Shiseido charged tax penalties in Japan for keeping profits in U.S.
Shiseido Co., Japan’s top cosmetics brand, was alleged by tax authorities to have failed to report 3.8 billion yen in income in Japan for five years through March 2012 by pooling profits at a U.S. subsidiary, sources familiar with the matter said Thursday.
The company is planning to dispute the allegation by filing a complaint and calling on Japan and the United States to hold consultations on its case to avoid double taxation, although it paid around 1.7 billion yen on Tuesday in tax penalties, according to the sources. The amount includes a charge for underreporting its income and local government duties.
The Tokyo Regional Taxation Bureau invoked the “transfer pricing” rules of the tax code designed to prevent businesses from evading taxes on income in Japan by moving or retaining profits abroad through transactions with affiliates, the sources said.
Shiseido imports cosmetics products from a New Jersey manufacturing subsidiary for sale under its namesake brand chiefly in Asian markets, according to the company.
The tax bureau alleged that the profit margin at this U.S. subsidiary is higher than those at competing local businesses, judging that Shiseido inflated purchasing prices when importing products from the New Jersey unit, resulting in income pooled in the United States, according to the sources.
Shiseido generates around half of its sales overseas. In the year ending March 2014, its consolidated turnover totaled roughly 762 billion yen, with 384.7 billion yen posted abroad.
This is not the first time that tax authorities challenged a business on the transfer pricing issue. In at least one case, their charge was revoked by a tax tribunal.
The Osaka Regional Taxation Bureau alleged Takeda Pharmaceutical Co. failed to declare more than 122 billion yen in income in Japan by transferring profits to a U.S. affiliate over six years through March 2005 and levied 57.1 billion yen in tax penalties.
Takeda disputed the charge after paying what was alleged to be due. But last year Takeda said the National Tax Tribunal overturned the tax bureau’s action.