bn of that bill is an accrual against dividends it moved out of the mainland years ago

The profit line is the wrong place to look.

Vipshop reported second quarter net income attributable to its shareholders of RMB4.3bn, up 189.1 percent on the same quarter last year. The company says the reason is a one-off investment gain of RMB5.79bn recognised on the listing of a commercial REIT. That gain is larger than the profit it produced.

Underneath it, the tax charge is the number with a story in it.

RMB3.3bn of tax on RMB1.5bn of operating income

Income tax expense for the quarter was RMB3.3bn, or US$491.8m at the rate the company uses. A year earlier it was RMB407.2m. That is roughly eight times as much, and it is more than double the RMB1.5bn the business earned from operations in the same three months.

Vipshop names two drivers and they account for almost all of it.

The first is RMB1.63bn of tax on the REIT gain, recognised by Shan Shan Commercial Group, which the release describes as the original holder of the underlying assets. The company raised gross proceeds of about RMB7.70bn on completion, subscribed for 49 percent of the units itself, and deconsolidated the two outlets under United States accounting rules.

The second is the one that is not about this quarter at all. An accrued withholding tax expense of RMB1.56bn, which the release says reflects the withholding tax treatments of historical dividend distributions from mainland China to Hong Kong regarding applicable policies on tax treaty benefits. That is the whole of the company's explanation. No authority is named, no period is given, and no assessment, audit or dispute is mentioned anywhere in the document.

Together the two come to RMB3.19bn.

The measure that strips out the gain

Vipshop's own non-GAAP figure removes the investment gain and keeps the tax.

On that basis, net income attributable to shareholders was RMB392.2m, against RMB2.1bn a year earlier, a fall of about 81 percent. Per diluted ADS it is RMB0.80 against RMB4.06. The company attributes the drop primarily to the one-time withholding tax adjustment.

Non-GAAP net margin went from 8.0 percent to 1.6 percent.

Everything operational is smaller

Revenue was RMB24.7bn against RMB25.8bn. Gross merchandise value was RMB50.6bn against RMB51.4bn. Gross profit fell to RMB5.8bn and the margin with it, 23.3 percent against 23.5 percent. Income from operations was RMB1.5bn against RMB1.7bn.

The customer numbers move the same way. Active customers fell from 43.5 million to 42.3 million and total orders from 193.0 million to 182.4 million, a drop of about 5.5 percent in orders.

Operating cash flow turned negative for the quarter, at RMB374.7m used rather than the RMB1.30bn generated a year earlier, though on a trailing twelve month basis the company still shows RMB8.77bn generated and RMB7.20bn of free cash inflow, the latter higher than the year before.

For the third quarter Vipshop guides revenue to between RMB20.3bn and RMB21.4bn, which it puts at a year-over-year change of approximately minus 5 percent to zero. Its chief financial officer, Mark Wang, says the top line stayed within the guided range and points to subdued consumer demand, and says about US$400m was returned to shareholders in the first half through dividends and buybacks.

All dollar figures here are the company's own translations at RMB6.7851 to the dollar, the Federal Reserve noon buying rate on 30 June.