June 18, 2014 5:50 am JST

Japanese companies face double taxation overseas

TOKYO -- About one out of every seven Japanese companies operating abroad has had trouble with double taxation at the hands of foreign governments in recent years, according to Japan's industry ministry.

     In a March poll of Japanese companies with foreign subsidiaries, 124 of the 895 respondents, or 14%, indicated they had been subject to double taxation internationally within the last five years.

     China proved to be the largest single source, with over 30% of the 124 companies reporting trouble there. It was followed by India at 19% and Indonesia at 17%. The figures were much lower for advanced nations, with the U.S. at 4% and France at 2%.

     Some 44% of the 124 affected companies said that foreign governments had sought back taxes because of disagreements with the corporations over the value of transactions between subsidiaries and the parent.

     A Chinese subsidiary of Rohm, a Japanese electronic parts manufacturer, was hit up for about 1.9 billion yen ($18.4 million) in back taxes in December. Chinese authorities said the subsidiary had supplied finished and other products to the parent at excessively low prices and that it had inappropriately transferred profits, avoiding local taxes in the process. Rohm is considering submitting a request for Chinese and Japanese authorities to enter negotiations on the matter.

     Minebea, a leading Japanese producer of precision machinery and electronic devices, encountered problems related to prices in transactions with a subsidiary in Thailand in fiscal 2012. Cooperation between Japanese and Thai authorities succeeded in avoiding double taxation, but Minebea ultimately forked over an additional 1.15 billion baht ($36 million) to the local taxman, forcing it to book a 2.9 billion yen extraordinary loss.

     The next most common reason cited in the poll involved disputes over what entities ought to be subject to taxation, with 23% of the 124 companies reporting such problems.

     In principle, companies operating overseas will have their main branches and other profit-generating outfits taxed, while foreign offices staffed with Japanese there to represent the business locally are exempt. In India, however, authorities have taxed such offices, judging them to be engaged in business activities because they have relatively large staffs.

     Some nations are seeking to conclude tax treaties that would mitigate the effects of double taxation, but advanced and emerging countries do not see eye to eye on some issues. The Organization for Economic Cooperation and Development and the United Nations have each put forth models. The latter is seen as preferential to emerging nations and gives the country where income is actually generated greater tax authority.

     Yet most countries, including emerging ones, follow the OECD model. Companies like Apple and Amazon.com, both of the U.S., are often criticized for reaping profits in emerging countries without paying local taxes.

     "I have the impression that countries like China and India are collecting taxes beyond the range of the OECD model recently," notes Kenichi Takashima, a partner at KPMG Tax.