Chapter Fifteen

Japan’s Directive on Transfer Pricing Operations

Japan’s National Tax Agency (NTA) has issued transfer pricing regulations in two parts, both the regulations themselves (the Commissioner’s Directive on the Operation of Transfer Pricing) and subsequent examples (the Reference Case Studies on the Application of Transfer Pricing Taxation; hereafter Reference Case Studies). The reader is forewarned that the Japanese transfer pricing regulations are complex compared with transfer pricing regulations in most other countries. Further, the examples address different issues from those issues the regulations raise. As a consequence, this analysis addresses Japan’s NTA’s transfer pricing regulations standing alone.

BACKGROUND

Japan’s NTA amended its Commissioner’s Directive on the Operation of Transfer Pricing on June 25, 2007. This directive serves as Japan’s Transfer Pricing Administrative Guidelines in applying the applicable transfer pricing techniques. The Japanese Transfer Pricing Administrative Guidelines take the place of the “Commissioner’s Directive on Procedure for Confirmation of Transfer Pricing Methodologies to Determine the Arm’s Length Price.” The NTA originally issued the guidelines on October 25, 1999. The 2007 Japanese Transfer Pricing Administrative Guidelines address operations that are related to Article 66-4 of the Act on Special Measures Concerning Taxation (i.e., the “Special Taxation Measures of Transactions between Corporations and Foreign-Related Persons”; hereafter referred to as ASMT).

The Japanese Transfer Pricing Administrative Guidelines are extensive, comprising 140 pages in all. These guidelines are themselves 32 pages in size, but the Japanese Reference Case Studies on the Application of Transfer Pricing Taxation that accompany the guideline examples add an additional 108 pages. When comparing the size of these transfer pricing regulations, the Japanese guidelines are second largest in length on a country-by-country basis. Only the United States transfer pricing provisions are lengthier.

The overriding purpose of the Japanese Transfer Pricing Administrative Guidelines is to provide “the proper and smooth enforcement of transfer pricing taxation.” As we shall see, some limited instances arose where the Japanese guidelines fail to meet this objective.

The NTA furnished the preceding document in the English language; it is a translation of the original Japanese-language directive. The Japanese-language original is the official text.

REGULATIONS AND THE EXAMPLES—HOW THEY DIFFER

To a large extent, the Reference Case Studies examples cover different transfer pricing issues from what the Japanese Transfer Pricing Administrative Guidelines address. We provide three specific examples. Neither the Japanese Administrative Guidelines nor the Reference Case Studies explain these disparities in focus. The three examples are:

1. Advance pricing arrangement (APA) procedural issues. The Japanese Transfer Pricing Administrative Guidelines expend a considerable amount of time and effort on addressing APA procedural issues. In contrast, the Japanese transfer pricing examples, the Reference Case Studies, put little of their attention to these APA procedural issues.
2. Cost contribution agreements (CCAs). The Japanese Transfer Pricing Administrative Guidelines devote considerable space to CCAs. In contrast, the Reference Case Studies devote comparatively little space to CCAs.
3. Residual profit split. The Japanese Transfer Pricing Administrative Guidelines devote comparatively little attention to the residual profit split transfer pricing approach. The Reference Case Studies, in contrast, devote considerable space to the residual profit split approach.

OPERATION OF THE JAPANESE TRANSFER PRICING ADMINISTRATIVE GUIDELINES

The Japanese NTA organizes the Japanese Transfer Pricing Administrative Guidelines in this manner:

  • Chapter 1: Definitions and Basic Policies
  • Chapter 2: Examination
  • Chapter 3: Points to Note in Calculating Arm’s Length Prices
  • Chapter 4: Treatment of Foreign Transferred Income
  • Chapter 5: Advance Pricing Arrangements (APAs)

CHAPTER 1: DEFINITIONS AND BASIC POLICIES

Chapter 1, Definitions and Basic Policies, comprises:

  • 1-1 Definition of Terms, 29 terms in all
  • 1-2 Basic Policies
  • 1-3 Use of Reference Case Studies

1-2 Basic Policies

Japan’s NTA enumerates three basic policies. As a general matter, Japan’s NTA expects the taxpayer to properly manage its transfer pricing tax operations, taking into consideration that the Japanese transfer pricing system is based on arm’s length principles. The basic policies place heavy reliance on the APA process itself. The three basic policies are:

1. The comparative process. Japan’s NTA will closely examine whether the prices that the taxpayer fixed for foreign-related transactions are equal to the prices that the taxpayer normally fixed for uncontrolled transactions. Japan’s NTA might find that problems exist as to these transactions. If Japan’s NTA does find that these problems do occur, the taxpayer is to make the effort to collect information regarding the market and its business. The taxpayer is to facilitate the provision of documents for these objectives:
a. Methods: The tax authority’s appropriate examination as to the taxpayer’s selection of the transfer pricing methods
b. Comparable transactions: The tax authority’s appropriate examination as to the taxpayer’s selection of comparable transactions
c. Adjustments: The tax authority’s appropriate examination as to the taxpayer’s making the adjustments for differences
2. The importance of predictability. Japan’s NTA is seeking to ensure the predictability of what the corporation achieves and is seeking to recognize the proper and smooth enforcement of transfer pricing taxation. To fulfill these objectives, the taxpayer is to undertake the APA process where the corporation submits an APA request regarding the calculation of methodologies for the arm’s length price and is to include the specific details of that APA request. The taxpayer is to submit the APA request based on the contents of the mutual agreement related to the APA request if such an agreement applies.
3. Reliance on OECD principles. It is important for the tax authorities of each country to share an understanding of transfer pricing for the purposes of resolving international double taxation issues that transfer pricing taxation causes. In light of this objective, Japan’s NTA is to conduct an examination or is to conduct an APA review in an appropriate manner by referring to the Organisation for Economic Co-operation and Development (OECD) transfer pricing guidelines as necessary.

1-3 Use of Reference Case Studies

The “Reference Case Studies on Transfer Pricing Taxation” is the supplement to Japan’s Transfer Pricing Administrative Guidelines. The Reference Case Studies examine 26 factual patterns. Most notably, the Reference Case Studies tend to point the taxpayer toward the residual profit split method in situations in which other taxing regimes might have reached a different result.

The taxpayer is to make use of the Reference Case Studies in order to assist the proper administration of transfer pricing taxation. At the same time, the taxpayer should be mindful that other cases exist as well as those cases described in the Reference Case Studies that, although similar, might be treated differently for transfer pricing purposes because these cases are based on different preconditions.

CHAPTER 2: EXAMINATION

Japan’s Transfer Pricing Administrative Guidelines contain 25 specific examination principles:

  • 2-1 Examination Policies
  • 2-2 Points To Consider when Conducting Examinations
  • 2-3 Examination of Attachment for Information on Foreign-Related Persons
  • 2-4 Documents To Be Inspected at Time of Examination
  • 2-5 Points To Note in Applying the Estimation Clause or the Rules of Inquiry and Inspection to Third Parties in the Same Trade
  • 2-6 Loans
  • 2-7 Corporations Not in the Financial Business
  • 2-8 Providing of Services
  • 2-9 Providing of Services Incidental to the Original Business Activities
  • 2-10 Treatment of Intra-group Services
  • 2-11 Intangible Properties the Examination Is To Consider
  • 2-12 Contribution to the Formation, Maintenance, or Development of Intangible Properties
  • 2-13 Transactions for Licensing Intangible Property
  • 2-14 Cost Contribution Arrangement (CCA)
  • 2-15 Treatment of Cost Contribution Arrangements
  • 2-16 Points To Consider in Relation to Cost Contribution Arrangements
  • 2-17 Use of Existing Intangible Property in Cost Contribution Arrangements
  • 2-18 Documents To Be Inspected at the Time of the CCA Examination
  • 2-19 Transfer of Money for Price Adjustments and So Forth
  • 2-20 Consideration Calculated by Foreign Tax Authority
  • 2-21 Relationship with APA Requests
  • 2-22 Transfer Pricing Taxation and the Classification Domestic/Foreign Source Income
  • 2-23 Relationship with Thin Capitalization Provisions
  • 2-24 Relationship with Withholding Tax Provisions
  • 2-25 Relationship with the Consumption Tax Provisions

2-1 Examination Policies

As a general matter, the taxpayer should take the preceding foreign-related transactions into account. The purpose of this analysis is for the taxpayer to correctly ascertain whether any problem exists in the transaction subject to transfer pricing taxation. Japan’s NTA plans to examine each case carefully in the examination process rather than providing a careful review, bearing in mind the circumstances of each transaction. The Japanese Transfer Pricing Administrative Guidelines impose three specific examination policies on the international taxpayer:

1. Variations from customary margins. Japan’s NTA plans to examine whether the taxpayer’s gross profit margin or the taxpayer’s operating margin that arise from the taxpayer’s foreign-related transactions is excessively low compared with other transactions. Japan’s NTA plans to compare these transactions with transactions the taxpayer undertakes with unrelated persons in a similar market and that are similar in quantity, market level, and other respects.
2. Low profit margins. Japan’s NTA plans to examine whether the taxpayer’s gross profit margin or the taxpayer’s operating margin, which margin arises from the taxpayer’s foreign-related transactions, is excessively low compared with the taxpayer’s gross profit margin or excessively low compared with the taxpayer’s operating margin as to other unrelated persons who are engaged in the same category of business. Japan’s NTA is to examine the similarity in quantity, market level, and other respects as to the taxpayer’s operations.
3. Functional analysis. Japan’s NTA plans to examine whether the taxpayer’s profit that arises from the taxpayer’s foreign-related transactions is relatively low compared with the foreign-related person’s profit arising from the same or similar nonrelated transactions. Japan’s NTA would make this determination in light of the functions the corporation performs or the risks the corporation assumes or the foreign-related person undertakes as to these foreign-related transactions.

Note that the Australian Tax Office uses a similar transfer audit approach to the three methods in the Japanese Transfer Pricing Administrative Guidelines.

2-2 Points To Consider when Conducting Examinations

Japan’s NTA is to examine foreign-related transactions on the basis of the final tax return the taxpayer submitted and on other materials or data that Japan’s NTA collected through examinations. This statement, standing alone, would appear to authorize Japan’s NTA to select secret comparables, at least as a beginning point when considering bringing a transfer pricing audit against a taxpayer.

Japan’s NTA is seeking to determine whether the taxpayer applied arm’s length prices. Prior to Japan’s NTA’s examination as to the arm’s length determination issue, the NTA is to conduct other facets of the tax examination. This examination includes the next two methods to determine whether any problems exist regarding transfer pricing taxation, the goal being to ensure that the Japanese NTA conducts these examinations effectively.

1. Profit margins. Japan’s NTA would verify whether the profit margin of the foreign-related transaction under examination is within the profit margin range of the uncontrolled transactions. Japan’s NTA would make this profit margin determination in the same business category and for transactions that are substantially similar to the foreign-related transactions in terms of quantity, market level, and other respects. Japan’s NTA terms this process as applying “transactions deemed comparable with the foreign-related transaction.”
2. Average values. Japan’s NTA can use the average value of the consideration or the profit margin for the foreign-related transactions, or for the transactions deemed comparable with foreign-related transactions. The Japan’s NTA can make this average value determination during a reasonable length of time, before and after such taxable year, or a consolidated taxable year. The Japan’s NTA can use this average value technique if it is inappropriate for the Japan’s NTA to examine the price of inventory and so on as to the foreign-related transactions. Japan’s NTA would make this average value determination inappropriately based only on information for each relevant year, or consolidated taxable year, due to considerable changes in prices reflecting changes in public demand, product life cycle, or other such factors.

2-3 Examination of Attachments for Information on Foreign-Related Persons

A corporation that conducts foreign-related transactions must attach Form 17-(3), “Information on Foreign-Related Persons,” to its final tax return. Alternatively, the taxpayer is to provide sufficient information on its Form 17-(3). Japan’s NTA urges the corporation to submit Form 17-(3) and to revise the information that the corporation provided when changes occur. Further, Japan’s NTA urges the corporation to obtain the most accurate information on the particulars of the transaction.

2-4 Documents to Be Inspected at the Time of Examination

Japan’s NTA expects the taxpayer to provide broad categories of documents in the event of audit. In such examinations, Japan’s NTA should ascertain whether any transfer pricing problem exists. Japan’s NTA is to obtain information as to the actual circumstances of the foreign-related transaction from documents, books and records, and other materials (referred to in 2-4 as “documents”).

1. Capital relationship. Documents that contain the capital relationship of the corporation, and of each foreign person, together with the business details:
a. Capitalization and business documents. Documents that contain the capital and the business relationship between the corporation and its affiliate(s).
b. Business history. Documents that contain the history pertaining to the major shareholders of the corporation and to the foreign-related person, together with any changes in position.
c. Financial records. Financial documents, or financial statements and reports, as to the business details of the corporation, together with corresponding documents for the foreign-related person.
d. Product lines. Documents that list the major product lines of the corporation and of the foreign-related person. The documents are to include the transaction price, the selling markets, and the market size for each such product.
e. Results and characteristics. Documents that contain the results and the characteristics of each business, the special circumstances during each taxable year, and other details of the business and the foreign-related person.
2. Calculations. Documents that the corporation uses for the calculation of arm’s length prices:
a. Selection of comparables. Documents that contain the corporation’s selection of comparable transactions, together with the details of these comparable transactions.
b. Combining transactions. In some cases, the corporation might calculate arm’s length prices by reflecting more than one transaction as a single transaction. In the event that the corporation does make that calculation, the corporation is to provide documents that report the details of each such original transaction on the basis of which the corporation makes the calculation.
c. Transfer pricing rationale. Documents that contain the reasons for adopting arm’s length price and that include any other document the corporation prepared for calculating arm’s length prices.
d. Adjustments. The corporation might make adjustments as to determining comparable transactions. In the event that the corporation does make such adjustments, the corporation is to provide documents that contain the adjustment method and the reason for making such adjustments.
3. Foreign-related transactions. Documents that contain details of the foreign-related transactions:
a. Contracts. The contracts themselves, or, alternatively, documents that contain the content of these contracts.
b. Pricing policy. The pricing policy (i.e., the documents that contain the details of price negotiations between the person and the foreign-related person).
c. Strategies. Documents that contain the details of the corporation’s business strategies or the foreign-related person’s business strategies as to these foreign-related transactions.
d. Financial statements. Documents that contain the corporation’s profit and loss statement with regard to foreign-related transactions, or documents that contain the foreign-related person’s profit statement with regard to the foreign-related person’s profit and loss statement.
e. Functions. Documents that contain the functions the corporation or the foreign-related person performed as to foreign-related transactions, or the risks that the corporation or the foreign-related party assumed as to foreign-related transactions.
f. Intangible properties. Documents that contain the details of the corporation’s intangible properties for conducting foreign-related transactions, or documents that contain the details of the foreign-related person’s intangible properties for conducting foreign-related transactions.
g. Inventory. Documents that pertain to inventory markets and so forth relating to the foreign-related transactions.
h. Inventory details. Documents containing inventory details and so on related to the foreign-related transactions.
i. Closely connected transactions. The corporation is to provide the details of transactions that are “closely connected with” the foreign-related transactions.
4. Additional material. Other documents:
a. Accounting standards. Manuals and so on that contain the corporation’s accounting standards details or contain the foreign-related person’s accounting standards details.
b. Transfer pricing details. Documents that contain the details of the transfer pricing examinations or APA, that details the foreign tax authorities conducted as to the foreign-related person.
c. Documents prepared by the foreign-related person. The foreign-related person might prepare a document, pursuant to the rules of the foreign-related person’s jurisdiction, which require the foreign-related person to prepare appropriate documents for supporting the effectiveness of the system (i.e., the Documentation Rules). The foreign-related person must provide any such prepared document.
d. Additional documents. Other documents, as necessary.

2-5 Points to Note in Applying the Estimation Clause, or the Rules of Inquiry and Inspection to Third Parties in the Same Trade

Japan’s NTA might request the corporation to present or submit documents, books, records, or copies. Section 2-5 refers to this request as “documents prescribed in Paragraph 7.” Japan’s NTA can request the corporation to provide these documents “without delay.” ASMT Article 66-4 applies if the corporation in fact fails to provide the Paragraph 7 documents without delay. Such a delay could cause the taxpayer to be subject to Paragraph 7, the Estimation Clause, or the delay could cause the taxpayer to be subject to Paragraph 9, the Rules of Inquiry and Inspection to Third Parties in the Same Trade. These three points are to be noted in applying these delay rules:

1. The “without delay” standard. When Japan’s NTA requests the corporation to present or submit the Paragraph 7 documents, Japan’s NTA is to explain to the corporation that ASMT Paragraph 7 or ASMT Paragraph 9 would apply if the corporation fails to present or submit these documents without delay. Japan’s NTA is to record the fact that it provided this explanation to the corporation and is to record the manner in which the corporation presents or submits the documents after receiving such explanation from Japan’s NTA.
2. Timing issues impacting the “without delay” standard. Japan’s Transfer Pricing Administrative Guidelines do not directly address the scope and timing of the “without delay” standard. Instead, Japan’s Administrative Guidelines provide that Japan’s NTA will determine whether the corporation furnished, presented, or submitted the Paragraph 7 documents, doing so “without delay,” in light of the time period “normally required” for such a corporation to submit or present such documents.
3. Selecting comparative transactions. The corporation might select an uncontrolled transaction for comparative purposes, pursuant to ASMT Directive 66-4(2)-1, as recognized by applying the provisions of ASMT Article 66-4(9). In the event that the taxpayer might make such a selection of the uncontrolled transaction, Japan’s NTA should inform the corporation about the content of the comparable transaction and should inform the corporation as to the method of making an adjustment for such differences. After Japan’s NTA provides such an explanation to the corporation, it is to pay attention to the Article 163 provisions, the Confidentiality of Staff provisions within the Corporate Tax Act. Japan NTA should then record the making of that explanation to the corporation.

2-6 Loans

The taxpayer should note these two points when Japan’s NTA examines intercompany loans:

1. Interest-free loans. Corporate Tax Act 9-4-2 addresses loans the corporation makes to its subsidiary without charging interest to this subsidiary. The taxpayer is to treat these transactions as being legitimate transactions under the transfer pricing tax provisions.
2. Maturity date. The corporation might not know the maturity of a foreign-related transaction. In that event, the corporation is to reasonably calculate the period of the loan in light of the purpose of the loan.

2-7 Corporations Not in Financial Businesses

Japan’s NTA might conduct examinations on lending and borrowing activities of a foreign-related person. Japan’s NTA can undertake this examination approach in cases where neither party is engaged in lending or investment activities as a core business. Similarly, Japan’s NTA can undertake this examination approach in cases where ASMT Directive 66-4(6) is not applicable. In such examination situations, Japan’s NTA is to examine the appropriateness of the interest applied to the lending or borrowing. Japan’s NTA is to treat the interest rate, being calculated as described next, as the arm’s length interest rate:

1. Normal interest rate. The interest rate that would normally apply to the loan. This normal rate assumes that the lender involved in the foreign-related transaction made the loan from an unrelated bank under similar conditions in terms of currency, borrowing date, and borrowing period.
2. The “funds involved” provisions. The interest rate that would normally be earned in the funds involved in the foreign-related transaction. This analysis presupposes that these funds were invested in government securities or the like under “similar conditions.” Japan’s NTA is to measure “similar conditions” in terms of currency, transaction date, and transaction period. The provisions in (2) do not apply when the interest rate is set in (1) above.

Note that the presence or absence of a loan’s conditional relationship with the foreign-related transaction is not relevant when the interest rate is set forth in (1) above. The presence or absence of a loan’s conditional relationship with the foreign-related transaction is not relevant where the bank and/or other lender makes the loan in the foreign-related transaction under “similar conditions,” as set forth in (1).

2-8 Providing of Services

Note these two points when examining the providing of services:

1. Intangible issues. In some cases, the provider of services might be using intangible properties in providing services. Nevertheless, such a provider of services does not include the consideration for using intangible services in establishing a price for providing these services. Japan’s NTA might examine whether the provider of services uses intangible properties when that provider of services provides such services. Nevertheless, Japan’s NTA views the providing of services and the use of intangible properties as being conceptually distinct. The taxpayer needs to consider whether the intangible properties that the service provider provides when rendering services correspond to the intangible properties as set forth in ASMT Directive 66-4(2)-3-(8). Further, the taxpayer needs to consider what effect the providing of services has on the service recipient’s activities and functions.
2. Services in conjunction with property transfers. In some cases, the provider of services might render its services in conjunction with the transfer and so on as to the transfer of tangible assets or to intangible properties. The provider of services might value the consideration of tangible property and intangible property in the price of such transfers and so on as to such properties.

2-9 Providing Services Incidental to the Original Business Activities

ASMT Directive 66-4(6)-5 applies to the service provider’s providing incidental services to the corporation’s original business activities with the foreign-related person. In cases where ASMT Directive 66-4(6)-5 does not apply, Japan’s NTA should examine whether the consideration for rendering such services is appropriate, assuming the gross cost for rendering such services is an arm’s length price.

Japan’s NTA defines “incidental services” in this manner: Services that are incidental to the original business activities means the services rendered by the service provider, whether the service provider renders these services incidentally, or whether these services are related to the original business activities of the corporation or a foreign-related person. These preceding definitional provisions apply so long as the recipient is not principally engaged in providing services. As an example of a taxpayer subject to the incidental services provisions, a corporation imports products from its foreign subsidiary and provides technical guidance regarding the manufacturing facilities of the foreign subsidiary.

Japan’s NTA defines the “gross cost” for providing services. This gross cost includes, as a rule, the direct expenses related to the services themselves but also includes indirect expenses. “Indirect expenses” include the general and administrative expenses of the department in charge or any assisting department. The taxpayer is to calculate these expense amounts in accordance with reasonable distribution standards.

As a rule, Japan’s NTA judges whether the taxpayer provides incidental services based on the taxpayer’s underlying purpose of rendering such services. Nevertheless, the taxpayer is not to treat the gross cost incurred in providing services as the arm’s length cost if either of two situations apply:

a. Considerable portion. The cost that the taxpayer incurs for providing services accounts for a considerable portion of the corporation’s or the foreign-related person’s costs or expenses for the taxable year during which the service provider renders such services.
b. Use of intangible properties. The taxpayer uses intangible properties for providing services or for similar reasons. For that reason, it is inappropriate for the taxpayer to treat the gross cost, which would include intangible costs, as the consideration for services standing alone.

2-10 Treatment of Intragroup Services

Japan, similar to Singapore and the United States, focuses heavily on intragroup services:

  • Commercial value standard. Japan’s NTA applies the “transactions having commercial value” standard for intragroup services. As such, all transactions having commercial value between a corporation and its foreign-related persons come within the scope of these provisions. Japan’s NTA is to conduct transfer pricing examinations bearing in mind that these services have commercial value: services regarding management, finance, business, and administration (see the following list). The intragroup services could apply where corporation performs such services for the foreign-related person or where the foreign-related person performs such services for the corporation. The intragroup services could apply where the foreign-related person would need to acquire such services from unrelated persons by paying consideration for these services itself. Alternatively, the foreign-related persons could perform these activities by themselves if the corporation does not perform these activities by themselves in its ordinary course of business.
  • Intragroup services. These include:
    • Planning and/or coordination
    • Budgeting and/or budgetary control
    • Accounting, tax, and/or legal services
    • Credit management and/or factoring
    • Operation, maintenance, and/or computer network management
    • Cash flow supervision and/or solvency
    • Investing and/or raising of funds
    • Interest management and/or exchange rate risks
    • Assistance as to production, purchase, distribution, and/or marketing
    • Recruiting and/or staff training
  • Staffing and equipment. The corporation might continuously maintain staff and equipment, where that staff and equipment are ready to perform services for foreign-related persons, doing so on request and at any time. In such case, maintaining this state of readiness is itself a service. As a result, Japan’s NTA can examine these services during transfer pricing examinations, conducting these examinations based on the respective conditions.
  • Foreign-related persons and duplication of services. Foreign-related persons might acquire some services from unrelated persons or the foreign-related persons might perform such services for themselves. Such services that the corporation duplicates for the foreign-related persons do not have “commercial value.” The corporation is not to include such duplicate services in the foreign-related transactions. Exceptions apply when the duplication of services is only temporary or where the corporation undertakes the duplication to reduce the risk of a wrong business decision.
  • Stewardship. Services that the corporation performs in its capacity of being the parent company for the foreign-related person that pertain to intragroup services do not have commercial value. The corporation is not to include these activities as foreign-related transactions. This treatment applies to activities such as the meeting of shareholders of the parent company or complying with legislative-based reporting requirements. These activities are not the type of activities that foreign-related persons would acquire from unrelated persons by payment or activities the foreign-related persons would perform for themselves if the corporation did not perform these activities by themselves. The taxpayer is to determine if the activities have commercial value or not, whether the taxpayer includes these activities in the activities the parent company performs in its capacity as shareholder, or whether the taxpayer is monitoring the services included as intragroup services.

2-11 Intangible Properties the Examination Is To Consider

Japan’s NTA is to determine under audit how intangible properties contribute to the income of the corporation or of the foreign-related persons. Japan’s NTA is to comprehensively consider properties such as the following ones that have material value and serve as a source of income:

a. Patents and trade secrets. Patents and trade secrets the corporation or the foreign-related person derives from technical innovation.
b. Know-how. Know-how that employees derive from experience together with human resources, the corporation or the foreign-related person derives from business activities such as management, front-office operations, production, research and development (R&D), and sales promotion.
c. Other functions. Production processes, negotiation procedures, development, distribution, and financing networks.

Japan’s NTA is to determine whether the intangible property of the corporation or the intangible property of the foreign-related person serve as a source of income. In this case, it is possible for Japan’s NTA to identify a corporation that, without having intangible properties, serves as a source of income among corporations engaging in the same category of business as the foreign-related transaction and having similar markets and scales of operation. Japan’s NTA is to make a comparison based on the profit margin or similar indices of the foreign-related transactions of the corporation or of the foreign-related person and profit margin of the corporation without having such intangible properties. Japan’s NTA is also to examine the activities, functions, and so forth in relation to the creation of the intangible properties of the corporation or of the foreign-related person. See note 2–8(1) regarding the relationship between the provider of services and provider of intangible properties in cases where the taxpayer uses intangible properties when providing services.

2-12 Contribution to the Formation, Maintenance, or Development of Intangible Properties

When Japan’s NTA examines licensing transactions that pertain to intangible properties, Japan’s NTA is to take into account the legal ownership of the intangible properties and also take into account the degree of contribution the corporation or the foreign-related person makes to the activities for the formation, maintenance, or development of the intangible property. In assessing the degree of the contribution to the activities for the formation, maintenance, or development of the intangible property, Japan’s NTA is to comprehensively take into account the functions that the corporation or the foreign-related person performed. These functions include, for example, decision making, the rendering of services, the bearing of costs, and risk management.

Japan’s NTA is to evaluate the extent of the contributions that each party makes. Japan’s NTA is to assess the contribution made by a corporation as being low when the corporation or the foreign-related person bears the cost of formation and so on of the intangible properties that are expected to be the source of income.

2-13 Transaction for the Licensing of Intangible Property

There might be situations in which either a corporation or a foreign-related person is using the intangible property owned by either of them without having an agreement concerning its use. In that event, the parties are to calculate the arm’s length amount of this transaction as a licensing arrangement except in situations in which the transaction is a transfer transaction.

The parties are to determine the commencement date of the licensing of the property from one of three dates: the date when the parties concerned provided the intangible property, the date when the use of intangible property began, or the date at which the party recorded the profit. The parties, in establishing a commencement date, might want to consider examples of transactions between nonrelated parties.

2-14 Cost Contribution Arrangement (CCA)

A cost contribution arrangement (CCA) is a contract to share the costs that the parties require. The activities giving rise to these costs must be necessary to achieve a common purpose. Such common purpose can include the development of a specific intangible property. These activities include R&D taking place between the contracting parties, known as participants. The purpose of engaging in a CCA is to obtain the interest of the outcome yielded from activities such as from R&D. The taxpayer is to determine that interest in accordance with the proportion to the total amount of the expected benefit the participant expects. The participant expects its proportion of the benefit to increase or decrease by the new outcome that activities such as R&D create.

These relationships fall under the CCA definition:

  • Contract. A contract takes place to share the costs that participants require for the development of the manufacturing technology between the corporation and the related person.
  • Expected benefit. The participants would then use the expected proportion of benefit, calculated on the basis of the expected benefit that the participants would enjoy through the sale of the new products the corporation and the foreign-related person would manufacture.
  • Technology. This CCA makes reference to the manufacturing technology concerned, doing so to obtain the interest of the new intangible property that the participants yield from the development of manufacturing technology.
  • Cost determination. The participants are to make that cost determination in accordance with the costs that the participants are to share.

2-15 Treatment of the CCA

CCAs include:

1. Adjustments. CCAs include adjustments made to the cost contribution amount.
2. Acquisitions of CCA interests. CCAs include the acquisition of a CCA interest, such as a buy-in payment, that the corporation and the foreign-related person conclude.
3. Measures of benefits. CCAs include cases where the CCA recognizes the expected proportion of benefit to be excessive compared with an appropriate portion.

Sections 2-16 and 2-18 determine the participant’s proportion. The corporation cannot deduct the excessive amount for tax purposes because this excessive amount exceeds the arm’s length price.

As a general matter, a cost that the corporation shares must treat this cost in accordance with the corporate tax laws and regulations. Consider the treatment of entertainment expenses and so forth. The corporation incurs R&D activities, but these R&D activities constitute entertainment. Pursuant to ASMT Article 61-4(3), the corporation can deduct the amount of shared entertainment expenses based on the proper expected proportion of the benefit and subject to expense limitation rules of ASMT Directive 61-4(1)-23(1), “Methods of the Expenditure of Entertainment Expenses and So Forth.” This same procedure applies to the calculation of nondeductible expenses.

2-16 Points To Consider in Relation to the CCA

Japan’s NTA is to examine whether the amount of cost contribution is appropriate when a corporation concludes a CCA with a foreign-related person. Japan’s NTA is to take these points into consideration:

a. Range of activities. Whether the participants clearly define the range of activities, such as R&D, and provide the content concretely and in detail.
b. Expected benefits. Whether all participants are expected to enjoy benefit of the CCA directly by using the outcome the participants yield for themselves as to R&D activities.
c. Research and development. Whether each participant has determined the amount of cost to be shared by allocating the total amount of costs required for R&D activities. The participants are expected to allocate the proportion of the costs and benefits, based on estimated benefits.
d. Estimation measures. The participants can estimate benefits by using the sales amount, the gross margin amount, the operating profit amount, the volume of production or sales, and so forth. In some cases, it will be difficult for Japan’s NTA to estimate these benefits. Japan’s NTA permits participants to estimate the outcome that these activities yield, such as through R&D.
e. Benefits and functions. Whether Japan’s NTA reviews the expected proportion of benefits in accordance with the functional standards that the NTA itself created.
f. Expected and realized benefits. A difference can occur between the participants’ expected proportion of benefits and the realized proportion of benefits. This difference can be significant. The “proportion of benefits realized” means the proportion of increased earnings or decreased costs for each participant. The “proportion of benefits utilized” is based on the outcome the participants yielded as to activities such as R&D compared with the total realized benefit that each party receives.
g. New entrants. There might be situations in which a participant joins the CCA as a new entry or a party leaves the CCA. The presence of intangible property might be more relevant in that situation, whether the participants evaluate the intangible property at the time of new entry or withdrawal. Japan’s NTA should consider whether the new participant pays for its buy-in payment or whether the participant shares the payment in proportion to the payments made by other participants.

2-17 Use of Existing Intangible Property in the CCA

Existing intangibles are treated in a different manner from the acquisition or development of the intangible. A participant might use such an existing intangible property for activities such as R&D within the CCA. The procedure discussed herein does not apply when the participant acquires or develops intangible property through the CCA.

Japan’s NTA is to examine whether the participant who owns the existing intangible property has received the arm’s length royalty or whether the participant has developed the cost share, assuming the participant has shared such amount. This procedure does not apply when a participant recognizes the transfer of the intangible property to other participants. Nor does this procedure apply when the participant acquires or develops intangible property through the CCA.

A corporation might conduct development activities and so forth by itself in relation to activities such as R&D within the CCA framework. Additionally, the realized benefit of the foreign-related participant might markedly exceed the foreign-related participant’s expected benefits. In these situations, Japan’s NTA must examine whether the corporation uses the existing intangible property for activities such as R&D. The points in the principal clause for conducting development apply for purposes of this examination.

2-18 Documents To Be Inspected at the Time of CCA Examination

Japan’s NTA is to obtain accurate information as to actual circumstances of the foreign-related transaction from documents and from other items listed in Section 2-4 in examinations. When Japan’s NTA applies CCA techniques, Japan’s NTA should determine whether there are any transfer pricing taxation problems by requesting that the taxpayer submit CCA documents. Such CCA documents describe the scope and content of the R&D activities. These documents include:

1. Documents prepared at closing. Documents that the participants prepared at the time of concluding a CCA:
a. Basic documents. Documents that describe the name, address, capital relations, description of the business, and other information as to the participants.
b. Negotiation documents. Documents that describe the details or the negotiation or consultation that led to the participant’s conclusion of the agreement.
c. Benefit sharing. Documents that describe the method of calculating the expected proportion of benefits and the reason why the participants use such a method.
d. Accounting standards. Documents that describe the participant’s accounting standard for calculating the amount of the costs being shared and the expected benefit.
e. Adjusted amounts. Documents that describe the details of adjusting the amount of costs shared in the case where there is a difference between the realized proportion of benefit and the expected proportion of benefit.
f. Valuation details. Documents that describe the valuation details as to the intangible property and so on, in cases where any new participation or a withdrawal takes place.
g. CCA details. Documents that describe the CCA details in relation to the modification of contractual terms and conditions; the revision of the CCA; or the termination of the CCA.
2. Documents prepared after closing. Documents prepared after the conclusion of the CCA:
a. Participant cost breakdown. Documents that describe the total amount of the cost and the breakdown for activities such as R&D; the costs shared by each participant and the calculation process.
b. Differences between expected benefits and actual benefits. Documents that describe the extent of the difference between the expected benefit proportions and the realized benefit proportions; providing this information as to activities such as R&D.
c. Share participation. Documents that describe the change in the share of each participant in the intangible property and so forth. The participants form the CCA through activities such as R&D. The participant is to include changes through the valuation method as to the intangible property and so forth that the participants form through activities such as R&D.
3. Additional documents. Other documents include:
a. Intangible property. Documents that describe the content of the intangible property; details of calculating the royalty in cases where an intangible property is used in activities such as R&D.
b. Nonparticipants. Documents that describe the name, address, and other particulars of those who are scheduled to make use of the outcome for the activities such as R&D, but where such parties do not participate in the CCA.

2-19 Transfer of Money for Price Adjustment and So Forth

Japan’s NTA will closely examine cases where a corporation transfers money back and forth with a foreign-related person nominally for the purposes the pricing adjustment. Japan’s NTA retains this priority whether the corporation and the foreign-related party in fact make this adjustment for adjusting transfer prices or not.

2-20 Consideration Calculated by Foreign Tax Authority

Since the laws of Japan apply in computing arm’s length prices only in Japan, the taxpayer should not necessarily assume that a foreign tax authority would view transfer pricing taxation in Japan as its determination of the arm’s length price. A mutual agreement between the countries and taxpayers might change the situation (i.e., creating a common approach in determining arm’s length pricing).

2-21 Relationship with APA Requests

The Japanese tax authorities clarify the APA process:

1. No interruption. An APA request does not interrupt the tax examination.
2. Tax examinations are separate. Japan’s NTA cannot use the documents it received from the corporation as an applicant for the APA unless the corporation gives its consent for the use of such materials.

2-22 Transfer Pricing Taxation and the Classification of Domestic/Foreign Source Income

Japan’s NTA might apply Article 69(1) of the Foreign Tax Act within the Corporation Tax Act at the same time as Japan’s NTA examines the corporation’s transfer pricing taxation. Japan’s NTA calculates the creditable amount of foreign tax after deciding whether the increased income that arises through the transfer pricing audit is domestic source or is foreign source. Japan’s NTA applies Domestic Source Income provisions of Article 138 of the Corporation Tax Act and applies the Details of the Scope of Domestic Source Income provisions of Article 140 of the Corporation Tax Act, inclusive.

2-23 Relationship with Thin Capitalization

Japan’s NTA might apply the Special Rules for Interest on Indebtedness Pertaining to Foreign Controlled Stockholders, ASMT Article 66-5, together with applying transfer pricing taxation in tax examinations. In that event, the taxpayer cannot apply the portion of the interest on borrowed funds that exceeds the arm’s length price when calculating the interest on borrowed funds.

2-24 Relationship with Withholding Tax

In some cases, as a result of a tax examination, Japan’s NTA might identify any difference for the purpose of levying the corporation tax as to the amount of interest or the amount of royalty the corporation paid to the foreign-related person and the arm’s length price. Such a difference does not affect the interest or the amount of royalty subject to withholding tax. Treaties with some countries do not permit reduced tax rates in those circumstances.

2-25 Relationship with Consumption Tax

As a general matter, transfer pricing taxation covers the application of the Corporate Tax Act and other laws related to corporation tax. A transfer pricing tax audit does not affect the calculation of consumption tax.

CHAPTER 3: POINTS TO NOTE IN CALCULATING ARM’S LENGTH PRICES

Chapter 3 provides for seven specific points in making adjustments for these differences:

  • 3-1 Method for Adjusting Differences
  • 3-2 Selection of Comparable Transactions for Foreign-Related Transactions with Use of Intangible Properties
  • 3-3 Calculating Arm’s Length Prices for Some Comparable Transactions
  • 3-4 Treatment of Common Expenses in the Profit Split Method
  • 3-5 Treatment of the Residual Profit Split Method
  • 3-6 Selling and General Administrative Expenses in Applying the Transactional Net Margin Method
  • 3-7 Points To Note Concerning the Treatment of Taxation by Estimation

3-1 Method for Adjusting Differences

The taxpayer can adjust differences between a foreign-related transaction and a comparable transaction. The taxpayer can make the adjustment by applying the method described below according to the circumstances of each case. The taxpayer can adjust for the differences if it is objectively clear that such differences would have an impact on:

  • ASMT Article 66-4(2) item 1(a) as to the calculation of the consideration
  • ASMT Article 66-4(2) item 1(b) and ASMT Article 66-4(2) item 1(c) as to the determination of the profit margin
  • ASMT 39-12(8) item 2 of the Cabinet Order and ASMT 39-12(8) item 3 of the Cabinet Order on the calculation of the percentage, by the same method given in ASMT Article 66-4(2) item 2(a)

As to adjusting these four differences:

1. Trade terms. The trade terms for one transaction might be free on board (FOB) and the trade terms for the other transaction might be cost, insurance, and freight (CIF). When that difference applies, the taxpayer is to add or deduct the amount of freight or insurance from the consideration of the comparable transaction.
2. Payment period. There might be a difference between the foreign-related transaction and a comparable transaction as to the period of payment. When that time period exists, the taxpayer is to add or deduct the amount of interest that accrues during that period as to consideration of the comparable transaction.
3. Discount or rebate. The trade terms for a comparable transaction might specify the discount or rebate according to the quantity of the transaction. In that event, the taxpayer is to use the consideration that results from the application of the terms, such as the discount or the rebate of the comparable transactions as to the quantity of the foreign-related transaction.
4. Function and risk. In some cases, there might be differences as to function or as to risk. In such an event, the taxpayer is to measure the extent of such function or risk by the amount of expenses the parties incur as to the foreign-related transaction and the comparable transaction. The taxpayer is to adjust that difference using the percentage of the amount of the above-mentioned expenses to total sales, or to sales cost, that relate to foreign-related transaction and the comparable transaction.

3-2 Selection of Comparable Transactions for Foreign-Related Transactions with the Use of Intangible Properties

A corporation or a foreign-related person might engage in foreign-related transactions involving the use of intangible properties pursuant to ASMT Directive 66-4(2)-3. In that situation, the taxpayer should consider the similarity of intangible properties in terms of type, scope, mode of use, and so forth when selecting comparable transactions.

3-3 Calculating Arm’s Length Prices for Some Comparable Transactions

The taxpayer can apply a mean of prices or a mean of margin profits from comparable transactions if such comparable transactions are so similar. ASMT Directive 66-4(2)-3 describes the factors that make comparable transactions so similar.

3-4 Treatment of Common Expenses in the Profit Split Method

Japan’s NTA applies a “reasonable factors” approach for common expenses in splitting profits. The term “common expenses” means cost of sales, together with general, administrative, and selling expenses incurred in connection with both the foreign-related transaction and with other expenses. Japan’s NTA permits the taxpayer to treat the costs of goods (cost of sales) as an expense that the taxpayer could treat as a general expense. Note that many other countries, including the United States, directly tie the cost of goods sold to the product being sold rather than treating this amount as an expense.

The taxpayer might include common expenses (i.e., the cost and expenses of the corporation or its foreign-related person) for purposes of determining the profit to be split pursuant to ASMT Directive 66-4(4)-1. The taxpayer is to divide the costs and expenses in accordance with the proportion of reasonable factors. The taxpayer is to regard the reasonableness of these factors in light of the content of the transactions and the nature of these expenses. The taxpayer is to take into account such factors as sales, cost of sales, value of the assets the taxpayer uses for these transactions (i.e., the number of employees involved in the transactions, etc.). The taxpayer calculates the common expenses based as above when it calculates the factors the taxpayer is to use for attributing profits to be split. The OECD permits multinational enterprises and tax administrations to address common expenses in a similar manner. See OECD, Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, July 2010 2.124–2.126.

3-5 Treatment of the Residual Profit Split Method

The profit split method pertains to “ordinarily gained profit” obtained from “the profit to be split” where unrelated persons do not possess these material intangibles. When the taxpayer applies the residual profit split method, as prescribed in ASMT Directive 66-4(4)-5, the taxpayer is to calculate this profit split amount based on profit indices. Such profit indices include ratios, such as the ratio of operating profit to the value of the business assets or the ratio of operating profit to the sales of the corporation. Such analysis does not include a corporation that has material intangible assets. The prerequisite for applying the residual profit split method is that the taxpayer must be engaged in the same category of business as the foreign-related person and the company the corporation applies for comparative must be similar in market size or scale of operation to the foreign-related person. The OECD permits multinational enterprises and tax administrations to address residual analysis in a similar manner. See OECD, Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, July 2010 2.121–2.123.

3-6 Selling and General Administrative Expenses in Applying the Transactional Net Margin Method

The Japanese Transfer Pricing Administrative Guidelines define the term “selling and general administrative expenses for selling the inventory concerning the foreign-related transaction” to contain the direct cost of selling and the indirect cost of selling in computing arm’s length prices using the transactional net margin method. Costs can arise from both foreign-related transactions and from other transactions. In such an event, the taxpayer is to divide these costs according to a rational ratio in light of the contents of both transactions and the nature of such expenses. Such a ratio might include, for example, sales, cost of sales, value of assets, and the number of employees, according to the format of the individual transaction.

3-7 Points to Note Concerning the Treatment of Taxation by Estimation

The Japanese tax authorities recognize that transfer pricing is not an exact science and that some transfer pricing facets can be time-consuming. As a result, the Japanese tax authorities permit the taxpayer to undertake estimation techniques:

1. Estimation methods. The taxpayer might apply the estimation method set forth in ASMT Cabinet Order Article 39-12(12) item 1. When the taxpayer does apply this method, the taxpayer is to apply ASMT Directive 66-4(4)-1 through ASMT Directive 66-4(4)-5 inclusive with the matters or things being the same but altered when necessary. The taxpayer is to allocate in principle the operating profit or a corresponding sum to the corporation and to foreign-related persons by splitting the profit according to factors provided. The operating profit or the corresponding sum arise from business involving foreign-related transactions according to financial documents that describe the consolidated assets and the profit and loss situation of the business group to which the corporation and the foreign-related person belong.
2. Operating profit. Note that, in some cases, the taxpayer might not separate the operating profit when the operating profit arises from business involving foreign-related transactions, measured according to consolidated financial statements. In that event, the taxpayer can apply an estimation approach, calculating the operating profit arising from the business involving foreign-related transactions. The taxpayer can allocate the operating profit by proportion of (b) to (a):
a. Degree of contribution. Factors that are sufficient to estimate the degree of contribution of the business group to the generating of the operating profit from the business group, including businesses involving foreign-related transactions.
b. Factors. Factors, among those factors specified in (a), above, that are sufficient to estimate the degree of contribution made by the business involving such foreign-related transactions.
3. Manner of applying the estimation method. When the taxpayer applies the estimation method set forth in ASMT Article 39-12(12) Cabinet Order item 4, the taxpayer is to apply ASMT Directive 66-4(5)-1 with the matters or things being the same but altered when necessary.

CHAPTER 4: TREATMENT OF FOREIGN TRANSFERRED INCOME

Three specific provisions apply to the treatment of foreign transferred income:

  • 4-1 Treatment of the Refund of Foreign Transferred Income
  • 4-2 Treatment of the Refund of Foreign Transferred Income with Corresponding Adjustment
  • 4-3 Treatment of Amounts Refunded to Foreign-Related Persons with Corresponding Adjustment

4-1 Treatment of the Refund of Foreign Transferred Income

A corporation might have submitted a refund request pursuant to ASMT Directive 66-4(8)-2, but the corporation did not receive all or part of the refund stated in that document by the scheduled date. Japan’s NTA will determine whether the corporation’s refund application is appropriate, examining whether there is any reasonable reason for not providing a refund. The corporation might inquire about the form of the document prescribed in ASMT Directive 66-4(8)-2; Japan’s NTA is to inform the corporation that it can use the “Application for Refund of Foreign Transferred Income.”

4-2 Treatment of the Refund of Foreign Transferred Income with Corresponding Adjustment

The foreign tax authority might have imposed tax on a foreign-related person under a system that corresponds to transfer pricing taxation. The tax authorities might reduce the corporation’s taxable income by reason of corresponding adjustment based on a mutual agreement. The corporation might have remitted the entire amount reduced to the foreign-related person. The corporation cannot deduct the remitted amount from its taxable income.

4-3 Treatment of Amounts Refunded to Foreign-Related Persons with Corresponding Adjustment

The corporation might be able to reduce its taxable income by reason of its corresponding adjustment based on mutual agreement. Such a corporation might possibly remit the entire amount so related to the foreign-related person within a reasonable period or remit part of the amount so related to the foreign-related person within a reasonable period. Such a corporation is to request a correction to its tax return pursuant to the provisions of Article 7(1) of the Act on Special Provisions for the Enforcement of Income Tax Conventions, “Special Measures for Correction in the Case of Agreement Based on Income Tax Convention Concerning the Amount of Compensation for Transactions.”

The corporation is to report the next particulars in writing, using the Notification Regarding Refund of Foreign Transferred Income with Corresponding Adjustment, appended Form 7. The corporation is to submit this notification to the District Director or submit this document to the Regional Commissioner in the case of a corporation the regional tax bureau handles. The foreign-related person is to treat the amount to be refunded as an account payable.

The corporation is to provide this information:

a. Name of the corporation
b. Place of tax payment
c. Name of the representative
d. Name and location of the foreign-related person
e. Scheduled date of the refund
f. Amount of the refund, together with the amount in foreign currency in the case of transactions in foreign currencies
g. Method of refund

The amount that the corporation reports as a refund as to a transaction in foreign currency is to be the yen equivalent. The corporation is to determine the yen equivalent in accordance with the provision of the Corporate Tax Act Directive 13-2-1-2, “Transactions in Foreign Currencies and Yen Conversions by the Accrued Calculation Method.” The corporation is to include its gross revenue or loss in the taxable year on the day in which the refund falls (i.e., the difference between the “Transactions in Foreign Currencies and Yen Conversions by the Accrued Calculation Method” and the yen equivalent converted by using the foreign exchange buying and selling rate on the day of the refund).

CHAPTER 5: ADVANCE PRICING ARRANGEMENTS

Japan’s Transfer Pricing Administrative Guidelines address these issues pertaining to APAs agreements:

  • 5-1 APA Policies
  • 5-2 Filing Request for the APA
  • 5-3 Documents the APA Applicant Is To Attach
  • 5-4 Translation of Attached Documents
  • 5-5 Revision of APA Requests
  • 5-6 Forwarding APA Requests and So On
  • 5-7 Taxable Years To Be Confirmed
  • 5-8 Amendments to APA Requests
  • 5-9 Withdrawal of APA Requests
  • 5-10 Pre-Filing Consultations
  • 5-11 Review of APA Requests
  • 5-12 Mutual Consultations Relating to an APA
  • 5-13 Coordination of the RTB Division in Charge, the NTA, and the Office of Mutual Agreement Procedures
  • 5-14 In the Case where an APA and the Performance of an APA Process Are Not Appropriate
  • 5-15 Notification of the Results on an APA Review
  • 5-16 Effect of the APA
  • 5-17 Submission of Reports
  • 5-18 Treatment of Reports
  • 5-19 Compensating Adjustments
  • 5-20 APA Revisions
  • 5-21 APA Cancellations
  • 5-22 APA Renewal
  • 5-23 Applying the TPM to Tax Years Prior to the Confirmed Years
  • 5-24 Application to Transactions between the Head Office and the Branches
  • 5-25 Treatment of the Corporation’s Entry into the Consolidated Corporation Group

5-1 APA Policies

The purpose of the APA policy is to ensure the predictability of transfer pricing taxation for corporations and to assist the proper and smooth enforcement of transfer pricing taxation. In light of that objective, the tax authorities are to conduct APA reviews in a manner that is balanced, accurate, and swift, according to the complexity and importance of each case, while paying full consideration to ensure taxing rights of Japan.

Corporations are eligible to initiate appropriate pre-filing consultations in order to improve the convenience of the APA procedure and to expedite the APA procedure.

5-2 Filing Requests for the APA

Japan, like most other countries that have an APA process, treats the APA process in a formal manner:

  • Eligibility. Corporations are eligible to file APA requests relating to some or all foreign-related transactions. The corporation is to file the APA request with the District Director. Alternatively, corporations are eligible to file the APA requests with the Regional Commissioner of the Regional Taxation Bureaus (the RTB Commissioner) in cases where these corporations are within the jurisdiction of the RTB Large Enterprise Examination Division under the Ministry of Finance Ordinance No. 49 of 1949 who has the responsibility for the corporation’s returns.
  • Timing requirements. In requesting an APA, the applicant is to file the request for the APA as to the transfer pricing method by filing Form 2. This document becomes the APA request. The applicant is to file the APA request for each address in the country with the District Director having a precinct RTB. The applicant is to undertake this process by the prescribed due date for filing final tax returns. The applicant can extend this process by securing an extension pursuant to the provisions of Article 75-2 of the Corporation Tax Act, Special Rules for Extending the Due Date by Filing Final Returns. The date in question is the first taxable year of the taxable years that the applicant is requesting confirmation with Japan’s NTA.
  • Multiple copies. The Japanese government requires taxpayers to meet specific multiple copy requirements:
    • The applicant in general is to file the APA request in duplicate.
    • However, the applicant is to file the APA request in triplicate when a tax authority requests that Japan’s NTA pursue mutual agreement procedures.
    • The applicant is to file the APA request in triplicate if the applicant is a corporation handled by the RTB Large Enterprise Examination Division.
    • However, if the applicant filing the APA request is a corporation handled by the RTB Large Enterprise Examination Division, the applicant is to file such an APA request in quadruplicate when a tax authority requests that Japan’s NTA pursue mutual agreement procedures. See cases 5–3, 5–8, and 5–9.

5-3 Documents the APA Applicant Is to Attach

The District Director is to ask the APA applicant to submit these documents with the APA request:

a. Outline of the transactions. Documents that describe the outline of the transactions the District Director is to confirm, and the organizations to confirm these transactions.
b. Transfer pricing methods. Documents that describe the transfer pricing method that the applicant seeks to confirm with the District Director, and the specific details thereof, and an explanation as to why the method is the most reasonable.
c. Business and economic conditions. Documents that describe the business and economic conditions essential to the APA and the continuation of the APA, hereinafter referred to as “critical assumptions.”
d. Detailed explanation of the transactions. Documents that provide a detailed explanation of the transactions the applicant would seek the District Director to confirm, including the cash flow considerations and the currencies involved.
e. Direct and indirect relationships. Documents that reflect direct or indirect relations and relations under substantial control with the foreign-related person pertaining to transactions the applicant seeks to confirm with the District Director for the APA. Japan’s Transfer Pricing Administrative Guidelines call this party an “applicable foreign-related person.”
f. Functions. Documents that pertain to the functions the APA applicant performs in transactions that the applicant seeks to confirm with the District Director, and documents that pertain to the functions the applicable foreign-related person performs in transactions that the applicant seeks to confirm with the District Director.
g. Internal data. Operating and accounting information for the prior three years for the APA applicant and the applicable foreign-related person. The APA applicant can provide alternative information, such as future business plans; business projections suffice if the APA applicant is seeking the District Director confirm a relatively new product or business and data, if data for the prior three years are not available.
h. Prior audits, taxation, and litigation. Documents that describe any transfer pricing examinations, appeals, lawsuits, and so forth where these documents pertain to applicable foreign persons, and the details of past taxation in the country where the foreign persons are located.
i. Additional data. Documents Japan’s NTA would require so that the APA applicant can concretely examine the transfer pricing method. These documents include the results of the APA application for the transfer pricing method that the applicant requested in seeking confirmation from Japan’s NTA for the preceding three years.

In addition to requesting the documents set forth in items (g) and (i), above, the RTB in charge shall require the APA applicant to submit documents for the two possible years if Japan’s NTA finds it impossible to conduct a proper APA review in using the documents for three taxable years. Japan’s NTA, in making that determination, is to consider factors such as the life cycle of the products involved and is to consider the nature of the transactions the APA applicant seeks to confirm with Japan’s NTA.

5-4 Translation of Attached Documents

Japan’s NTA can request APA applicants to submit Japanese translations if any of the documents the APA applicants submit are written in foreign languages.

5-5 Revision of APA Requests

The Corporation Examination Group within the Tax Office, the group in charge of corporate tax, or the RTB Large Enterprise Examination Division is to check the content of the APA request and documents as prescribed in Section 5-3. The APA applicant might have submitted documents containing misstatements or deficiencies. In that event, the Corporation Examination Group or the RTB can ask the APA applicant to revise the APA request.

5-6 Forwarding of APA Requests and So On

The Corporation Examination Group within the Tax Office shall promptly forward two sets of the APA request documents it received from the APA applicant to RTB Corporation Tax Division. If the APA applicant requests a mutual agreement procedure, the Corporation Examination Group within the Tax Office is to promptly forward three sets of the APA request documents it received from the APA applicant to the RTB Corporation Tax Division.

The RTB Corporate Tax Division, upon receiving two sets of the APA request documents from the APA applicant, shall promptly provide one of these two sets to the NTA Corporation Tax Division. If the APA applicant seeks a mutual agreement procedure, the Corporate Tax Division, upon receiving three sets of the APA request documents from the APA applicant, is to promptly provide two of these three sets to the NTA Corporation Tax Division.

If the APA applicant requests a mutual agreement procedure, the NTA division in charge shall forward one set of the APA request documents to the NTA’s Office of Mutual Agreement Procedures.

5-7 Taxable Years to Be Confirmed

Japan’s NTA can confirm the applicant’s results taking place between three to five taxable years.

5-8 Amendments to APA Requests

An APA applicant might submit documents that pertain to the amendments of the APA that the APA applicant has filed with Japan’s NTA. In the event that the APA applicant submits such amendment documents, the Corporation Examination Group of the Tax Office or the RTB Large Examination Division shall process such amendment request in accordance with the provision of Section5-5 and 5-6.

5-9 Withdrawal of APA Requests

An APA applicant might submit documents that pertain to the withdrawal of the APA that the APA applicant has filed with Japan’s NTA. In the event that the APA applicant submits such withdrawal documents, the Corporation Examination Group of the Tax Office or the RTB Large Examination Division shall process such withdrawal request in accordance with the provision of Sections 5-5 and 5-6.

5-10 Pre-Filing Consultations

The Japanese tax authorities require the taxpayer to meet specific pre-filing requirements before seeking a consultation with the government:

1. Pre-filing procedure. An APA applicant can request a pre-filing consultation with the RTB. The RTB in charge shall accede to requests made by corporations for a pre-filing consultation. The NTA division in charge, in principle, is to attend such consultations. The NTA division in charge includes the Office of Mutual Agreement Procedures in the case of consultations with an APA with mutual agreement.
2. Procedure for facilitating APA requests. The Japanese tax authorities are mindful that APA applicants request pre-filing consultations to make APA procedures more convenient for corporations, and request pre-filing consultations to expedite APA procedures. As a result of these objectives, the RTB division in charge, including the NTA division in charge involved in pre-filing consultations, focus on streamlining the APA request process for the APA and to facilitate APA requests after their review. The RTB division in charge, including the NTA division in charge involved in pre-filing consultations, shall pay attention to these points when meeting with corporations:
  • Necessary procedures. Matters that are necessary to APA procedures. Such procedures include guidelines on the preparation of the attached documents the APA applicant submits with the APA requests and deadlines for submission. The Japanese tax authorities are to explain these guidelines at the time of the pre-filing consultations.
  • Foreign-related transactions. The Japanese tax authorities will extend the effort to provide the effort that the APA applicant would require in order to correctly ascertain the details of the foreign-related transactions that are the subject the consultation. The Japanese tax authorities will extend the effort to enable the corporation concerned to make an appropriate judgment as to whether to apply for an APA and make an appropriate judgment as to the kind of application the corporation is to make.
3. Pre-filing discussions. During the pre-filing consultation process, the RTB division in charge is to discuss issues and information that fall within the scope of the documents the corporation requesting the consultation presents or submits. The APA applicant might fail to present or submit documents required for the pre-filing consultation. In that event, the RTB division in charge shall explain to the APA applicant why it cannot hold such a pre-filing consultation.
4. Failure to provide documents. There might be a situation in which the APA applicant fails to attach the Section 5-3 documents, as specified, as part of an APA request. If the APA applicant fails to provide the above-mentioned documents, the Japanese tax authorities shall inform the taxpayer that it cannot conform the APA request pursuant to the provisions of Sections 5-15(4) and 5-15(5). However, situations might arise in which there are adequate grounds for the APA applicant not to submit certain documents by the APA submission deadline at a pre-filing consultation where these documents are specified in 5–3. In such an instance, the RTB division in charge shall not be required to apply the provisions of 5–15(4) and 5–15(5). The delay provides the APA applicant with an extension for a period “deemed ordinarily necessary” for the preparation of such documents. The procedure is different when the APA applicant requires an extended period of time, termed the “submission grace period.” In such a case, the RTB in charge is to specify the submission grace period to the corporation requesting the pre-filing consultation. The RTB in charge is to explain to the APA applicant that in principle the RTB has deferred the APA review for the duration of that grace period.

5-11 Review of APA Requests

The RTB division in charge is to evaluate the APA request in this manner:

1. Commencing the APA review. The RTB division in charge is to commence the APA review promptly upon its receipt of the APA request. The RTB division in charge is to conduct the review in a balanced manner that is appropriate to the complexity and difficulty of the case, while endeavoring to process the request correctly and swiftly. The NTA division in charge will additionally be involved in the APA review as necessary. The NTA recognizes that cooperation of the APA applicant is essential for the NTA to process the APA review swiftly. As such, the NTA is promoting a better understanding to the APA applicant as to the importance of such cooperation.
2. APA review is not an examination. The RTB division in charge is in principle to perform APA reviews in accordance with provisions of 2–1 and 2–2 and otherwise prescribed in Chapter 2 and in Chapter 3. Such APA reviews do not constitute an examination or inspection of the taxpayer’s books and records regarding corporation tax.
3. Inadequate documentation. The documents prescribed in 5–3 might not be sufficient for APA purposes in all circumstances. The RTB division in charge should explain to the APA applicant the deficiencies in the APA submitted application, and request that the APA applicant submit these additional documents. In order to expedite the APA review process, the RTB division in charge is to set a deadline for the submission of such additional documents. The RTB division in charge is to set a deadline that is reasonable in view of the circumstances of the APA applicant in light of the period the APA applicant would need to prepare such documents.
4. Amending the APA request. The RTB division in charge might request the APA applicant to amend its APA requests in the case where the division concludes the transfer pricing method that the APA applicant requested is not the most reasonable method.
5. Role of the NTA. The NTA division in charge is to request the RTB division in charge to report on the status of the APA review process as necessary.

5-12 Mutual Consultations Relating to the APA

The Japanese tax authorities have separate requirements for unilateral APAs and bilateral APAs, and address foreign tax authorities’ prior requests.

1. Unilateral APAs. Situations can occur in which the APA applicant has requested that the Japanese tax authorities agree to accept a unilateral APA, and the APA applicant has not filed a request with the Japanese tax authorities for a mutual agreement procedure for the APA. In such situations, the RTB division in charge is to provide information the APA applicant requires to appropriately decide what kind of request the APA applicant is to make. The Japanese tax authorities can confirm that the APA applicant intends to request an APA with the mutual agreement procedure. If the APA applicant proceeds with this procedure, the Japanese tax authorities are to recommend that the applicant request mutual consultation in order that the APA applicant can avoid double taxation and to ensure tax predictability.
2. Prior request filed by foreign tax authority. The RTB division in charge is to recommend the prompt requesting of a pre-filing consultation, or that the corporation file an APA request, in the situation in which the corporation or the foreign-related person already filed an APA request with a foreign tax authority.
3. Application for mutual consultation. An APA applicant must take an additional step if the APA applicant requests the mutual agreement procedure from the RTB division in charge. The RTB division in charge is to request the APA applicant to file an Application for Mutual Consultation, prescribed in the “Commissioner’s Directive on Mutual Agreement Procedures (Administrative Guidelines)” issued on June 25, 2001.1

5-13 Coordination among the RTB Division in Charge, the NTA, and the Office of Mutual Agreement Procedures

An APA applicant might request a mutual agreement procedure pertaining to the APA. If that situation occurs, the RTB division in charge, the NTA division in charge, and the Office of Mutual Agreement Procedures are to consult with each other as necessary.

The RTB division in charge is to complete its APA review and then present its opinions pertaining to the APA request to the Office of Procedures through the National Tax Office division in charge. The Office of Mutual Agreement Procedures is to forward the contents of the mutual agreement to the RTB division in charge and then to the NTA division in charge.

5-14 In the Case where the APA and the Performance of the APA Process Are Not Appropriate

When the Japanese tax authorities conduct APA reviews, these tax authorities are to properly handle these reviews as prescribed in (1) or (2) in order to ensure the proper and smooth enforcement of transfer pricing taxation:

1. Inappropriate APAs. Situations can arise in which an APA is inappropriate. In such a situation, the RTB division in charge is to request the APA applicant to correct the APA request. The RTB division in charge is to make this determination after its consultation with the NTA division in charge (including the Office of Mutual Agreement procedures in the case of an APA with mutual agreement). The APA applicant might fail to make such a correction. In the event the APA applicant fails to make such a correction, the Japanese taxing authorities are to provide the APA applicant with an explanation that an APA is not possible. The content of a pre-filing consultation might fall within (a) below. The Japanese taxing authorities are to explain the next details to the corporation requesting the pre-filing consultation:
a. Inappropriate attempt to reduce the tax burden. The facts indicate that the APA applicant could reduce the Japanese tax burden without reasonable economic grounds as a result of a transaction that the APA applicant sought to confirm with the Japanese taxing authorities. Such a transaction could be a form that unrelated parties do not ordinary undertake.
b. Failure to submit information. The failure of the APA applicant to submit information necessary for the APA review or otherwise fail to provide necessary cooperation that would hinder an APA.
2. Inappropriate continuation of the APA process. A procedure applies to situations such as the following when the commencement of the APA review or the continuation of an APA review is inappropriate. The RTB division in charge is to consult with the NTA division in charge, including the Office of Mutual Agreement Procedures in the case of an APA with mutual agreement. The Japanese tax authorities are to provide the APA applicant with an explanation that they are deferring the APA process until the time that the commencement or recommendation of the APA review is possible.
a. Similarity based on prior reassessment. The APA applicant might file an APA request for transactions that are similar to those transactions involving reassessment based on transfer pricing taxation. In such a situation, it is necessary for the Japanese tax authorities to conduct an APA review following adjudication of an appeal or finalization of a decision or a judgment regarding such assessment.
b. Improper coordination with the mutual agreement procedure. In some cases, an APA applicant might file an APA request and might file a request for a mutual agreement procedure in respect of foreign-related transactions other than transactions that the APA applicant seeks to confirm. In such a situation, it is necessary for the Japanese tax authorities to conduct an APA review for these transactions following a mutual agreement.
c. Need to confirm transactions. In some cases, it might be necessary for the Japanese tax authorities to conduct an APA review after the Japanese tax authorities confirm these transactions. The Japanese tax authorities might not be able to ascertain the actual circumstances of the business operations just from the documents, such as for future business plans and business projections, as prescribed in the parenthetical clause to Section 5-3(g).

5-15 Notification of the Results of the APA Review

The Japanese tax authorities provide the taxpayer with a complex notification process.

1. Receipt of notification. The RTB division in charge might receive notification of a mutual agreement from the Office of Mutual Agreement Procedures, doing so via the NTA division in charge. After the RTB division in charge receives this notification, and after the RTB division in charge suitably processes the APA request, the RTB division in charge is to promptly notify the district director that they have made the APA confirmation based on the results of the agreement. The RTB division in charge is to request the APA applicant to correct the application if necessary according to the results of the agreement.
2. Failure to receive mutual agreement notification. The RTB division in charge might not receive notification of a mutual agreement from the Office of Mutual Agreement Procedures, doing so via the NTA division in charge. After the RTB division in charge receives this notification, the RTB division in charge is to ask the opinion of the APA applicant regarding whether the APA applicant is to withdraw its APA request or to seek an APA without having a mutual agreement (i.e., through unilateral APA). The RTB division in charge is then to process the APA request in accordance with the provisions of Section 5-9, 5-12(3), or 5-15(4).
3. Failure to file for a mutual agreement. The RTB division in charge might conclude, after its review of the applicant’s APA, that the corporation’s transfer pricing method is the most reasonable selection. If the APA applicant has not filed for a mutual agreement procedure, the RTB division in charge is to promptly forward an APA notice to the district director.
4. Wrong selection of transfer pricing method. The RTB division in charge might conclude, after its review of the applicant’s APA, that the corporation’s selected transfer pricing method is not the method that is the most reasonable. Alternatively, the APA applicant might fail to submit the documents set forth in Section 5-11(3), or the RTB division in charge determines that it cannot conduct the APA review in accordance with the provisions of Section 5-14(1). In such situations, the RTB division in charge shall, in consultation with the NTA division in charge, including the Office of Mutual Agreement Procedures in the case of APA request with mutual agreement, promptly inform the district director that APA confirmation is not possible.
5. Intraoffice coordination. The district director might receive a notice set forth in Section 5-15(1), 5-15(3), or 5-15(4) from the RTB division in charge. In the event that the district director does receive such a notice, the district director is to send a notice for or against the APA, as applicable, to the APA applicant. The district director is to use Form 3, Notification of Confirmation of Method of Calculation of Arm’s Length Prices, or Form 4, Notification that Method of Calculation of Arm’s Length Prices Cannot be Confirmed.

5-16 Effect of the APA

The corporation might have received a notice of APA confirmation as set forth in Section 5-15(5), and such a corporation might file tax returns that comply with the content of the APA for the confirmed taxable years. Such a corporation is termed a “confirmed corporation.” The district director is to treat the foreign-related transactions, hereinafter referred to “confirmed transactions,” as having been conducted at arm’s length.

In some situations, a taxable year to be confirmed has already lapsed at the time of confirmation. If this situation occurs, an amended return submitted by the confirmed corporation to confirm the return filed for the taxable year will comply with the content of the APA requirement. Such an amended return is not treated as a “return filed foreknowing that corrections should be made” as prescribed in Article 65(5), Additional Tax for Deficient Returns, of the Act on General Rules for National Taxes.

5-17 Submission of Reports

The district director requests that confirmed corporations submit their reports with the following information, submitting this report no later than the prescribed date for filing tax returns. This date pertains to confirmed transactions pertaining to each taxable year confirmed (hereinafter referred to as a “confirmed taxable year,”) or within the period specified by the district director. The APA applicant is to file this report in duplicate in the case of corporations handled by the RTB Large Enterprise Examination Division and in triplicate in the case of all other corporations. The APA applicant is to submit this information:

a. Compliance statement. A statement that the confirmed corporation files tax returns that comply with the contents of the APA.
b. Income statement data. Profit or loss data of the confirmed corporation, and profit or loss data of the applicable foreign-related person that relate to the confirmed transactions. In cases where it is necessary, the parties to the APA are to take the content of the APA into account.
c. Fluctuations. Statement of the fluctuations, if any, of the material and economic conditions based on the fluctuations that the APA has taken into account.
d. Adjustments. Statement of the adjustments made by the confirming corporation, as provided in Section 5-19, in cases where the results of the confirmed transaction do not comply with the contents of the APA.
e. Financial and accounting data. Financial and accounting data for the confirmed corporation and financial and accounting data for the applicable foreign-related person for the confirmed taxable years.
f. Additional information. Other relevant information that helps the tax authorities determine whether the confirmed corporation files tax returns that comply with the contents of the APA.

5-18 Treatment of Reports

The Japanese tax authorities recognize that the report might have continuing value to the tax administrations as well as to multinational enterprises.

1. Ordinary processing. A confirmed corporation might submit the report prescribed in Section 5-17. In the event that the confirmed corporation does submit this report, the Examination Group Corporation of the Tax Office or the RTB Large Enterprise Examination Division are to process the report in accordance with Section 5-5 or 5-6.
2. Evaluation of the report. The RTB division in charge is to evaluate the report submitted and to determine whether the confirmed corporation complies with the contents of the APA. This report corresponds to corporate tax examinations. The RTB division in charge is to explain that relationship to the confirmed corporation at the time it reviews the report. This report review might indicate that the APA applicant has not filed a return that complies with the contents of the APA, and that the APA applicant has understated the amount of income. In that event, the RTB division in charge is to explain to the confirmed corporation that it needs to submit an amended application.
3. Voluntary filing. Note that the confirmed corporation might voluntarily file an amended return pursuant to the provisions of Section 5-19(2)(b). The confirmed corporation might file the amended return voluntarily if it detects such an understatement before the RTB in charge knew of the report review. The RTB division in charge might have known of the report review on account of visitation of the corporation by officials of the RTB division in charge for the purpose of report review or for indicating such an understatement. The RTB division in charge does not treat such an amended return as corresponding to a “return filed foreknowing that corrections should be made” as prescribed in Article 65(5), Additional Tax for Deficient Returns, as part of the Act on General Rules for National Taxes. The RTB division in charge is to judge whether a return corresponds to a “return filed foreknowing that corrections should be made.” The RTB in charge is to make this determination in the basis of the Administrative Guidelines, “Treatment of Additional Tax for Understatement and Return After the Due Date” issued on July 3, 2000.2
4. Intraoffice coordination. The RTB division in charge is to report the results of the report review to the NTA as required. The RTB division in charge is to forward the results to the Office of Mutual Agreement Procedures via the NTA division in charge where the parties reach a mutual agreement.

5-19 Compensating Adjustments

Certain tax authorities recognize that the multinational enterprise and the tax administrations might need to make compensating adjustments to fully reflect transfer pricing adjustments.

1. Adjustment process. The confirmed corporation might make adjustments the district director requires to comply with the contents of the APA in its financial statements. In the event that the confirmed corporation makes these adjustments, the district director is to regard these adjustments as legitimate transactions for transfer pricing purposes.
2. Request for compensating adjustments. The RTB division in charge is to request that the confirmed corporation make compensating adjustments pertaining to the APA in this way:
a. Correction of taxable income. The confirmed corporation is to correct its taxable income on its final return. The confirmed corporation is to correct its taxable income where the confirmed corporation had understated its income due to an inconsistency between the actual transaction and the results of applying the confirmed transfer pricing method before the confirmed corporation filed its final tax returns.
b. Filing amended returns. The confirmed corporation is to promptly file amended tax returns in a case when it turns out that the confirmed corporation understated its income in its tax returns. This procedure applies to confirmed taxable years. The procedure reflects an inconsistency between the actual transaction and applying the confirmed transfer pricing method after filing its final tax returns.
c. Mutual agreement implications. A mutual agreement might cover the APA (i.e., a bilateral APA). In the event that such an agreement exists, the confirmed corporation can correct the taxable income on the final returns based on the mutual agreement concerning adjustments. The confirmed corporation can make these adjustments if it turns out that income in the financial statements pertaining to the confirmed taxable years is overstated. Such overstatement can arise due to a difference between the actual transaction and the results of applying the confirmed transfer pricing method. This difference takes place after the closing date for financial statements and before filing final tax returns.
d. Overstatements. A mutual agreement might cover the APA (i.e., a bilateral APA). In the event that such an agreement exists, the confirmed corporation can file a request to correct the tax return, as prescribed in Article 7(1) of the Act on Special Provisions for Enforcement of Income Tax Conventions. That procedure pertains to the mutual arrangement concerning compensating adjustments. The confirmed corporation can apply this compensating adjustment approach if it turns out that the confirmed corporation overstated its income due to a difference between the actual transaction and the results of applying the confirmed transfer pricing method in the tax returns. This procedure takes place after the confirming corporation files final tax returns that pertain to the confirmed taxable years.

5-20 APA Revisions

The confirmed corporation might file a request to revise the APA where material differences can arise in a situation that would cause material differences to business and economic conditions that are essential to the continuation of the APA in each of the confirmed taxable years. In such a situation, the district director is to process and receive the revisions to the APA and process these revisions in accordance with its relevant provisions of Section 5-1 to 5-19, inclusive.

5-21 APA Cancellations

The Japanese tax authorities acknowledge that there are situations in which the government can cancel the APA procedure.

1. Cancellation process. The district director can cancel the APA under narrowly defined circumstances. The RTB division in charge is to forward a notice to the district director concerning that cancellation. The cancellation applies to taxable years subsequent to the year in which the applicable incident incurred as to (a), (b), or (c). The cancellation applies retroactively as to (d):
a. Failure to revise. A confirmed corporation fails to submit a request for a revision as prescribed in Section 5-20 even when material differences arise.
b. Failure to comply. A confirmed corporation fails to comply with the contents of the APA in its tax returns.
c. Failure to submit. A confirmed corporation fails to submit the report, as prescribed in Section 5-17, or the report contains material errors.
d. False statements. Any of the facts on which the Japanese tax authorities have relied for the APA but are revealed to be false; or the APA request contains material errors.
2. Intra-agency coordination. The RTB division in charge is to consult with the NTA division in charge when necessary before the RTB division in charge forwards a notice of cancellation under Subparagraph (1).
3. Intervening mutual agreement. Subparagraph (1) might apply to an APA that is covered by a mutual agreement. In such an event, the RTB division in charge is to consult with the Office of Mutual Agreement Procedures via the NTA division in charge. The RTB division in charge is to forward a notice to cancel the APA after the RTB division in charge receives a notification of another subsequent mutual agreement that cancels the former mutual agreement.
4. Intra-agency notification. The district director is to cancel the APA upon its receipt of a notice from the RTB division in charge. The district director is to send to the confirmed corporation appended Form 5, Notification of Cancellation of Confirmation of Method of Calculation of Arm’s Length Prices.

5-22 APA Renewal

A confirmed corporation can file a request to renew the APA. The district director is to process this request pursuant to provisions Section 5-1 through 5-21. The confirmed corporation is to file an APA renewal request with the precinct district director, in principle by the day before the commencement of the taxable years to be confirmed.

5-23 Applying the Transfer Pricing Method to Tax Years Prior to the Confirmed Years

An APA applicant might intend to apply the requested transfer pricing method for years prior to the taxable years to be conformed. This procedure also applies to consolidated taxable years, if they are applicable. The APA applicant is to accompany the APA request with a request for a mutual agreement. The parties must regard the confirmed transfer pricing method as being the most appropriate method even for the years prior to the confirmed taxable years. The parties are to process the APA request in accordance with the provisions of Section 5-15, 5-16, 5-19, and 5-21.

5-24 Application of Transactions between the Head Office and Branches

The head office of a corporation might be located outside Japan. In such a situation, the foreign tax authority in the country where the head office of the corporation is located might request the commencement of a mutual agreement. Such a mutual agreement can be based on a request corresponding to the APA as to transactions between the head office or branch offices in foreign countries and the branch office in Japan that conducts business. These provisions are set forth in CTA Cabinet Order Article 176(1), item 7. The Japanese tax authorities are to take necessary measures in accordance with provisions 5-1 through 5-23.

5-25 Treatment of the Corporation’s Entry into the Consolidated Corporation Group

A multinational enterprise can enter into a consolidated group. This is the joining process:

1. Joining the affiliated group. An APA applicant might become a member of a consolidated group when the consolidated group files an APA request. In that situation, the district director is to request that the consolidated corporation promptly submit its requisite form (i.e., Form 6, Application for Continuation of APA after Entry into Consolidated Corporation Group). The APA applicant is to submit its form in duplicate with the RTB Commissioner or in triplicate if the consolidated parent corporation requests a mutual agreement. Alternatively, the APA applicant is to submit the form in triplicate with the district director or in duplicate if the consolidated parent corporation requests a mutual agreement.
2. Filing requirements. The consolidated parent corporation, as set forth in Subparagraph (1), might submit Form 6 to the precinct district director. In that event, the precinct district director is to send a copy of Form 6 to the district director who governs the district in which the concerned corporation’s head office or main office is located. The Examination Group Corporation of the Tax Office or the RTB Large Enterprise Division is to handle the case in accordance with the provisions of Section 5-5 and 5-6. The NTA division in charge is to send a copy of Form 6 to the Office of Mutual Agreement procedures when the concerned corporation requests a mutual agreement.
3. Consolidated filing. The consolidated parent company might be submitting Form 6. In that situation, the Commissioner’s Directive on the Operation of Transfer Pricing with Regard to Consolidated Corporations, issued on April 28, 2005, Section 5-1 to 5-25 inclusive, is to apply to the APA as to the concerned corporation. This procedure assumes that the consolidated parent corporation sent this request to the precinct district director pursuant to the Commissioner’s Directive on the Operation of Transfer Pricing with regard to Consolidated Corporations, Section 5-2.

NOTES

1. Document ID: Office of Mutual Agreement Procedures 1–39.

2. Document ID: Corporation Tax Division 2–9, etc.

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