Glaxo To Owe Tokyo Tax Authority $171 Million

by Mary Swire, Tax-News.com, Hong Kong

12 March 2003

An affiliate company to the pharmaceutical giant GlaxoSmithKline is facing a demand from the Japanese tax authority for some $171 million which it alleges is a result of Y65 billion of income which should have been declared under CFC laws.

The financial arm of the GSK group, which lends to and invests in associate companies within the group, seems to have fallen foul of a Japanese 'Controlled Foreign Corporation' law that is intended to claw back revenue lost when companies generate income in other jurisdictions with unacceptably low tax rates.

According to Japanese daily Asahi Shimbun, sources close to the investigation say that the Tokyo Regional Tax Bureau's claim arises from Glaxo's failure to report Y65 billion from its Singapore subsidiary in 1998. Under Japanese rules, companies operating out of Japan must declare income generated from countries where the corporate tax rate is less than 25%. Singapore's corporate tax was at a rate of 26%, exempting Glaxo from having to declare any income. However, at the time, Glaxo apparently made huge profits from the sale of stock, which took the effective tax rate to which the firm was subject below the 25% level.

Spokesman for Glaxo, Martin Sutton confirmed that the company was in discussions with the Japanese authorities over the matter, but appeared to be not overly concerned regarding the dispute, according to a report from Reuters. "Like most companies, tax disputes do arise from time to time, but we believe that we are adequately covered to deal with them," he explained. However, he did indicate that the company does not agree with the Tax Bureau's findings.

The Japanese government have been keen to learn how companies go about lessening their tax burden, and set up a task force last July to investigate this area of corporate affairs. Should the decision go against Glaxo, it could have a widespread impact on many international firms with Japanese operations, and lead to conflicts of interest amongst the other countries dragged into such disputes.

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