Significant changes in Japan's transfer pricing landscape
International Tax Review is part of Legal Benchmarking Limited, 4 Bouverie Street, London, EC4Y 8AX
Copyright © Legal Benchmarking Limited and its affiliated companies 2024

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Significant changes in Japan's transfer pricing landscape

Jun Tanaka and Nobuhiro Tsunoda, partners at KPMG in Japan, and Yosuke Suzaki, a senior manager, discuss the significant changes in Japan’s TP documentation requirements, the influence of tax audits in Japan, as well as the implications of the tax governance rule for taxpayers.

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 the rapid 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, they also are expanding the taxation base, including the removal of tax deductions and to shift the tax base from direct tax to indirect tax (ie 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 the tax revenue. In particular, the Japanese tax authorities pay much attention to whether the 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.

From the business environment perspective, as more companies become multinational and international, the volumes of international transactions also increase. Particularly, many Japanese companies accelerate development in their business outside of Japan. According to the statistical data released by the NTA, the number of overseas related parties of Japanese companies almost doubled to 25,000 companies from 10 years ago. Especially, they have shifted functions such as manufacturing and sales or distribution overseas, though they still have high value added functions including R&D and strategy or planning functions at their HQs in Japan.

Japanese tax authorities are concerned whether Japanese taxpayers could be remunerated for these high value added functions and risks from overseas. Considering these situations, TP audits in Japan have strengthened more than ever, focusing on intangible transactions (ie royalties) and service transactions (including management service fee). This trend in strengthening the TP audits in Japan is expected to continue in future.

Changes in tax audit and taxation

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 and intangible and service transactions have strengthened. 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, Japanese tax authorities are highly interested in whether Japanese tax payers receive reasonable compensation from these overseas entities. Thus, the rapid increase in the number of tax audit and tax assessment for transactions with foreign related parties located in these countries are one of the major characteristics in the recent Japanese TP audit.

Additionally, the scope of tax audits and TP assessments has broadened. Although large enterprises have traditionally been the primary target of TP audits, it can be observed the target of TP audits has recently shifted to medium- and smallsize companies including foreign companies' subsidiaries. According to "the outline of actual audit results for corporate tax and others" released by the NTA, the number of TP assessment cases was 240 in FY 2014 (the year ended in June 2015), which increased by 70 cases from last year. However, the TP assessment amount was JPY 17.8 billion ($173 billion), which was decreased significantly from the previous year (JPY 53.7 billion). As a result, the average TP assessment amount per case was below JPY 100 million (in FY 2014 it was JPY 74 million, but in FY 2013 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 medium- or small-size 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 FY 2011, 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-size companies. The increased number of target companies for transfer pricing audit will lead to the increase in the number of TP assessment cases and the 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 3,430 and the tax assessment amount is JPY 220.6 billion (including TP assessment) in FY 2014, which is significantly larger than the TP assessment amount as the statistics does not include any voluntary tax adjustment by tax payers. Thus, the actual number of cases and TP 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 minimise TP risk for related party transactions in advance.


In Japan, APA is one of the popular options to avoid potential TP risk and enhance predictability as well as transparency of taxation. Also, the tax audits in Japan are made periodically, and the level of tax audits are normally much in detail. 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 FY 2014, the number of APA application increased to 121 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 characteristics of APA and 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 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 (eg 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 treaty. The number of tax information exchanges is about 300,000 each year for recent the several years.

Aspect of BEPS on the Japanese transfer pricing regulations

Most of Japanese companies do not seek tax-saving scheme and tax planning proactively. They rather believe they have reported their taxable income appropriately. However, they have a strong concern about the BEPS argument. Among the 15 BEPS Action Plans, BEPS Action Plan 13 TP documentation is the area Japanese taxpayers are mainly interested in.

In order to solve international taxation issues including transfer pricing, Japanese tax authorities expressed the need to keep coordination 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 Plan 13. In Japan, there was TP documentation rule. However, not being a contemporaneous TP documentation, the old regulation listed the information, analysis and materials a taxpayer is required to submit when requested by tax authorities during a TP audit.

The new TP documentation rule based on the BEPS Action Plan 13 was introduced from (the FY 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) within one year from the fiscal year end of the parent company in electronic format, and also to prepare the Local File by the timing of a taxpayer's tax return filing date.

Many Japanese taxpayers anticipate this new rule for TP documentation will increase significant compliance burdens beyond the level presently required, which will lead to additional compliance costs. Also, many companies are concerned that the filing information may lead to the streamlining of tax audit process and significant increases of TP audits in both Japan and other foreign countries, especially due to information described in the CbC report that is electronically filed and automatically shared with foreign tax authorities. Therefore, many companies have concerns of the increase in potential double taxation risk. The BEPS Action Plan 14 "Making Dispute Resolution Mechanisms More Effective" can help for solving double taxation issues, because the introduction of the clause for implementation of mandatory binding MAP arbitration in tax treaties has been discussed as a measure to solve international double taxation issues. The Japanese taxpayers desire the clause to be introduced, expecting that the clause for implementation of MAP arbitration will significantly promote MAP and lead to resolutions of conflicts. However, receiving approval by the parliament is necessary in order for the treaty to be effective officially, but the introduction of the clause for mandatory arbitration is not necessarily agreed among the participants of the BEPS projects. Therefore, some Japanese taxpayers raise concerns for such situations.

Considering these situations, it is necessary for Japanese taxpayers to develop their group's TP policy initiated by the parent company, to prepare TP documentation, and to check the status of TP documentation at their foreign related parties, as the minimum level of the countermeasures. Especially for the companies that do not have any TP documents, the introduction of the new TP documentation rule is assumed as a good opportunity for to the preparation of TP documentation.



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 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 US.

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 spending his 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 had worked for KPMG NY 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.

more across site & bottom lb ros

More from across our site

Proposals by HM Revenue and Customs to raise standards in the advisory market are ‘well overdue’, one partner declared
An intimate understanding of a client’s sector is essential to winning new business, a survey of over 28,000 corporate counsel reveals
‘Auditors are failing to perform their core function’ according to a think tank; in other news, White & Case adds a tax partner in Luxembourg
An overhaul of EU import taxes could spell the end of an exemption for cheap parcels
Sharma, managing director for A&M in the United Arab Emirates, tells ITR about intense time pressures, mimicking Jurgen Klopp and what makes tax cool
AI will speed up some of the most laborious TP processes without making human input redundant, argues Hank Moonen, CEO of TaxModel
Firms with a broad geographic reach are more likely to win work, especially from global companies with high turnovers, according to survey data of nearly 29,000 corporate counsel
Australian businessman Gordon Merchant used EY’s advice to offset an A$85 million capital gain, according to the Federal Court
Griggs has been drafted in ahead of schedule as the incumbent Tim Ryan departs for Citigroup; while the Netherlands plans to scrap a 15% share buyback tax
Authorities must ensure that Russian firms do not use transfer pricing schemes to increase profits made from oil sold in different markets, advocacy organisations have argued
Gift this article