| May 18, 2011 |
| Dispute on a tax penalty imposed by the Japanese Taxation Bureau |
| On May 17, 2011, some media outlets reported that the Osaka Regional Taxation
Bureau had identified approximately 6.4 billion yen in income that Kawasaki
Kisen Kaisha, Ltd. ("K" Line), neglected to declare. In the interest
of fairness, though the report concerned was not announced by our company,
it deserves the explanation provided below. On June 28, 2010, following an audit by the Osaka Regional Taxation Bureau of fiscal years beginning March 2005 to March 2009, we received notification of an adjustment. Earnings were adjusted upward approximately 6.4 billion yen, and a tax penalty for corporate, business, and municipal taxes (including principal and additional taxes) was assessed at approximately 1.9 billion yen. What follows are the two principle reasons claimed for the adjustment. |
| (1) Renegotiation of Contract Prices for newbuildings |
| A shipbuilding firm contracted by one of our foreign subsidiaries to build vessels was unable to meet their pre-contractual estimates due to sharp increases in the prices of steel materials, and appealed to us to pay more for the vessels. After further negotiations, we agreed to a price increase. The Taxation Bureau is treating the new agreement as a mere pretense, denying the difference in value between the original and subsequent agreements, and charging us with an error in the calculation of taxable income. This is why our revised earnings purportedly increased 1.6 billion yen. That alone makes up the brunt of this adjustment's additional tax burden. The fact of the matter is the shipbuilding firm did make an appeal to raise the price of the vessels, and we agreed to the increase. That the Taxation Bureau, after some baseless fact-finding, would contravene these facts by treating a legitimate agreement as some sort of ruse and impose such heavy penalties, we strongly contend, is without basis. |
| (2) Other factors |
| We pay charter hires to our foreign subsidiary to charter vessels, however, the Taxation Bureau denied the inclusion of some of these hires as financial losses. The Taxation Bureau says that mistakes were made about the period in which these particular hires may be included. Adjustments recognizing these discrepancies in timing of inclusion brought total earnings upward approximately 4.8 billion yen. |
| We again strongly contend that our company's handling of these transactions, under all laws and directives, was without error. |
| This adjustment, therefore, in light of our significantly disparate understandings of the facts, cannot possibly stand unchallenged. We have requested reconsideration to the Osaka National Tax Tribunal, the hearing for which is currently underway. Going forward with the proceedings, we will continue to submit to the propriety and lawfulness of our accounting practices. |