NEC dodged tax via ¥10 billion ‘compensation payment’ for H.K. pullout

Kyodo

The National Tax Agency has determined that electronics maker NEC Corp. concealed more than ¥10 billion in income in the three years through March 2010 via extra “compensation” paid to a Hong Kong company for NEC exiting a mobile phone business abroad, sources familiar with the matter said Sunday.

The payments, found through an audit by the Tokyo Regional Taxation Bureau, had been added to the amount specified on a contract, and it appears the tax authorities have judged them a taxable expense, the sources said.

But NEC does not appear to have been slapped with a penalty or additional tax charges because the losses were logged in the past financial results that were applicable, the sources said.

Of the unusually large sum allegedly concealed, NEC said: “It was pointed out in the course of a routine tax audit and we had a different view from that of the tax authorities. But ultimately we have conformed to the judgment by the tax authorities.”

According to the sources, as part of its plan to move into European mobile phone markets, NEC took a stake in 2002 in a Hong Kong communications carrier that operated mobile phone services in Britain and Italy.

Revenue from the mobile business, however, remained sluggish as its music distribution and other services failed to take root and its mobile phones malfunctioned.

NEC subsequently withdrew from the business and the Hong Kong company requested compensation.

NEC made payments greater than the amount designated under the contract and logged later them as expenses, the sources said.

The tax bureau appears to have concluded that these payments were neither contractually obligated nor determined in a concrete manner, thus constituting a taxable expense-account item, the sources said.

NEC operates an array of electronics businesses ranging from the mobile phone and personal computer production to information technology services for building corporate computer systems and providing network enterprises services, such as laying undersea telecommunications cables.

In the year ended March 2009, NEC registered a gaping net loss of ¥296.6 billion. It also marked a ¥110.2 billion net loss in the fiscal year ended in March 2012, due to sluggish sales of smartphones and the impact of flooding in Thailand.