(Yicai Global) April 28 -- A.O. Smith Corp. is being investigated by Chinese authorities for violating tax laws and running a monopoly in China after former senior employees, who are both being sued by the US water heater manufacturer for alleged copyright infringements, report it to regulators.

A.O. Smith China is evading taxes and transferring profit and taxes to other countries, Zhu Jun, an ex-chief financial officer at the China division, said in a report submitted to the Nanjing Tax Bureau a few days ago. The tax authority has accepted the report and started the investigation.

And Zhu submitted a separate report to the Anti-Monopoly Bureau together with Chen Dong, former general manager of A.O. Smith (China) Environmental Products, about A.O. Smith’s vertical monopoly. Jiangsu Provincial Market Regulation Bureau is on the case.

Both Zhu and Chen worked over 20 years at the company and left in 2021. They are among a number of employees who are being sued by A.O. Smith China for supposedly stealing trade secrets and infringing copyrights. The case is still underway.

A.O. Smith China is cooperating with authorities and has submitted the documents requested, it told Yicai Global. The firm did see this coming and was trying to negotiate with the whistleblowers.

Zhu laid bare a number of other offences in his reports. A.O. Smith China is breaching China’s third-party pricing law by exporting products to affiliated firms at a price 15 percent higher than cost price, and semi-finished products and spare parts at a price between 5 percent and 10 percent higher than cost price, he said.

The Nanjing, eastern Jiangsu province-based firm was investigated by the Changzhou Tax Bureau for similar tax evasion offences in 2018 and was fined between CNY3 million and CNY4 million, Zhu said. Between CNY13 million (USD1.9 million) and CNY14 million of unpaid taxes were recovered, he added.

A.O. Smith also disguised its water heater subsidiary A.O. Smith (China) Investment as a subsidiary of two of A.O. Smith’s units registered in the offshore tax haven of Barbados, which are not involved in the running of the subsidiary, and was granted a tax discount from China of nearly CNY150 million (USD21.6 million), Zhu said.

Another former employee told press on World Consumer Rights Day last month that A.O. Smith China allegedly bought back a large amount of unsellable stock, changed the production dates and resold them to customers.

Editors: Shi Yi, Kim Taylor