TOKYO -- Japanese authorities have ordered Mizuho Bank to pay taxes on 8.4 billion yen ($77.2 million) in profit that it allegedly failed to report from a subsidiary based in the Cayman Islands.
Japanese tax officials argue that these earnings should have been included in Mizuho's fiscal 2015 profit under anti-tax-haven rules. The 2 billion yen bill includes a penalty for underreporting.
Mizuho has filed a lawsuit disputing the penalty, arguing that it did not engage in tax avoidance, sources familiar with the situation told Nikkei. A Mizuho Bank representative acknowledged that a suit had been filed because of a "difference of opinion" between tax authorities and the bank but declined to comment further on pending litigation.
The case highlights the risks corporate Japan faces when dealing with tax havens like the Caymans, which have come under growing scrutiny in recent years. As companies expand abroad, more are likely to run afoul of complex Japanese rules surrounding affiliates in low-tax jurisdictions.
The dispute centers on a plan by Mizuho Bank and parent Mizuho Financial Group to boost the bank's capital after the 2008 global financial crisis. That December, the parent issued 355 billion yen in preferred securities through a wholly owned special-purpose subsidiary headquartered in the Cayman Islands.
The fundraising scheme itself was entirely legal. The dispute arose from how the securities were redeemed in June 2015.
Money raised through this plan had been transferred to Mizuho Bank via subordinated lending from a different special-purpose company owned by the bank, also based in the Caymans. When investors were paid back, the money followed its previous path in reverse: Mizuho Bank repaid the loan to its subsidiary, which transferred the money to the other Caymans company for the securities redemption.
But the bank also paid interest on the loan, which was treated as profit for its wholly owned subsidiary. Japanese tax authorities found that under tax haven rules, Mizuho Bank should have included this in its own profits when determining its tax liability.
These regulations were introduced in 1978 to prevent Japanese businesses from using overseas units in countries with lower tax rates to reduce their tax burden. Whether these rules apply in a given situation is based on several criteria, including the extent of the Japan-based company's rights to the affiliate's profits.
Mizuho Bank contends that the fundraising scheme involved no tax avoidance whatsoever and that the special-purpose company was a vehicle created for the capital increase and not an avenue to conceal profits.
Tax authorities point to precedent showing that failure to report earnings in such cases can be punished even if done without ill intent.
SoftBank Group was involved in a similar case last year. It amended four years of tax filings after authorities flagged 94 billion yen in unreported earnings from offshore subsidiaries of American wireless units Sprint and Brightstar.