• Kyodo

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Shiseido Co. is under fire from tax authorities for allegedly failing to report ¥3.8 billion in income for a five-year period through March 2012 by pooling profits at a U.S. subsidiary, sources said.

Japan’s top cosmetics brand 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, the sources said.

Even so, Shiseido paid a tax penalty of around ¥1.7 billion on Tuesday, they said. The amount included a charge for underreporting its income and local government duties.

The Tokyo Regional Taxation Bureau invoked the “transfer pricing” rules of the tax code, which are designed to prevent businesses from evading taxes on income in Japan by moving or retaining profits abroad through transactions with affiliates, in making the allegation, the sources said.

Shiseido imports cosmetics from a New Jersey manufacturing subsidiary for sale under its namesake brand chiefly in Asia, the company said.

The tax bureau alleged that the profit margin at this U.S. subsidiary is higher than at competing local businesses, and judged that Shiseido inflated its purchasing prices when importing products from the New Jersey unit, resulting in income being pooled in the United States, the sources said.

Shiseido generates around half of its sales overseas. In the business year ended last March, its consolidated turnover was roughly ¥762 billion, with ¥384.7 billion posted abroad.

This is not the first time tax authorities have challenged a business on a 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 In at least one case, their charge was revoked by a tax tribunal.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 in income in Japan by transferring profits to a U.S. affiliate over six years through March 2005 and levied ¥57.1 billion in penalties.

Takeda disputed the charge after paying the fine. But last year Takeda said the National Tax Tribunal overturned the tax bureau’s action.