Tax authorities ordered a Seattle-based affiliate of online retailer Amazon.com Inc. to pay ¥14 billion in back taxes for unreported income earned in Japan during the three years through December 2005, sources said Sunday.
Dissatisfied with the order, Amazon.com has requested that tax authorities in Japan and the United States discuss the matter in light of a bilateral tax treaty, the sources said.
The pact frees U.S. companies that engage in business in Japan without “permanent establishment” such as branch offices from having to file a tax return or pay taxes here.
But the Tokyo Regional Taxation Bureau has determined that two Japanese wholly owned subsidiaries of Amazon.com have in effect acted as branch offices of the affiliate, Amazon.com International Sales Inc., the sources said.
The two subsidiaries — Amazon Japan Logistics K.K. and Amazon Japan K.K. — are commissioned to carry out merchandise distribution and other functions.
Amazon.com International Sales concluded direct contracts with its customers in Japan and received payments for goods, the sources said.
The tax bureau reportedly told Amazon.com International Sales that it should have declared to Japanese tax authorities a substantial amount of the income gained through transactions in Japan.
Amazon.com disclosed in its annual report for the 2008 business year that it has been ordered by Japanese tax authorities to pay the back taxes.
The report says it has been ordered to pay $119 million in back taxes plus a penalty for an amount equivalent to ¥14 billion.
Amazon.com International Sales is responsible for operations outside the United States. The company has booked sales posted in Japan as those of the Seattle-based company while paying relevant taxes only in the U.S.
But the tax bureau found that employees of Amazon Japan Logistics have received instructions from the U.S. side through e-mails at its distribution center in Ichikawa, Chiba Prefecture, while approval by the U.S. side was required whenever the center’s administrators assigned its employees to new posts, the sources said, indicating it acted as a branch.