Honda tumbles on tax woes

By Chang-Ran Kim, Asia auto correspondent

TOKYO (Reuters) - An unexpected tax bill sent Honda Motor Co's quarterly profit tumbling 86 percent, and Japan's No.2 carmaker warned of a weak year ahead due to a stronger yen, rising materials costs and a soft U.S. car market.

The net result for the January-March quarter was dragged down by the allocation of about 80 billion yen ($767 million) for a possible tax liability related to an ongoing investigation into alleged transfer pricing, Honda said.

Honda said it was under investigation by the Tokyo regional tax authorities, which allege that the automaker had not properly accounted for earnings made in China. The probe covers a five-year period from April 2001, but Honda said it had factored in for possible liabilities arising through last year.

"The issue is still under investigation, and the cost could be bigger or smaller," Executive Vice President Koichi Kondo told a news conference.

The 25.4 billion yen profit fell far short of an average estimate of 143.9 billion yen in a Reuters Estimates poll of 20 brokerages, which had expected a drop mainly due to interest rate-related derivatives.

For the year ahead, Honda, also the world's top motorcycle maker, forecast a net profit of 490 billion yen ($4.7 billion) and operating profit 650 billion yen, down 18 percent and 32 percent, respectively.

Consensus forecasts from 20 brokerages had called for a net profit of 575.5 billion yen and operating profit of 725.5 billion yen.

Honda, like its domestic peers, faces an erosion in the value of its exports and repatriated earnings with the yen's 10 percent gain versus the dollar from last year.