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מחירי העברה: יפן - מאי 2011

09 מאי 2011

The recent tax reform in Japan

On 16 December 2010, Japan’s Tax Commission of the Cabinet Office released its tax reform proposals for 2011, including a section on transfer pricing.

At present (April 2011), the 2011 tax reform proposals have been suspended due to ‘the Great East Japan Earthquake’ and are expected to be resolved in June 2011. Additionally, it is expected that the revisions to transfer pricing regulations will be made without any modification.

OECD Transfer Pricing Guidelines
In order to harmonise transfer pricing regulations in Japan with the recent amendments to the OECD Transfer Pricing Guidelines, the following proposals have been made:
- A change of the Transfer Pricing Method (TPM) election rule to the ‘Best Method Rule’ from the ‘Statutory Prioritised Method Rule’;

  • The addition of a Comparable Profit Split Method and a Residential Profit Sprit Method to other specified methods;
  • Permission to use ranges in testing the transfer prices or profitability of foreign related party transactions of the tax payer.


Documentation requirements
The 2011 proposals do not impose administrative requirements in relation to the documentation in the transfer pricing regulations, except for a filing requirement of an information return (Form 17-4) which shows e.g. the types and amounts of related party transactions, TPM, and profit and loss statements of a foreign related party.

It should be noted that the 2010 tax reform enacted in April 2010 provided clarification of the ‘necessary documents’ by stipulating two types of documents:

  • The contents of foreign related party transaction;
  • Documents pertaining to the arm’s length prices determined by the taxpayer.


A transfer pricing study report on the prevailing transfer pricing practice around the world would cover almost all of the above necessary documents. However, a profit and loss statement of each related party transaction segmented out of the entire profit and loss statement is specified as a necessary document.

The use of secret comparables by the tax authority
In Japan, tax inspectors have been granted a right of inquiry under which they can visit third parties engaged in similar transactions to obtain comparable data. This data is not disclosed to the taxpayer undergoing a tax audit (hence the ‘secret comparables’ term).

The application of these secret comparables had been at the sole discretion of the tax inspector in charge. Serious disputes have therefore arisen between taxpayers and tax inspectors regarding the application of the secret comparables.

Under the 2011 proposal, the risk of the NTA applying secret comparables exists mainly where the taxpayer fails to submit the necessary documents on time, following the notification of a request by the tax inspector.

Proposed sanctions for failing the documentation requirements
If the taxpayer fails to provide documentation to tax inspectors within 30 days of a request, the so-called ‘presumptive taxation’ rule may be applied. This rule allows the NTA to presume ‘certain prices’ to be at arm’s length, based on e.g. secret comparables. In this context, the application of the presumptive taxation rule constitutes a type of penalty.

The NTA does not impose penalties for failing to meet the documentation requirements (even for failure to file the information return).

**The information contained on this website and from any communication related to this website is for informational purposes only and does not constitute any legal, financial or other advice. For specific tax advice you should contact a qualified professional.