Amazon’s Income – Who Gets to Tax It?

The following story got me curious as to how much Amazon earned in pretax income over the 2003 to 2005 period:

TOKYO (Reuters) – Japanese tax authorities have told an affiliated company of Amazon.com to pay some $119 million in taxes for unreported income in Japan over three years to the end of 2005, the Asahi newspaper reported on Sunday. But the company said the taxation was inappropriate and asked tax authorities in the United States and Japan to discuss whether the firm properly complied with the tax code in the bilateral tax treaty, the newspaper added. The affiliated company in Seattle, Amazon.com International Sales, has commissioned Amazon Japan and Amazon Japan Logistics to manage sales and logistic operations in Japan, while booking sales from its business in Japan back in the United States where it paid taxes, Asahi said. But the Tokyo Regional Taxation Bureau has judged that Amazon's operations in Japan should be considered as having a 'permanent establishment (PE)', meaning their income should be taxed in Japan under the U.S.-Japan tax treaty, it added. Officials from Amazon Japan were not immediately available for comments.

I learned two things from looking at their 10-K filings. Their most recent 10-K states:

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

Someone at Reuters should consult the 10-K filings as Amazon is saying that the claims of the Japanese tax authorities have no merit. It also turns out that the cumulative pretax income over the 2003 to 2005 period for Amazon on a worldwide basis was $982 million. Does the Japanese tax authority really believe that over 20 percent of this income should be taxable in Japan?

Then again – national income tax authorities will likely be looking for all sorts of ways to increase taxable income from its residents include going after transfer pricing related issues with respect to multinational corporations. Stay tuned – as this could turn fun (or ugly depending on one’s perspective).