Chinese authorities found three companies linked to Google Inc broke tax rules and are investigating possible tax avoidance, a Chinese state-run newspaper said on Thursday, raising the risk of fresh pressure on the Internet search giant.

Google, the world's largest Internet search company, said two of the companies named were its units, and a third was a separate firm that works closely with Google.

But Google denied the tax violations alleged in the Chinese-language Economic Daily.

We believe we are, and always have been, in full compliance with Chinese tax law, Google said in a statement responding to Reuters' questions.

Even if the report is unfounded or embellished, it could bring fresh headaches in China for Google, which has gone through difficult times there since early last year when it quarreled with the one-party government over Internet censorship and hacking attacks.

China generates a small percentage of Google's revenues, but is the world's largest Internet market with more than 450 million users. The country's search market, dominated by homegrown Baidu Inc, was worth 11 billion yuan ($1.7 billion) in 2010 and is likely to grow by about 50 percent each year for the next four years, according to iResearch.

The Economic Daily said that the three companies investigated and punished were Google enterprises in China.

The taxation authorities have already investigated and punished the three companies according to the law, said the report on its front page.

The companies were accused of presenting false and unjustified claims to the total value of 40 million yuan ($6 million), said the report. It did not say when the claimed violations are alleged to have happened.

It is understood by this reporter that the taxation authorities are further investigating Google businesses in China on suspicion of tax avoidance, said the brief story, which was also later reported by China's official Xinhua news agency.

A Google spokesperson said the two of the accused companies -- Google Information Technology (China) Co, Ltd, and Google Information Technology (Shanghai) Co, Ltd -- were its sub-units.

It said the third company named, Google Advertising (Shanghai) Co, Ltd, was a separate firm that works closely with Google as Google's sole first-tier reseller in China of advertising on the search engine's web pages.

Most foreign companies in China, especially high-profile companies with a global reputation at stake, are pretty careful to make sure they are in full compliance with the relevant tax laws, said Mark Natkin, managing director of Marbridge Consulting, a Beijing-based company that advises investors about China's Internet and telecommunications sectors.

China's Foreign Ministry would not comment directly about the report. Generally speaking, any companies operating abroad should obey the laws and regulations of the host country, said the ministry spokeswoman Jiang Yu.

RUN-INS CONTINUE

The report appeared after Google again clashed with the Chinese government over Internet censorship.

Earlier this month, Google said any difficulty that users in China may have faced opening its email service were likely the result of government blocks.

China's ruling Communist Party has intensified censorship in recent months, fearing that calls for protests inspired by anti-authoritarian uprisings across the Middle East and north Africa could gather momentum.

Google's serious run-ins with the Chinese government began in January 2010, when the company said it was no longer willing to censor search results in the country. Previously, the company included a disclaimer on its China service that searches may not be complete because of local laws.

Searches for terms deemed sensitive by Chinese censors are routinely blocked. Chinese search engines such as that offered by Baidu already voluntarily filter searches.

Google also said it had uncovered sophisticated China-based attacks on human rights activists using its Gmail service around the world. The censorship and hacking dispute became a diplomatic sore point in Sino-U.S. relations.

After months of quiet wrangling with Beijing, Google altered its main Chinese-language search page so that inquiries are redirected to a site in Hong Kong.

That means Google searches from within China are still censored by the government's Great Wall of Internet filters, but the company no longer plays a direct role in that censorship.

(Additional reporting by Sally Huang, Sabrina Mao and Ben Blanchard in BEIJING and Melanie Lee in SHANGHAI; Editing by Lincoln Feast)

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