While the government’s release is only indicative of its intention, and there are certain areas that need to be clarified, one area that was explicitly addressed concerns transfer pricing documentation requirements.
The Japanese tax reform proposal concerning transfer pricing documentation requirements (The Japanese Transfer Pricing Proposal), however, differs from the rules that are established in other OECD countries.
For instance, the Japanese Transfer Pricing Proposal does not require the taxpayer to have in place a transfer pricing documentation by the time of the tax return. It also does not provide specific details on the content or form of the documentation. Finally, it does not mention any specific penalty (or penalty protection) to the taxpayer for complying with the documentation requirements.
Rather, the Japanese tax authorities have the authority to presume an arm’s-length price, which usually includes the use of secret comparables, and to reassess the company’s income based on it if a taxpayer fails to submit, without delay, information and documents requested by the authorities during a transfer pricing audit.
The Japanese Transfer Pricing Proposal clarifies and stipulates the information, documentation and manner for complying with the transfer pricing rules by a taxpayer under a transfer pricing audit to avoid transfer pricing taxation. The proposal suggests that a taxpayer would be required to submit various documents and information promptly in the event of a transfer pricing audit, including those concerning the transfer pricing method selected, the reason/justification for the selection of this method and comparables analysis.
The Japanese Transfer Pricing Proposal, therefore, if enacted would codify enforcement rules relating to documentation.
Prudent taxpayers need to consider preparing for the anticipated transfer pricing documentation rules and review their existing documentation to determine if it satisfies the requirements under the 2010 amended tax laws.
Daisuke Horiguchi (daisuke.horiguchi@jp.kpmg.com) and Tats Kanenari, (tatsuhide.kanenari@jp.kpmg.com) KPMG, Japan
