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Update on Japanese transfer pricing 2018

Recent changes in the business environment and the financial situation of the Japanese government have affected the Japanese taxation environment and transfer pricing regulations, explain Jun Tanaka, Nobuhiro Tsunoda and Yosuke Suzaki of KPMG in Japan.

From the perspective of the taxation environment, especially with the substantial increase in the financial deficit and additional financial expenditure on the social security system due to a rapidly ageing society, it has become imperative for the Japanese government to increase its tax revenue. Accordingly, while the Japanese government is reducing the corporate tax rate for the purpose of maintaining the competitive edge for Japanese taxpayers, it is also expanding the taxation base by shifting the tax base from direct tax to indirect tax (i.e. raising the consumption tax rate).

In order to ensure and increase its tax revenue, the Japanese tax authorities are paying particular attention to whether taxpayers located in Japan are reporting reasonable taxable income in relation to their functions and risks, and whether there is any unreasonable outflow of income to overseas countries. As a result, transfer pricing (TP) remains a hot topic in Japan.

Changes to (or introduction of) local transfer pricing legislation

In order to solve international taxation issues including TP, the Japanese tax authorities have expressed the need to coordinate with other countries' tax authorities and have actually amended or newly introduced the related regulations reflecting the BEPS action items. At the core of these is the rule for TP documentation in relation to the BEPS Action Plan 13.

There was already a TP documentation rule in existence in Japan, but it was not contemporaneous. The new TP documentation rule, based on BEPS Action 13, was introduced from (the fiscal year starting on) April 1 2016. Under the new TP documentation rule, Japanese taxpayers are required to prepare and file TP documents – a master file and a country-by-country (CbC) report – in electronic format within one year from the fiscal year end of the parent company. They are also required to prepare a local file by the taxpayer's tax return filing date, beginning from the fiscal year starting at April 1 2017.

At the same time, the authorised OECD approach (AOA) TP documentation rule was introduced. Under the AOA, permanent establishments (PEs) located in Japan, or entities which have PEs outside of Japan, need to prepare a local file to cover internal transactions with PEs.

Release of new administrative guidance by local tax administration

In 2018, some new administrative guidance was disclosed in relation to the TP area. One of the major topics is remuneration for intra-group services. In new guidance, for routine and support services with limited risks, a 5% mark-up on total costs can be assumed as arm's-length price, as long as certain terms and conditions are met.

BEPS-related developments

Transfer pricing documentation (Action 13)

The new Japanese TP documentation rule, which applied from FY2017, clarified that "a taxpayer engaged in either (1) controlled transactions whose total amounts for the previous business year was JPY5 billion ($44 million) or more, or (2) transactions of intangibles whose total amount for the previous year was JPY300 million or more with one foreign-related party, must prepare a local file by the deadline for the submission of its tax return". However, this threshold does not guarantee exemption from the local file requirement. Even if the above threshold is not met, taxpayers are supposed to submit their local file when the tax authority requests it during a tax audit. Therefore, regardless of whether the thresholds are met, it would be advisable for taxpayers to review and assess their TP risk for their overall foreign related-party transactions and prepare a local file.

When preparing a local file, there are some major potential issues for taxpayers. One of the major issues is the treatment of intangible assets. Even if no agreements regarding intangible properties are entered into among related parties, it is generally found that intangible assets are used by foreign related parties and the remuneration for the use of intangibles are added on prices in other related-party transactions, such as the sale or purchase of tangible goods. Therefore, taxpayers need to understand the overall picture of the transaction, functions and risks each party bears, the intangible assets employed, and the impact of intangible assets on the transactions before concluding TP methodologies for relevant transactions described in the local file.

As regards the transfer pricing method (TPM) in the local file, the transactional net margin method (TNMM) is the most popular TPM, involving simply testing the overseas subsidiaries' margin. However, it is important to review the profit allocation among related parties even if TNMM is used as the primary TPM.

Intangible assets (Action 8)

As a result of the shift in manufacturing and distribution functions from Japan to overseas, the volume of out-out transactions conducted completely outside of Japan is still at a high level. Consequently, tax auditing and tax assessments for such out-out transactions have strengthened. In particular, intangible transactions including royalties and services transactions are major target areas during the tax audit, reflecting the main points of BEPS Action Plans 8 to 10. For Japanese companies, many foreign related parties that receive any benefit from a Japanese parent's intangible assets and services are located in BRICs and Asian countries, where Japanese companies have their manufacturing and distribution functions with no large volume of tangible transactions with their Japanese parent company. Therefore, the rapid increase in the number of tax audits and tax assessments for intangible or service transactions with foreign related parties located in these countries is one of the major characteristics of recent Japanese TP audits.

Also, in the outline of a tax reform plan released in 2017, it was announced that the concept of the 'commensurate with income' standard would be discussed with a view to being introduced into Japanese tax regulation in the near future. Therefore, Japanese taxpayers need to pay attention to the treatment of hard-to-value intangibles (HTVI) and the related remunerations for HTVI in Japan and other countries.

Developments in relation to country-by-country reporting

As noted above, master files and CbC files must be prepared and submitted to the Japanese tax authority from FY2017. Taxpayers are expected to be cautious as regards consistency of the information included in the master file, as the Japanese tax authority will try to check that items such as definitions of business models, value chain analyses, and intangible assets in the local file correspond with those in the master file and CbC report.

Transfer pricing compliance activities by local tax administration

It appears that the target of TP audits has recently shifted to small and medium-sized companies, including foreign companies' subsidiaries. According to 'The outline of actual audit results for corporate tax and others' released by the National Tax Agency (NTA), the number of TP assessment cases was still at a high level – 169 in FY2016 (the year ending June 2017) – and the TP assessment amount increased to JPY62.7 billion, which represents an increase of 460% against the previous year.

This situation indicates that the large multinational companies have already been addressed, and these large companies have taken preventive measures – most commonly TP documentation and advance pricing agreements (APAs) – but that the small and medium-sized companies are still to take such measures and ensure they have the relevant TP documentation. Another reason for this situation is the change in TP and tax audit procedures. In Japan, TP audits were traditionally conducted separately from corporate tax audits and carried out by a specialised TP audit team in a regional tax bureau. However, as a result of the tax reform in FY 2011, from January 1 2013 transfer prices, in principle, have been audited as a part of the corporate tax audit. The corporate tax audit is conducted regularly, targeting not only large enterprises but also small and medium-sized companies. The increased number of target companies for TP audit will lead to an increase in the number of TP assessment cases and the resulting amounts involved in the TP assessments.

In addition to TP assessments, another major issue is that during regular tax audits, Japanese tax examiners often challenge small transaction amounts, viewing them as donations to foreign related parties. When, during the course of a tax audit, a tax examiner finds a transaction in which a taxpayer receives no remuneration or the tax assessment amount is minimal, the tax examiner may try to deem it a donation to the foreign related party. Similarly, some companies may be required to make voluntary tax adjustments. The 'Status of field audits for corporations engaging in overseas transactions' survey released by the NTA reported the number of tax assessment cases at 3,335 and the tax assessment amount at JPY236.6 billion (including TP assessments) in FY2016, which was substantially larger than the TP assessment amount in the statistics. In addition, since this statistic does not include any voluntary tax adjustments by taxpayers, the actual number of cases and the tax assessment amount resulting in double taxation in relation to controlled transactions with foreign related parties, will be considerably larger than those disclosed in the statistics by the Japanese tax authority. Considering these circumstances, Japanese taxpayers should certainly take advance measures, including as regards TP documentation, in order to minimise TP risk for related-party transactions.

Dispute resolution

In Japan, APAs are one of the popular options used to avoid potential TP risk and to enhance the predictability and transparency of taxation. Also, tax audits in Japan are carried out periodically, and include a high level of detail. There has been an increase in the number of taxpayers who consider filing an APA in order to minimise the burden of a tax audit in relation to TP aspects, to avoid TP risk, and to strengthen their compliance with regulations. Advance pricing agreements provide much benefit to taxpayers, and thus the number of APA cases is increasing. The NTA also recommends applying a bilateral APA as an effective way to improve predictability. In FY2016, the number of mutual agreement procedure (MAP) requests including APA applications was 162, and the number of cases closed was 171.

Additionally, the coverage of countries taking part in bilateral APAs has increased and has been diversified, which is a recent characteristic of APAs/MAPs in Japan. As previously described, with increasing transactions with different countries, such as BRICs and other Asian countries, as well as the increasing number of TP assessment cases in relation to transactions with related parties located in such countries, the counter-party countries of the Japanese tax authorities at the competent authorities' negotiations has also become diversified. Although the US is the major counter-party country, followed by European countries such as the UK, the number of APAs with Asia Pacific countries such as Australia, China, South Korea, Thailand, India, Indonesia, Singapore, and Hong Kong has recently increased. Considering these increases in APAs, the Japanese tax authorities have enhanced their internal resources (e.g. the number of employees) and expanded their network with foreign countries. Also, the Japanese tax authorities have tried to gather information via information exchange schemes based on tax treaties. The number of tax information exchanges over the past few years has been about 300,000.

Other relevant updates

In the 2017 tax reform, the Japanese controlled foreign company (CFC) regime was extensively amended in light of the final report of Action 3 of the BEPS project (designing effective CFC rules). This indicates that the Japanese tax authority is still focused on the trend of shifting profits from Japan to overseas.


In Japan, taxation on international transactions has been enforced in recent years. In the area of TP, as a result of the newly introduced BEPS TP documentation and the sharing of tax information contained in the master files and CbC reports with related countries' tax authorities, it is even more important for taxpayers in Japan to understand the tax position of all their group companies, to check on potential TP risks, to ensure the consistency of their TP policy within the group and to prepare all the relevant files.

Jun Tanaka



KPMG in Japan

Izumi Garden Tower 1-6-1, Roppongi, Minato-ku, Tokyo 106-6012

+81 3 6229 8322

Jun Tanaka is the head of the transfer pricing (TP) service division of KPMG in Japan. He joined the Asahi & Co (Andersen) audit department in Tokyo in 1993 and worked extensively with a number of multinational Japanese corporations on a wide variety of accounting issues, including financial audit, IPO consulting, and due diligence. In 1996 he transferred to Andersen's tax department engaging in TP practice. He was also stationed in Los Angeles in 1998 where he assisted a Japanese multinational corporation in obtaining a bilateral advance pricing agreement (APA) between Japan and the US.

Jun advises various clients on TP audit defence, global TP documentation, the implementation of TP strategies, global tax planning involving TP, planning on cross-border transaction schemes and bilateral and unilateral APA discussions with tax authorities in Japan, the US, Germany and other countries.

Nobuhiro Tsunoda



KPMG in Japan

Izumi Garden Tower 1-6-1, Roppongi, Minato-ku, Tokyo 106-6012

+81 3 6229 8040

Nobuhiro Tsunoda is a KPMG partner in Tokyo's global transfer pricing services. He joined KPMG in October 2013.

Before joining KPMG, from 1984, he worked at the Japanese National Tax Agency (NTA). After spending his early career as a corporate tax examiner, he turned to management reform and strategic planning as a director of the taxation office. He gained experienced in the policy for the Japanese accounting standards and disclosure system at the Ministry of Finance. He also worked on the modernisation of tax administration in developing countries as a headquarters-based consultant at the fiscal affairs department of the IMF. As an assistant regional commissioner, he developed strategy to improve large taxpayers' compliance. Making full use of such rich experience in the field of tax administration, he specialised in TP taxation and contributed to mutual agreement procedures (MAPs) with developed and developing countries as a competent authority, while director of the NTA's office of MAPs. He also contributed to exchange of information development as a competent authority, with the OECD and UN, as the NTA's director of international operations division.

Yosuke Suzaki



KPMG in Japan

Izumi Garden Tower 1-6-1, Roppongi, Minato-ku, Tokyo 106-6012

+81 3 6229 8334

Yosuke Suzaki is a partner in KPMG in Tokyo's global transfer pricing service practice who has more than 16 years of experience in transfer pricing, valuation, and economic analysis services. Out of 16 years, he had worked for KPMG in the US's transfer pricing practice in New York for two years until September 2014 to support Japanese based companies as well as other multinational companies.

He has advised clients on matters in the areas of transfer pricing planning study, TP documentation, APAs), Competent Authority, cost sharing, IGS cost allocation, and examination issues. Also, he is a specialist of valuation and economic analysis such as intangible and businesses valuation and business planning.

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