Japan Probes Komatsu's Transfer Pricing

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

17 March 2010

Komatsu Ltd. has announced that the Tokyo Regional Taxation Bureau is conducting a tax investigation concerning transfer pricing issues over a six-year period from the fiscal years ended March 31, 2004 to 2009.

This involves internal transactions with two subsidiaries in the United Kingdom and Belgium in the construction, mining and utility equipment business. The Bureau considers that Komatsu has recorded approximately JPY17.4bn (USD192m) too little in profits in Japan (and the same amount too much in the UK and Belgium).

Concerning taxation related to pricing of equipment for internal transactions among Komatsu Group companies, Komatsu stated that it has complied with the laws of Japan and other countries, ensured appropriate pricing by establishing in-house rules, and properly paid taxes on the profits from internal transactions in Japan, the UK and Belgium.

According to Komatsu, it has explained its stance on transfer pricing, but there remains a difference in opinion, which may be difficult to resolve.

While Komatsu still awaits a notice of correction, it plans to challenge any future Bureau decision for correction and file for inter-governmental negotiations between Japan, the UK and Belgium to eliminate double taxation. Komatsu believes that it should be able to receive tax refunds corresponding to its additional tax payment in Japan.

With respect to the impact of this matter on the business results for the fiscal year ending March 31, 2010, Komatsu is planning to record an allowance of approximately JPY2.6bn (USD29m) for the tax expense as the sum of the difference in corporate tax rates of the three countries (the difference between additional tax payment in Japan and tax refunds in the UK and Belgium) and the incidental tax amount in association with the additional tax payment.

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