Amazon slapped with 14 billion yen tax bill

An affiliate of online retailer Amazon owes 14 billion yen in back taxes and penalties after failing to report income in Japan, according to Japanese tax authorities.

Amazon officials quickly rejected the levy, saying Japanese authorities had misread the law and that the appropriate taxes were paid to U.S. authorities.

Amazon officials have asked U.S. government officials to take up their cause in discussions with their Japanese counterparts.

Amazon's Japanese affiliate released a statement that said in part, "The tax claim is inappropriate and we are in the process of continuing discussions with the authorities."

The government sent the tax bill to Amazon.com International Sales, based in Seattle. The affiliate oversees all operations outside North America.

The international sales organization farms out Japan sales operations to an affiliate headquartered in Tokyo's Shibuya Ward. Distribution is handled by another affiliate, Amazon Japan Logistics, based in Ichikawa, Chiba Prefecture.

The Seattle affiliate pays commissions to the two Japanese companies.

Actual sales transactions are conducted between customers in Japan and the U.S. affiliate. All sales revenue is considered income earned by the U.S. affiliate.

Under a tax treaty between Japan and the United States, an American company that does not have a permanent presence in Japan, such as a branch office, is not obligated to report income or pay taxes.

While Amazon does have a distribution center in Ichikawa where books and other merchandise are stored before delivery, the warehouse is not considered a permanent establishment.

However, Japanese tax authorities are trying to make the case that the distribution center has sufficient ties to its U.S. overseers to constitute a "permanent establishment" in Japan.

These include use of computers and other equipment supplied by the U.S. affiliate at the Ichikawa center, the need for permission from the United States before plant design changes can be made and receipt of e-mail instructions from the U.S. affiliate by staff of Amazon Japan Logistics.

The tax authorities claim that part of the income accrued in Japan for the three-year period until December 2005 should have been reported to Japanese authorities and the proper tax paid.

A similar case arose in 2004, when Japanese tax authorities claimed Adobe Systems Inc. had failed to report 3.7 billion yen in income. The company was the Japanese subsidiary of the U.S. software developer.

The parent company was registered in the British Cayman Islands, a tax haven. Software sales revenue was paid to the parent, and the Japanese subsidiary only received commissions and sales management fees.

Adobe Systems filed a lawsuit against the decision of the tax authorities, and the Tokyo High Court in October 2008 ruled against the central government.(IHT/Asahi: July 6,2009)