Latest update of transfer pricing in Japan
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Latest update of transfer pricing in Japan

By Jun Tanaka, Nobuhiro Tsunoda and Yosuke Suzaki of KPMG in Japan.

Recent changes in the business environment and the financial situation of the Japanese government have affected the Japanese taxation environment and TP regulations. From the perspective of the taxation environment, especially with the significant increase of financial deficit and additional financial expenditure for the social security system with a rapidly aging society, it becomes 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 of Japanese taxpayers, it is also expanding the taxation base, including the removal of tax deductions and shifting the tax base from direct tax to indirect tax (i.e. raise of the consumption tax rate). In the context of the above-mentioned Japanese government's efforts, the Japanese tax authorities also intend to ensure and increase tax revenue. In particular, Japanese tax authorities pay much attention to whether taxpayers located in Japan report reasonable taxable income for their functions and risks as well as whether there are any unreasonable outflows of income to overseas countries. As a result, TP is one of the hottest topics areas in Japan.

Changes to (or introduction of) local transfer pricing legislation (including regulations)

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

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

BEPS-related developments

Before preparing the local file, it is necessary to understand clearly the threshold of transaction amount. The new Japanese transfer pricing documentation rule indicates that a taxpayer engaged in either (1) Controlled transactions whose total amounts for the previous business year was JPY 5 billion ($44.8 million) or more, or (2) transactions of intangibles whose total amount for the previous year was JPY 300 million or more with one foreign-related party must prepare the local file by the deadline for submission of tax return. However, this threshold does not guarantee of exemption from the local file. Even if the above threshold is not met, taxpayers are supposed to submit their local file when the tax authority requests the local file during a tax audit. Therefore, regardless whether of the thresholds are met, it would be advised for the taxpayer to review and assess the transfer pricing risk for the overall foreign related-party transactions and prepare the local file.

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

Also, maintaining consistency is another issue. Taxpayers are expected to be consistent with the information described in the master file as Japanese tax authorities will check explanations in the local file such as the definition of the business model, value chain analysis, and intangible assets, and ensure that information corresponds with those in the master file and the CbC Report.

In addition, many taxpayers may use transactional net margin method (TNMM) as the primary transfer pricing method and simply test the overseas subsidiaries margin in the local file. However, it is important to review the profit allocation among related parties even if TNMM is the primary transfer pricing method.

Transfer pricing compliance activities by local tax administration

As a result of the shift in manufacturing and distribution functions from Japan to overseas, the number of out-out transactions conducted completely outside of Japan has increased. Consequently, the tax audit and tax assessment for such out-out transactions have strengthened. Also, the intangible transactions including royalty payment as well as services transactions are one of the major target areas at the tax audit with reflecting the arguments of the BEPS Action 8 to 10.

For Japanese companies, many foreign related parties that receive any benefit from Japanese parent's intangible assets and services are located in BRICs and other 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 are one of the major characteristics in recent Japanese TP audits.

Also, it can be observed 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 218 in FY2015 (the year ended in June 2016). However, the TP assessment amount was JPY 13.7 billion, which was continuously decreased. As a result, the average TP assessment amount per case was below JPY 100 million (in FY2015 JPY 63 million, but in FY2013 the amount per case was JPY 320 million).

This situation indicates the big cases at multinational companies have already gone around and these large companies have taken preventive measures, most commonly TP documentation and advanced pricing agreement (APA), but small and medium-sized companies might neither take such measures nor have TP documentation. Another reason will be the change in TP and tax audit procedures. In Japan, transfer pricing audits had traditionally been conducted separately from corporate tax audits, and TP audits were made separately by a specialised transfer pricing audit team in a regional tax bureau. However, as the result of the tax reform in FY2011, from January 1 2013, transfer prices have been audited as a part of corporate tax audit in principle. The corporate tax audit is regularly conducted, targeting not only large enterprises but also small and medium-sized companies. The increased number of target companies for transfer pricing audits will lead to an increase in the number of TP assessment cases and a decrease in the amount of TP assessments per case.

In addition to TP assessments, another major issue is that Japanese tax examiners often challenge to view the small amount of transactions as a donation to foreign related parties at regular tax audits. When a tax examiner finds that a transaction in which a taxpayer does not receive any remuneration or that the tax assessment amount is minimal in the process of tax audit, the tax examiner may try to regard it as a donation to foreign related parties. Similarly, some companies may be required to make voluntary tax adjustments. The survey of status of field audit for corporations engaging in overseas transactions released by the NTA reports the number of tax assessment cases is 3,362 and the tax assessment amount is JPY 230.8 billion (including TP assessment) in FY2015, which is significantly larger than the TP assessment amount statistics. In addition, since the statistics do not include any voluntary tax adjustment by tax payers, the actual number of cases and tax assessment amount resulted in double taxation in relation to the controlled transactions with foreign related parties will be considerably larger than those disclosed in the statistics by the Japanese tax authority. Considering these circumstances, the Japanese tax payers are supposed to surely take measures including TP documentation in order to minimse TP risk for related party transactions in advance.

Dispute resolution (including APAs)

In Japan, APA is one of the popular options to avoid potential TP risk and enhance predictability as well as transparency of taxation. Also, tax audits in Japan are made periodically, and the level of tax audits is normally much moredetailed. The number of taxpayers who consider filing the APA in order to minimise the burden of tax audit in relation to transfer pricing areas, to avoid TP risk, and to strengthen their compliance with regulations have increased. APAs provide such merits to taxpayers, and thus the number of APA cases is increasing. The NTA also recommends applying bilateral APA as an effective way to improve predictability. In FY2015, the number of APA applications increased to 134 cases and the number of cases closed were 100, with 330 cases still pending.

Additionally, the covering countries taking part in the bilateral APAs have increased and been diversified, which is a recent characteristic of APA/MAP in Japan. As previously described, with increasing transactions with different countries, such as BRICs and other Asian countries, as well as increasing number of TP assessment cases in relation to the transactions with related parties located in such countries, the counter party countries of Japanese tax authorities at the Competent Authorities negotiation also has become diversified. Although the most major counter-party country is the US, 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, or Hong Kong has recently increased. Considering these increases in APAs, the Japanese tax authorities enhanced their internal resources (e.g. number of employees) and expanded their network with foreign countries. Also, Japanese tax authorities have tried to gather information via information exchange schemes based on tax treaties. The number of tax information exchanges is about 300,000 each year for the past several years.

Other relevant updates

The Japanese tax authority updated international tax regulations including transfer pricing. In the 2017 tax reform, the Japanese CFC regime was extensively amended in light of the final report of Action 3 (designing effective controlled foreign company rules) of the BEPS Project.


In Japan, taxation for international transactions has been enforced for recent years. In the area of transfer pricing, since BEPS TP documentations are newly introduced and tax information described in the master file and CbC report will be shared among related countries' tax authorities, it is more important for any taxpayers in Japan to understand the tax position of all group companies, to check potential TP risk, to keep consistency of transfer pricing policy within the group, and prepare relevant files.

Jun Tanaka



KPMG in Japan

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

Tel: +81 3 6229 8322

Jun is the head of Transfer Pricing Service division of KPMG in Japan. He joined Asahi & Co. (Andersen) audit department in Tokyo in 1993 and worked extensively with a number of multi-national Japanese corporations on a wide variety of accounting issues including financial audit, IPO consulting, and due diligence. In 1996 he transferred to Andersen tax department and has engaged in transfer pricing practice. He also stationed in Los Angeles in 1998 to assist a Japanese multi-national corporation in obtaining a bilateral advance pricing agreement between Japan and the United States.

Jun advises various clients on transfer pricing audit defence, global transfer pricing documentation, implementation of transfer pricing strategies, global tax planning involving transfer pricing, 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

Tel: +81 3 6229 8040

Nobuhiro Tsunoda is a partner in KPMG Tokyo Global Transfer Pricing Services. He joined KPMG in October 2013.

Before joining KPMG, he had been in the Japanese National Tax Agency (NTA) since 1984. After spendinghis early career as a corporate tax examiner, he engaged in management reform and strategic planning as a director of taxation office. Tsunoda is experienced in policy for the Japanese accounting standards and disclosure system at the Ministry of Finance. He also worked on modernisation of tax administration in developing countries as a headquarters-based consultant at the Fiscal Affairs Department in the IMF and developed strategy to improve large taxpayers' compliance as an assistant regional commissioner. Making the full use of such rich experiences in the field of tax administration, he specialised in transfer pricing taxation and contributed to mutual agreement procedures with developed and developing countries as a competent authority, director of office of mutual agreement procedures in the NTA. He also contributed to exchange of information as a competent authority, OECD and UN, director of International Operations Division in the NTA.

Yosuke Suzaki


Senior Manager

KPMG in Japan

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

Tel: +81 3 6229 8334

Yosuke Suzaki is a senior manager in KPMG Tokyo Global Transfer Pricing Services who has more than 15 years of experience in transfer pricing, valuation, and economic analysis services. Out of 15 years, he has worked for KPMG in the US's New York transfer pricing practice 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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