TP country guide

Timothy O'Brien and Luke Tanner of Deloitte Tohmatsu Tax give an overview of TP developments in Japan.

Market overview

When the Japanese Prime Minister Shinzo Abe returned to office in 2012, his government implemented economic policies aimed at rejuvenating Japan's lacklustre economy. Policies included lowering corporation tax to 31% from 38% to increase the country's competiveness and attract foreign investment. However, Japan is a country that still faces long-term challenges. One of these challenges is an aging population that requires a social security system. However, with a lowered corporation tax, the Japanese government needs to expand its tax base in other areas. Homing in on transfer pricing is one significant way the Japanese tax authority is looking to achieve this.

On April 1 2016, the Japanese government introduced new TP rules based on BEPS Action 13. Taxpayers are now required to prepare and file the master file, the local file and country-by-country reporting (CbCR).

The Japanese government has made efforts to provide guidance and practical assistance to taxpayers concerning TP documentation. In June 2017, the National Tax Agency (NTA) published the 'Transfer Pricing Guidebook: Maintaining and Improving Voluntary Tax Compliance'. The guidebook informs taxpayers of the NTA's initiatives that came into effect shortly after in July 2017. These initiatives include the setting up of help desks across Japan and tax bureau officials visiting businesses that need advice on TP documentation. These initiatives are aimed at giving tax authorities information about any difficulties that taxpayers face when preparing TP documentation and enables the NTA to make informed assessments about the compliance process. The initiatives are intended to give confidence to taxpayers about preparing TP documentation and encourage them comply with the new reporting regime.

Tax authorities

National Tax Agency (Japan)
Tokyo Regional Taxation Bureau
3 Chome-1-1 Kasumigaseki, Chiyoda-ku, Tokyo-to 100-0013, Japan
Tel: +81 3-3581-4161
Website: www.nta.go.jp

Tax rates at a glance

(As of August 2017)

Corporate income tax rate 23.9% (a)
Capital gains tax rate 23.9% (a)
Branch tax rate 23.9% (a)
Withholding tax (b)
Dividends 20% (c)
Interest 15/20% (c)(d)
Royalties from patents, know-how, etc. 20% (c)
Branch remittance tax n.a.
Net operating losses (years)
Carryback 1 (e)
Carryforward 9 (f)

  1. Local income taxes are also imposed. The resulting effective corporate income tax rate is approximately 33% (35% for corporations with stated capital of JPY100 million or less).
  2. Except for the withholding taxes on royalties and certain interest, these withholding taxes are imposed on both residents and non-residents. For non-residents, these are final taxes, unless the income is effectively connected with a permanent establishment in Japan. Royalties paid to residents are not subject to withholding tax.
  3. Under the special law to secure funds for reconstruction related to the March 11 2011 disasters, a special additional income tax (2.1% of the normal withholding tax due) is imposed for a 25-year period running from January 1 2013 through December 31 2037. As a result, the 20% withholding tax rate is increased to 20.42%, and the 15% rate is increased to 15.315%. However, this special additional income tax does not affect reduced withholding taxes under existing income tax treaties.
  4. Interest paid to residents on bonds, debentures or bank deposits is subject to a 20% withholding tax, which consists of a national tax of 15% and a local tax of 5%. Other interest paid to residents is not subject to a withholding tax. Interest paid to non-residents on bonds, debentures or bank deposits is subject to a 15% withholding tax. Interest paid to nonresidents on national and local government bonds under the Book-Entry Transfer System is exempt from withholding tax if certain requirements are met.
  5. The loss carryback is temporarily suspended.
  6. The carryforward period of losses arising in fiscal years beginning on or after April 1 2017 will be extended to 10 years.

Source: EY 2017 Worldwide Corporate Tax Guide and Deloitte

Firm contact details

Deloitte Tohmatsu Tax
Tokyo Kyodo Accounting Office