Kawasaki Heavy hit with 1-B yen in back taxes over MSDF scandal

Osaka (Jiji Press) — Japan’s Kawasaki Heavy Industries Ltd. was slapped with about 1 billion yen in additional taxes after the defense contractor was found to have wined and dined Maritime Self-Defense Force personnel, sources said Tuesday.

The Osaka Regional Taxation Bureau found 1.3 billion yen in unreported income over the six years through the fiscal year to March 2023, as Kawasaki Heavy pooled funds through fictitious transactions related to repair contracts for MSDF submarines, according to the sources.

Combined with undeclared revenue from a U.S. subsidiary, the company failed to report some 4 billion yen in taxable income.

According to Kawasaki Heavy and the Defense Ministry, the company’s repair division at its Kobe plant in western Japan created slush funds by making bogus orders to subcontractors for materials when it was repairing MSDF submarines.

The division used the funds to wine and dine submarine crew members and give them gift certificates and daily goods. The practice is believed to have begun about 40 years ago.

Tax authorities determined that the 1.3 billion yen spent for such purposes should be considered entertainment costs that cannot be used to deduct taxable income. They found that the failure to report the funds constituted income concealment subject to additional penalty tax.

The authorities also determined that revenue from the U.S. unit should have been reported together with the parent’s domestic income under controlled foreign corporation tax rules.

Kawasaki Heavy said that it has already amended its tax reports and paid the additional levies.