The new transfer pricing regime based on the 2016 tax reform became effective on April 1 2016 in Japan.
As anticipated, the concept of three-tiered documentation in Action 13 of the 2015 Final Report of OECD/G20 BEPS Project was implemented into the new transfer pricing regulations.
The key features of the three-tiered documentation under the Japanese transfer pricing regime are as follows:
Country by Country Report (CbCR)
Taxpayers required to submit CbCR --
- Domestic corporations that are ultimate parent companies of MNE groups whose consolidated revenues are JPY 100 billion or more.
- Foreign corporations of multinational enterprise (MNE) groups that have permanent establishments ("PEs") in Japan OR domestic corporations that are not ultimate parent companies of MNE groups. This Japan CbyCR filing in both cases is only required if the ultimate parent companies of the MNE groups are located in countries where the information exchange with the Japanese Tax Authority is not effective. The CbCR requirement is also exempted for these companies where the consolidated revenues of the MNE group are less than JPY100 Billion in the preceding fiscal year.
Electronic submission of CbCR is required via the internet based system called "e-Tax".
A taxpayer must submit CbCR in the year following the fiscal-year-end of the ultimate parent company of the MNE group. For example, a Japanese ultimate parent company with a fiscal-year-end on March 31 2017 must submit the CbCR for fiscal-year-end on March 31 2017 by March 31 2018. The submission requirement under the new regulation will apply to the fiscal year starting on April 1 2016 or later.
The taxpayer is required to prepare the CbCR in English.
A penalty of JPY 300,000 or less will be imposed in the case where a taxpayer fails to submit the CbCR.
Taxpayers who are required to submit Master file
Domestic corporations of MNE groups and foreign corporations of MNE groups that have PEs in Japan. A company that is part of a MNE group that has consolidated revenue of less than JPY100 Billion in the preceding fiscal year is exempt from the Master file requirement.
Electronic submission of the Master file is required via an internet based system called "e-Tax".
Same as the CbCR.
The taxpayer is required to prepare the Master file either in Japanese or English.
A penalty of JPY 300,000 or less will be imposed in the case where a taxpayer fails to submit the Master file.
There is no requirement for scheduled submission of the local file. However, a taxpayer must prepare a local file on a contemporaneous basis and must keep it for 7 years from the day following the due date of the tax return. This time period could extend to 10 years under certain circumstances.
A taxpayer with intercompany transactions less than JPY5 billion (total amount of both payment and receipt) AND intangible transactions less than JPY300 million is exempted from this requirement. A taxpayer is required to prepare the local file for the fiscal year starting on or after April 1, 2017.
The Local file must be prepared on a contemporaneous basis; therefore, it must be prepared by the deadline to file the tax return. Further, upon request from the tax examiner, the local file must be submitted within a reasonable period as discussed below.
A penalty is imposed in the case where a taxpayer fails to submit the Local file. Presumptive taxation will be made in the case of failure to submit the local file, information or document that are the basis of the local file.
It should be noted that the deadline to prepare the local file, which is the same day as the due date of tax return filing (within three months after a taxpayer's fiscal-year-end where extension is granted), is quite tight in Japan. The taxpayer has only three months after the fiscal-year-end to prepare the tax return (four months where a consolidated tax return is elected and extension is granted) including the extension. Therefore, advance preparation including the preparation of the template, etc. is highly recommended.
Further, as mentioned above, the new transfer pricing regulation introduces a penalty in the case of failure to submit the documentation. The penalty for CbCR and Master file will be imposed when the submission is overdue. The penalty for Local file will be imposed when a taxpayer fails to submit the documentation within a certain period of time upon request by the tax examiner. A taxpayer is required to submit the Local file within 45 days upon request by the tax examiner, and the information or documents to calculate the arm's length price, which is the basis of the Local file, within 60 days upon request, respectively.
The presumptive taxation, where a taxpayer fails to submit the Local file within the aforementioned period, will be made as the penalty for failure to submit the Local file.
Finally, the submission of CbCR and Master file is required "electronically". This means that the tax authorities that are party to tax treaties can easily exchange the data and develop a database to pick-up a taxpayer to put their focus on in each jurisdiction. Therefore, the ultimate parent company of a multinational corporation is encouraged to reconfirm that its transfer pricing policy is globally consistent and is consistently applied in each jurisdiction. It may necessary to re-establish the transfer pricing policy and define what should be included in the Master file to avoid potential misunderstanding by the tax authorities before preparing the above three-tiered documentation.
This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG LLP. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.