A real-estate investment fund operated by the Morgan Stanley group of the U.S. allegedly failed to report 18 billion yen in Japanese income from the buying and selling of bad loans in 1999 and 2000, sources said Wednesday.
The fund has claimed there was no tax evasion and has lodged an appeal, the sources said.
The Morgan Stanley group said, "The fund respects the taxation laws of each country, including Japan, where it conducts its business, and it fulfills tax obligations."
The Tokyo Regional Taxation Bureau, however, has ordered the fund to pay nearly 7 billion yen in unpaid taxes and penalties.
According to the sources, the fund transferred the income to several Dutch companies, whose revenues are not subject to taxation in Japan under a bilateral treaty. However, the tax bureau deemed the Dutch firms "dummy" companies and the fund itself had absorbed the revenues, they said.
The Morgan Stanley fund traded land and property taken as collateral for nonperforming loans in Japan by using an "anonymous association," under which the Dutch companies concluded contracts with a Japanese firm specializing in purchases of bad loans.
The fund invested in these Dutch companies, but the tax bureau found that they were used only so that the fund could escape taxes in Japan, the sources said.
The fund bought bad loans with land and property as collateral at low prices so that it could resell or lease the real estate, the sources said.
Morgan Stanley is the pioneer of "collateralization" in Japan, where the balance of bad loans owned by major banks reached 27 trillion yen, the highest level ever, at the end of March.
The sources said Japanese tax authorities have strengthened their surveillance to prevent companies from exploiting loopholes through the use of "anonymous associations."
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