Amazon Ordered To Pay Back $119 Million In Taxes In Japan. More Tax Trouble May Be Ahead.

amazon_japan_logoBad news for Amazon over the weekend. The Tokyo Regional Taxation Bureau slapped Amazon’s affiliated unit “ International Sales” with a $119 million tax bill. Japanese newspaper Asahi Shimbun reported yesterday [JP], the subsidiary is accused of failing to report income in Japan between 2003 and 2005.

Japanese tax authorities started making these allegations as early as 2007 but now seem ready to pull out the hammer. The way Amazon operated so far is that every time Japanese customers buy something from Amazon’s Japanese website, they legally make contracts of purchase with Amazon offices in the US. The problem for the Japanese taxation bureau: These sales were booked and taxed in the US, even though Amazon operates two companies in Japan, Amazon Japan and Amazon Japan Logistics. (Click here for more background on Amazon’s position in Japan.)

Reportedly, income of several hundred of millions of dollars wasn’t taxed in Japan under the U.S.-Japan tax treaty, as demanded by local tax authorities now. Amazon is currently in talks with authorities to invalidate the accusations.

Amazon has a history of getting in trouble for the way they deal with taxes. In its 2008 annual report [PDF] released in April this year, disclosed that even more trouble may be on the horizon, especially in Japan (page 73):

We are under examination, or may be subject to examination, in the following major jurisdictions for the years specified: Kentucky for 2004 through 2008, France for 2005 through 2008, Germany for 2003 through 2008, Luxembourg for 2003 through 2008, and the United Kingdom for 2003 through 2008.

In addition, in 2007, Japanese tax authorities assessed income tax, including penalties and interest, of approximately $119 million against one of our U.S. subsidiaries for the years 2003 through 2005. We believe that these claims are without merit and are disputing the assessment. Further proceedings on the assessment will be stayed during negotiations between U.S. and Japanese authorities over the double taxation issues the assessment raises, and we have provided bank guarantees to suspend enforcement of the assessment. We also may be subject to income tax examination by Japanese tax authorities for 2006 through 2008.

(emphasis supplied)

But even the $119 million tax bill in Japan isn’t peanuts, even for Amazon (provided they really end up having to pay it): Their operating income, for example, stood at $842 million last year for the Amazon group as a whole, with the Japanese subsidiary estimated to having contributed 10% of that number. We’ll stay tuned.