Japan's Tax Authorities Probe Foreign Banks

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

21 July 2003

Many major investment banks with a substantial presence in Japan, such as UBS, Goldman Sachs, Merrill Lynch and Morgan Stanley are facing the prospect of lengthy audits by the tax authorities, it emerged in a recent Financial Times report.

Some of the banks and private equity investment entities targeted by the tax department have been subject to investigations lasting for many months, whilst others are still awaiting audits.

Consequently, there is a climate of uncertainty amongst foreign firms in the banking and investment sector, many of which have built up substantial holdings in Japanese banks. For example, according to the FT, Goldman has invested $1.2 billion in Japan's second largest bank, SMFG, whilst Merrill Lynch has entered into a $1 billion joint venture with UFJ (Japan's third largest bank) in a bid to dispose of bad loans.

Not surprisingly, foreign investors in Japan are expressing frustration - not only at the slow progress of tax audits, but also at the country's ambiguous tax laws, which affect firms' ability to plan for future investment. One area that is a particular source of friction between the international finance sector and the tax authority is the law governing income generated by foreign subsidiaries which is then moved overseas. Whilst investors believe this is not subject to income tax in Japan, the authorities take a different view.

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