TP audit guide

An overview of the Japanese transfer pricing environment by Michael Tabart, Timothy O'Brien and Luke Tanner of Deloitte Tohmatsu Tax.

Market overview

BEPS is an ongoing issue in Japan and to manage this new environment taxpayers are focusing on their transfer pricing documentation, namely country-by-country reporting (CbCR), and also their general tax governance, including maintaining a good understanding of the compliance process, being up-to-date with new laws, and being aware of audit risk.

The revised TP documentation rule is having a huge impact on the Japanese tax market. The CbCR legislation, which also requires master file and local file, came into effect in March 2016. Practitioners have described the advanced TP documentation as "very cumbersome". "Administrative burdens for big multinationals have increased significantly," said Makiko Kawamura, head of tax at DLA Piper.

Advance pricing agreements (APAs) are also an important issue in Japan. Japanese corporations are increasingly utilising APAs to provide certainty over their transfer pricing policy, with the government encouraging them to apply to the scheme. "It is relatively easy to reach agreement with US and European countries but difficult with emerging countries," said head of tax at Grant Thornton, Yoichi Ishizuka.

Tax planning activities are gaining more media attention in light of BEPS which, combined with more complicated rules, makes some corporations reluctant to do aggressive tax planning. Although tax planning is still important for multinationals to achieve their competitiveness, the transfer pricing advisers see that the tax liability gap is becoming wider in Japan.

Tax authorities have increased the number of tax audits for transfer pricing but the taxable amount has decreased meaning that the related case is becoming smaller. This comes from the tax authorities changing their focus to smaller companies.

"Large corporates already have APA arrangements, together with documentation protection which considerably lessen challenges by tax authorities. Furthermore, traditionally, only tax auditors in regional tax bureau were involved in transfer pricing audits but now local tax offices are also involved in transfer pricing audits focusing on small taxpayers," said Ishizuka.

Advisers predict this trend of increased transfer pricing focus will continue for a while for both the authorities and the taxpayers. "Japanese corporates have a lot of experience in transfer pricing and BEPS is a continuation of that. They are just trying to follow the new rules introduced by BEPS," said Yuichi Komakine, head of tax at KPMG.

Tax authorities

National Tax Agency (Japan)
Tokyo Regional Taxation Bureau
5 Chome-3-1 Tsukiji, Chuo, Tokyo 104-8449
Tel: +81 3-3542-2111
Website: www.nta.go.jp

Tax rates at a glance

(As of January 1 2016)

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 2016 Worldwide Corporate Tax Guide

Firm contact details

Deloitte Tohmatsu Tax
Grant Thornton
Tokyo Kyodo Accounting Office