Kristen Gelineau, THE ASSOCIATED PRESS

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SYDNEY, Australia - Australian authorities have slapped U.S. private equity firm TPG with a bill for 678 million Australian dollars ($629 million) in taxes and penalties, a move that is sending chills down the spines of foreign investors.

The tax bill is linked to TPG's Oct. 29 sale of its stake in Australian retailer Myer Holdings Ltd., from which the Fort Worth, Texas-based company made AU$1.58 billion ($1.46 billion).

The Australian Taxation Office has accused TPG of skipping out on paying Australian taxes on those profits by funneling the money to companies in tax havens such as the Cayman Islands and Luxembourg.

TPG officials said they would co-operate with any tax office inquiry, but deny wrongdoing.

The private equity firm, one of the world's biggest, was part of a consortium that bought Myer in 2006, delisting it from the stock exchange. A little over three years later, TPG sold its stake through an initial public offering that returned the retailer to the stock market.

There are already signs that the tax dispute is having a chilling affect on private equity investors looking at Australia, said Katherine Woodthorpe, CEO of the Australian Private Equity&Venture Capital Association.

That's largely because TPG's ownership structure - which in the case of Myer used companies it employs in tax havens to manage the investment - is common among private equity firms, Woodthorpe said.

"We've already had investors telling us that they are concerned about waiting to see what the outcome is, and concerned that the structures and processes that are used worldwide for investment seem to be under fire from the ATO at the moment," Woodthorpe said Thursday. "The anecdotal evidence is unequivocal."

On Nov. 11, at the tax office's urging, an Australian court ordered a freeze on money from the Myer sale that had been held in TPG's accounts with National Australia Bank. But tax authorities soon realized most of that money had already been sent off to TPG's tax havens.

Taxe authorities hit TPG with a bill for AU$452 million in income tax, plus a tax avoidance penalty of AU$226 million.

"TPG strongly believes it has met all of its Australian tax obligations in connection with the investment in Myer Department Stores and its other investment activities in Australia," the firm said in a statement.

"Ultimately, the issues will be dealt with according to the law and TPG will co-operate fully with any inquiry the ATO may make as it has done in the past," it said.

Australia's Finance Minister Lindsay Tanner acknowledged the complexity of dealing with international tax law in a speech to the National Press Club on Wednesday.

In his speech, Tanner noted the country's own sovereign wealth fund, the Future Fund, invests through asset managers domiciled in the Cayman Islands, calling it "common practice and often difficult to avoid."

The tax office declined to comment on its scuffle with TPG, except to issue a statement on capital gains tax laws. One of the main questions in the dispute is whether the profits from the Myer share sale should be treated as ordinary income or as capital gains.

For nonresidents, Australia doesn't usually tax capital gains - profits - made from the sale of Australian assets. But when the taxpayer's business is the purchase of assets with the intention of later reselling them at a profit then the gain is treated as taxable income, according to the ATO statement.

Secondly, business profits made in Australia by residents of countries that have tax treaties with Australia are normally taxed in their home country. But that is open to challenge when arrangements are made to avoid tax in the home country, the statement said.

"Australian sourced business profits ultimately derived by a tax haven entity may be taxable in Australia," the ATO said.