Tax authorities in Japan have ordered an affiliate of online retailer Amazon.com to cough up almost USD120m in back taxes for the three year period to the end of 2005.
Although neither the Tokyo Regional Tax Bureau nor Amazon have commented officially on the dispute, reports suggest that the case rests on whether the company has a permanent establishment in Japan, in which case it would be liable for Japanese income taxes.
Amazon is understood to have managed its sales and distribution in Japan through two subsidiaries, Amazon Japan K.K. and Amazon Japan Logistics K.K., but booked Japanese sales through a US-based affiliate, thus paying only US income taxes.
The Tokyo tax office believes that Amazon effectively has a PE in Japan, although the outcome of the dispute may rest upon the interpretation of the relevant clauses of the double taxation treaty between Japan and the US by the tax authorities.
The tax dispute was alluded to in the company’s 2008 annual report, which acknowledged that “significant judgment is required in evaluating our worldwide provision for income taxes.”
“During the ordinary course of business, there are many transactions for which the ultimate tax determination is uncertain,” the report stated. “For example, our effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in the valuation of our deferred tax assets and liabilities, or by changes in the relevant tax, accounting and other laws, regulations, principles and interpretations.
“We are subject to audit in various jurisdictions, and such jurisdictions may assess additional income tax against us,” the report noted. “Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different from our historical income tax provisions and accruals. The results of an audit or litigation could have a material effect on our operating results or cash flows in the period or periods for which that determination is made.”
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