Aoyama Sogo Accounting Firm Co. Ltd.
an independent member firm of PrimeGlobal
Among the tax implications considered by multinational corporations, cross-border transactions that involve transfer pricing taxation are of particular emphasis in recent years. Our advisory services cover not only transfer pricing documentation, but considers relevant local rules and tax treaties in reducing tax risks and maximizing benefits.
Advisory and Application of
Important Japanese Tax Regulations
Transfer Pricing Taxation
Calculation of Transfer Price
The transfer price between the overseas parent company and Japanese subsidiary often becomes arbitrary in nature; however the Japanese tax authority requires that a fair and appropriate price be used between related parties (group companies). If the authorities determine that there is discrepancy between the intragroup transaction price and that with a third party, the latter will be the assumed transaction price, and additional tax will be assessed. In addition, the overseas entity is not exempt from its country or area’s tax obligation and may result in double taxation. As such, to avoid this situation, it is vital to calculate and determine an appropriate transfer price.
Documentation of Transfer Price
Under transfer pricing taxation, there is a policy that allows the Japanese tax authority to assess a presumptive tax on the company, and requires companies to maintain documentation in calculating transfer price for overseas-related transactions for each fiscal year. Under this ordinance by the Ministry of Finance, if such documentation is not presented upon request, the agency will apply the presumptive tax assessment.
Documentation should be reviewed regularly to avoid the risk of paying unnecessary additional tax. It is advisable to prepare the documentation in advance of any tax audit, as such requests by the tax auditor are difficult to prepare during an audit.
Assuming the Transactional Net Margin Method (one of the transfer pricing methods) will be used in conducting the benchmark test, we extract applicable data from the transfer pricing database used by tax authorities in over 60 countries (For Japan, this includes the National Tax Agency Mutual Agreement Committee, Tokyo Regional Taxation Bureau, Osaka Regional Taxation Bureau, Nagoya Regional Taxation Bureau, and Kantoshinetsu Regional Taxation Bureau).
Tax Treaty Consideration
For non-residents (individuals, corporations) of Japan who receive domestic source income payment subject to income tax and special income tax for reconstruction, a tax treaty article may be available in reducing withholding tax. We consider any applicable tax treaty articles and prepare a notification to the tax office to enjoy such benefits.
Thin Capitalization Rule
A company may receive an intercompany loan from an overseas affiliated company, in which case the interest paid is deductible in calculating corporate income tax. However, under the thin capitalization rule, for the portion of interest paid that corresponds to the average debt balance in excess of the 3:1 debt-to-equity ratio will be non-deductible. Dependent on the size of business expected and amount of intercompany loan issued, this may be a relevant consideration.
Determination of Permanent Establishment (PE)
Earnings Stripping Rule
CFC Rule (Anti-Tax Haven Rule)
Foreign Tax Credit
Foreign Dividend Exclusion
Determination of Tax Residency (Particularly for business owners)
Advisory and Application of
Important Overseas Tax Regulation
Singapore / Indonesia / Malaysia / Micronesia / China / Hong Kong
*Tax services are provided by Aoyama Sogo Tax Corporation.