An Amazon affiliate company has apparently been ordered to pay $119 million in taxes by Japanese authorities for failing to report income between 2003 and 2005. The Tokyo Regional Taxation Bureau concluded that Amazon.com International Sales, the affiliate US company located in Seattle should pay taxes in Japan as well, as its operations there can be considered as having “permanent establishment (PE).”

The news, initially coming from Japanese newspaper Asahi Shimbun, follows several years of concerns from the Japanese authorities. Amazon operates in Japan through two local companies, Amazon Japan and Amazon Japan Logistics; however, the transactions are processed by the US-based company. This way, it paid taxes on the transactions in the US but not in Japan even though the purchases were made locally.

The company has asked the Japanese authorities to take into account the US-Japan tax treaty, which states that US companies that operate in Japan but have no branches set up there are exempt from paying any taxes in the country.

However, the Tokyo Regional Taxation Bureau now believes that the two firms that Amazon has in the country can be considered branches of the company and as such ordered it to pay taxes for the three years up to 2005. Amazon Japan Logistics and Amazon Japan are in charge of the distribution of goods, as well as perform other functions.

In fact, Amazon disclosed the matter in its 2008 annual report made available this April, bringing up the $119 million tax and further inquiry for the 2006-2008 period. “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,” Amazon stated (PDF). “We also may be subject to income tax examination by Japanese tax authorities for 2006 through 2008.”