Japan's Tokai University hides $14.7 milion in income

JAPAN - The National Tax Agency has discovered that Tokai University hid a total of about ¥1.2 billion (S$14.7 million) in income over six years through March 2011, according to sources.

The agency believes the university formed a dummy contract with an affiliated firm that operates the Tokai University Club and gave it about ¥100 million a year to maintain the operations of the club, which was established at the initiative of the university's founder.

Falsification of accounts put the club operator in the black, but the university's other profit-making businesses were burdened with accumulated debts of ¥1.46 billion at one point.

The total amount of income the university failed to declare, including that handled under other accounting procedures, was about ¥2.2 billion. The corporate tax penalty, including a heavy additional tax, was about ¥80 million after past deficits were offset.

In the case of public-interest organisations such as schools and religious organisations, the earnings from nonprofit businesses are exempt from tax, while those from for-profit businesses are taxable but receive preferential treatment.

The Corporation Tax Law allows public interest corporations, including educational corporations, to carry out 34 types of profit-making businesses under certain conditions.

"We followed the instructions of the National Tax Agency, and corrected the situation," a university official said. The official said the university has already revised the tax report and paid the penalty.

According to sources close to the university and others, the club facility has been located in Kasumigaseki Building in Chiyoda Ward, Tokyo, since the building was completed in 1968, because senior members of the company managing the building and university founder Shigeyoshi Matsumae had a close relationship.

The facility, which includes a luxury restaurant as well as conference and banquet rooms, is operated by Kasumigaseki Tokai Club, a firm based in the ward. Anyone can use the facility, but most of the restaurant customers are people affiliated with the university, and business is often slack.

"Due to its location, hardly any customers come in off the street. The restaurant makes absurdly little money," said the source close to the university.

While the university pays about ¥400 million a year in rent to the company that owns the building, the university received no rent from the Kasumigaseki Tokai Club. Instead, the university has received about ¥250 million a year as a subcontracting fee under a contract with the club's operating company.

"If we charge rent to [the Kasumigaseki Tokai] Club, it can't stay in business. The subcontracting is a last-ditch solution," said the source.

However, the tax agency said there was no actual subcontract and the subcontracting fee should be considered part of the rent. It concluded that about ¥600 million, part of the gap between the rent and the amount of subcontracting fees for six years, represented profits given to the facility by the university and should be considered as donations.

The agency also imposed a heavy additional tax on another ¥600 million that includes expenses for the interior work conducted when the facility moved to the 35th floor from the 33rd floor of the building in 2009. The university should have depreciated those over several years as assets for profit-making businesses, but it reported them in a lump as losses for the business year ending in March 2010 to reduce its income, the agency said.