800 million yen in back taxes, fines is sought.

The Japanese arm of a subsidiary of U.S. financial services giant GE Capital Corp. (GEC) failed to report about 3.7 billion yen in income in the two years up to December 2003, sources close to the tax investigation said.

The Japanese branch gained huge profits by setting high interest rates for loans extended to a consumer finance arm under GEC and transferred part of the proceeds to GEC in the name of loan guarantee fees to evade taxation in Japan, the sources said.

The Tokyo Regional Taxation Bureau has apparently levied about 800 million yen in back taxes and penalties on the Japanese branch of the subsidiary, called GE Capital International Funding, the sources said.

GEC is part of the General Electric group.

The move by tax authorities on the U.S. corporation is intended to stop major foreign financial groups that have purchased troubled Japanese financial institutions from transferring overseas the profits gained in Japan, sources said.

A Japanese representative of General Electric Co. denied any wrongdoing.

The official said the group has filed income reports appropriately based on the taxation systems of the countries where it operates. But the official declined to discuss specific cases.

Tax authorities investigated the Japan branch of the GEC subsidiary in Tokyo's Minato Ward. The office opened in May 1999 but closed in July 2004.

With credit guarantees from GE Capital, which enjoys a top credit rating due to its financial strength, the subsidiary obtained funds at low interest rates from overseas investors and lent the funds to the Tokyo office.

The money was then routed at high interest rates to the consumer finance firm that offers Honobono Lake brand loans in Japan. GEC acquired the Honobono Lake brand in 1998.

Most of the profits generated through the difference in interest rates were paid to GEC as fees for its loan guarantee, which were much higher than standard rates.

Perhaps more importantly, the consumer credit firm paid much higher interest rates than those that its competitors, with a similar credit-rating level, would have paid to borrow money from other financial institutions.

The tax authorities, therefore, suspect that the huge gains in interest from the loans were funneled to GEC, and that the subsidiary's income that should have been reported in full was made smaller, the sources said.

GEC entered the Japanese market following the Japanese version of the Big Bang financial deregulation in 1998.(IHT/Asahi: January 4,2005)