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Taiwan's Foxconn faces China tax probe, seen as politically motivated -sources

By Yimou Lee and Ben Blanchard

TAIPEI (Reuters) - Foxconn, a major supplier of Apple's iPhones, is facing a tax probe in China, two sources close to Foxconn confirmed on Monday, saying they believed it was disclosed by a state-backed paper for political reasons tied to Taiwan's upcoming elections.

On Sunday, China's state-backed Global Times tabloid said some of Foxconn's key subsidiaries in China were the subject of tax audits and that China's natural resources department had conducted on-site investigations on land use by Foxconn enterprises in Henan and Hubei provinces and elsewhere.

The two sources, who declined to be named due to the sensitivity of the matter, said several companies which they did not name had been audited by Chinese authorities in recent months, but they believed only Foxconn's probe was made public for political reasons.

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The sources highlighted the audits come less than three months ahead of Taiwan's presidential election and amid Foxconn's drive to expand production outside China.

The government of Taiwan, which China claims as its own territory, frequently accuses Beijing of seeking to exert pressure, whether military or economic, to sway the outcome of its elections to ensure an outcome favourable to China.

Foxconn's founder Terry Gou, who stepped down as company chief in 2019, is standing as an independent for president.

The Global Times, in an English language story late on Sunday, said by running, Gou might split the opposition vote, potentially ensuring a victory for current Vice President Lai Ching-te who is already leading in the polls.

Beijing detests Lai, whom it believes is a separatist. He says only Taiwan's people can decide their future, and Beijing has rebuffed his offers of talks.

Citing unnamed experts, the Global Times said Gou's "act of running for the elections is likely to further divide the island's opposition camp, and this will in the end favour secessionist ruling Democratic Progressive Party's candidate Lai Ching-te."

EXPANSION OUTSIDE CHINA

The audits of Foxconn have not been officially announced by any Chinese government department.

Local authorities which the Global Times said were conducting the audits and probes in Henan, Hubei, Guangdong and Jiangsu provinces did not immediately respond to faxed requests from Reuters seeking comment.

Foxconn, formally called Hon Hai Precision Industry Co Ltd, employs hundreds of thousands of people in China and is a major investor there, regularly hailed by Beijing as an example of the success of Taiwanese investors in the country.

However, the company has been pushing to diversify its manufacturing base outside China, and the first source told Reuters they viewed the audit as a "warning" to Foxconn.

"Their economy isn't doing well. It is a warning, seeing major companies like us moving to India," the source said

"They want you to take a side. You either stay with us, or leave," the first source said.

The second source said the audit was "unexpected" and relatively "unusual".

Foxconn said in a statement on Sunday legal compliance was a "fundamental principle" of its operations, and it would "actively cooperate with the relevant units on the related work and operations".

On Monday, Foxconn said it had no further comment.

China's Taiwan Affairs Office did not respond immediately to a request for comment. Taiwan Premier Chen Chien-jen offered his government's help to Foxconn, though did not give details.

Foxconn shares closed down 2.9% on Monday, underperforming the broader market's 1.2% fall.

'WAR OR PEACE' ELECTION

Foxconn's billionaire founder Gou has trailed in the polls despite running a high profile campaign for president.

He has accused Taiwan's ruling Democratic Progressive Party (DPP) of taking the island to the brink of war with China by its hostile policies and that only he, with his extensive business and personal contacts in China and the U.S., can maintain peace.

Gou's campaign spokesman Huang Shih-hsiu referred questions on the Foxconn probe to the company, saying Gou was no longer on the board and only a shareholder now.

But the Foxconn probe is now an election issue.

Hou Yu-ih, the presidential candidate for Taiwan's main opposition party the Kuomintang, which has cast the poll as a "war or peace" vote, said on Monday when asked about the Foxconn probe, what Taiwan firms fear most is instability between Taiwan and China.

Speaking at a campaign rally on Sunday, Lai, the DPP's candidate and leading the polls, said the Chinese report on the investigation was "unexpected" and "regretful".

"Taiwanese businesses have always contributed to China's economic development," DPP spokesman Chang Chih-hao said on Monday.

"However, the Chinese communists often use Taiwanese businesses as a bargaining chip for political pressure or election interference against Taiwan."

(Reporting by Yimou Lee and Ben Blanchard; Additional reporting by Shanghai Newsroom; Editing by Edwina Gibbs and Sonali Paul)