The Asahi Newspaper reported on 2 August 2010 that the major household electronics manufacturer Panasonic had been subject to an assessment for JPY22Bn of additional under reported income. The assessment was raised by the Osaka tax authorities further to an audit covering the five years to March 2009. It is alleged that of this assessment JPY0.7Bn related to the intentional transfer of income to a subsidiary company in China through the manipulation of price discount. Under normal circumstances the assessment would have given rise to more than JPY7Bn in additional tax but the five year period included a time when Panasonic was loss making, hence assessed taxes were limited to around JPY4Bn.
According to persons with knowledge of the matter, owing to the poor business position of Panasonic’s Chinese subsidiary the company discounted the price of goods sold to the entity. However such discounting was interpreted by the Osaka tax authorities as being the “…provision of income to the entity…” and the difference between the correct price being a “donation” which should give rise to assessment on additional concealed income.
The remaining part of the JPY22Bn assessment was due to accounting errors on transactions with foreign related companies not seen by the tax authorities as intentional under reporting of income. Panasonic has settled the amount in full.
Panasonics Information group reported that “There were some differences in view with the tax authorities, but we have followed their direction”. In June also the Osaka tax authorities had identified concealed income in arrangements between Panasonic and its counterparties relating to discounts on various parts of its products.
From a tax perspective an interesting feature of the above reported assessment is that the authorities treated mispricing of transactions between Panasonic and its overseas related parties as a “donation” issue rather than a transfer pricing issue. “Donation” is a Japanese domestic law doctrine that can give rise to the disallowance of the greatest part of any benefit given by one Japanese company to another (although under 2010 tax reforms for transactions within 100% groups this doctrine no longer applies).
The practical implication of this is that Panasonic would likely not have recourse to competent authority negotiations if the company wanted to appeal this issue but would have to follow domestic law appeal remedies, probably with less chance of success. The Osaka tax authorities involved in the audit may not have had jurisdiction over transfer pricing issues, hence may have taken this approach to assessing the company.