Japan's multinationals have been visited by an unwelcome ghost from the past. Lately some of the country's most prestigious companies have been ordered to pay billions of yen in additional taxes, including swingeing penalty fines for non-payment.
The roll of names includes Sony, the consumer electronics and entertainment group, Mitsubishi, Japan's biggest trading house, and Takeda, its largest drugs maker.
All have been caught out by the fiendishly tricky issue of transfer pricing -- how much companies in different countries, but in the same corporate group, should pay each other for goods and services. This decides how much income is earnt and affects the amount of tax each national tax office can levy. Japanese carmakers and other companies "were really tortured by the US tax authorities" over transfer pricing in the 1980s, says Hiroyuki Kamano of Kamano Sogo, the Japanese law firm. Now, he says, Japanese tax offices have become more aggressive about doing the same thing.
Mr Kamano says Japan's large fiscal deficit is putting pressure on the tax authorities. "They are looking for the opportunity to collect more taxes, and transfer pricing is one of the targets." he says. The amounts involved can be very large, so "it is a very efficient way" to boost the tax take. Tax officials can retrospectively claim extra taxes for a full seven tax years, and impose an extra 10 percentage points on the tax bill as punishment. Companies also face damage to their reputation that cannot be priced.
In the 1980s Japanese companies with large US operations were keen, because of internal corporate politics, to boost the apparent performance of their domestic operations. Some used transfer pricing to shift profits from the US to Japan, even though this increased the parent corporation's overall tax bill since corporate taxes were higher in Japan than the US. The method was for the Japanese company to charge an artificially high rate for goods and services provided to the US company. Now Japanese companies are at risk of being seduced by the opposite temptation -- transferring profits to the US, where corporate taxes are lower than in Japan.
The companies recently hit by large tax bills for transfer pricing say they have been acting in good faith rather than manipulating profit and loss accounts, and many say they will challenge Japanese tax offices' decisions.
Hidehiro Utsumi, tax expert at Linklaters Tokyo, says corporations need to embrace the concept of "arm's-length pricing" -- charging a sister company in a different country a price for goods and services that would be the same as the price charged in the open market by one of their competitors.
Mr Utsumi says companies also need to consult with the tax authorities in advance, and to keep detailed documentation showing they used arm's-length pricing. He admits, with disarming honesty, that this is expensive since it requires hiring lawyers and other experts. But it is, at least, not so expensive as being saddled with a hefty fine.
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