IDA Ireland has asked an asset management operation based at the Irish Financial Services Centre to explain its role in a major tax investigation which resulted in its parent company being fined $2.72 million (€2.93 million) in tax penalties by the Japanese authorities.

An IDA spokesman confirmed yesterday the State agency had become aware of the investigation into the Mitsubishi Trust and Banking Corporation and had asked the Irish subsidiary to provide a statement of information on its own role in the matter.

Reports in the Japanese media last week linked Mitsubishi Trust Finance (Ireland) Plc, a subsidiary of Mitsubishi Trust and Banking Corporation, to a scheme which enabled its parent company to evade Japanese tax payments.

Media reports claimed that some 380 million yen which the Japanese bank transferred to its IFSC subsidiary was made to evade tax in Japan. The report claims the Irish subsidiary reported interest income from loans extended to European firms as its own income to the Revenue Commissioners. However, funds for the loans were provided by the parent firm's London branch.

The reports said the Japanese tax authorities concluded that the revenues should have been declared in Japan because the loans were actually made by the parent.

When contacted by The Irish Times yesterday, Mr Seamus Naughton, operations manager at the IFSC subsidiary confirmed the parent company had been fined $2.72 million.

However, he said he was completely satisfied with the way the Irish subsidiary, which was established in 1990 and employs eight people, had conducted its business.

Mr Naughton said the company did not deny it worked closely with its sister company in London but that any loan guarantees offered were subject to a fee payment by the Irish firm and were completely legal.

Mr Naughton said there had been a difference of interpretation between the Japanese taxation authorities and the company. He said the Central Bank and VAT inspectors had already visited the subsidiary and had no complaints.

The IDA spokesman said it is the first case of this type involving an IFSC company. However, the timing of the incident follows shortly after an OECD report which cited the Republic five times for potentially harmful preferential tax practices and is likely to further embarrass IFSC managers and domestic tax authorities.

In an ironic twist to the affair, however, Mitsubishi Trust Finance, which operates as an IFSC company, has paid tax at a 26 per cent rate - rather than the 10 per cent rate which other IFSC companies pay - to the Revenue Commissioners since 1992. This is to avoid a Japanese taxation law which penalises the parent company of offshore subsidiaries which pay less than 25 per cent tax on profits.

The regulation of IFSC companies is carried out by the Revenue Commissioners and the Department of Finance. However, the Central Bank can play a role through chapter seven of the Act governing the Central Bank.

Mr Naughton said he had sent a document explaining the role of the Mitsubishi Trust Finance in the incident to each of these organisations.