The Japanese affiliate of GlaxoSmithKline, the world’s second-largest drug maker, failed to declare about 65 billion yen in income over a period of three years through its business year to Dec. 31, 2001, sources said Monday.

The Tokyo Regional Taxation Bureau reportedly found that Glaxo retained profits from stock sales at its affiliate in Singapore that should have been included in its taxable income, the sources said.

Glaxo, the financial arm of the British company, is based in Chiyoda Ward, Tokyo.

The taxation bureau apparently urged the firm to pay more than 20 billion yen in surcharges, they said. The firm plans to contest the claims, they said.

Under Japanese tax law, a firm must declare the income of an affiliate abroad if the affiliate’s corporate tax rate is below 25 percent in the foreign country, and if the firm has more than a 50 percent stake in the affiliate.

The law says a firm must declare the income of its affiliate in a foreign country in accordance with the proportion of the equity stake it holds in that affiliate.

The tax rate of the Singapore arm of the Japanese firm was 26 percent at the time, but profits from the stock sales were tax-free.

However, Japanese tax authorities have reportedly determined that the tax rate was below 25 percent, they said. The profit from selling stocks is taxable in Japan.

The affiliate declared earnings of 560 million yen in its 2001 business year.

The firm is reportedly under direct control of the parent firm in Britain. It provides capital and loans to group firms abroad and does not engage in business activities in Japan.

GSK of Britain also has a pharmaceutical business arm in Japan, GlaxoSmithKline KK.

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