In July of this year, Kawasaki Heavy Industries was found to have used slush funds generated through fictitious transactions to provide money and goods to the crew of the Maritime Self-Defense Force’s submarines, as well as to entertain guests with food and drink. In response to this, the Osaka Regional Taxation Bureau began a tax investigation, and this month it was reported that the expenses were deemed to be “entertainment expenses that cannot be recognized as business expenses,” and that it constituted “income concealment involving malicious disguise.” Kawasaki Heavy Industries is reportedly planning to file an amended tax return.
Kawasaki Heavy Industries creating slush funds?
The issue concerns Kawasaki Heavy Industries’ alleged use of slush funds generated through fictitious transactions with subcontractors to cover food and drink expenses for the crew of Japan Maritime Self-Defense Force submarines. The fictitious transactions took place in the company’s Kobe Works Repair Department, which repairs and inspects 12 submarines that Kawasaki Heavy Industries built under contract for the Japan Maritime Self-Defense Force. The department regularly repairs submarines and is said to have created slush funds by fictitiously ordering materials from subcontractors and pooling the money. The illegally pooled money was used to purchase gift certificates and home game consoles, and was provided to the submarine’s senior Self-Defense Force officers and general crew members, as well as for dining and entertainment.
This slush fund scheme is believed to have been going on for about 20 years. It is reported that it began when a former member of the Maritime Self-Defense Force was re-employed at a subcontractor of Kawasaki Heavy Industries and approached active submarine crew members to provide them with items.
Osaka Regional Taxation Bureau determines it to be “entertainment expenses”
The Osaka Regional Taxation Bureau determined that the items that had been recorded as expenses were not recognized as “entertainment expenses.” The unreported amount is estimated to be about 200 million yen per year for the six years up to the fiscal year ending March 2023, totaling about 1.2 billion yen. The additional tax, including the heavy surcharge imposed for malicious disguise and concealment, is expected to be at least about 600 million yen. The Ministry of Defense is currently conducting a “special defense inspection” and plans to compile an interim report by the end of the year, but it has been revealed that some personnel may have received food and drink entertainment during the course of the investigation so far. It has also been pointed out that some crew members had requested Kawasaki Heavy Industries to purchase items such as winter clothing and work shoes that were unrelated to the repair work on the submarine.
Kawasaki Heavy Industries has also set up a special investigative committee to look into the number of people involved in the creation of slush funds and the flow of money and goods. The results of the investigation are expected to be made public by the end of the year.
Entertainment expenses
The issue at hand this time is “entertainment expenses.” Entertainment expenses are treated differently under tax law than other expenses. The National Tax Agency defines entertainment expenses as “entertainment expenses, entertainment expenses, confidentiality expenses, and other expenses paid by a corporation for the entertainment, rendezvous, comfort, gifts, and other similar activities (hereinafter referred to as “entertainment, etc.”) of its customers, suppliers, and other persons related to its business.”
Entertainment expenses are expenses such as entertaining business partners. The upper limit varies depending on the size of the company, and the following conditions must be met in order to be recognized as an expense:
- Expenses that are necessary for business development and can be proven to be appropriate
- The amount is not excessive.
- The distinction between public and private expenses is clearly shown.
As you can see from this, expenses that are not related to the company’s business cannot be recognized as entertainment expenses. Specifically, expenses that cannot be recorded as entertainment expenses include:
- Meal expenses are less than 10,000 yen per person
- Food and drink expenses unrelated to business
- Expenses for company events
- Food and drink expenses for meetings
However, these expenses may be recorded as meeting expenses or employee benefits expenses, so careful checks are required.
This problem was discovered during a tax investigation by the Osaka Regional Taxation Bureau. “Failure to report” refers to a taxpayer under-reporting taxes due to calculation or accounting errors. It also applies to misinterpretation of tax law or delays in filing procedures. On the other hand, intentionally making false declarations, such as concealing sales, creating double books, or falsifying receipts, to reduce the amount of tax paid or not pay tax at all is considered “tax evasion.” If tax evasion is discovered, a heavy additional tax will be imposed. A tax rate of 35% or more will be added to the original tax amount as a penalty for the taxpayer’s concealment or falsification of the facts.
For example, if the amount of tax intentionally under-reported reaches 100 million yen, the person must pay “100 million yen in tax plus a heavy surcharge of more than 35 million yen.”
You should not intentionally create slush funds, but it is also important to properly handle daily accounting procedures to avoid mistakes resulting in reporting omissions.
