Documentation: Japan

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Takuma Mimura, Cosmos International Management  

l. Information to be documented

Japan, as opposed to most other major countries, still does not have a formal contemporaneous TP documentation requirement. In other words, even where Japanese corporations do not prepare TP documentation by the tax filing date, the tax authorities will not impose penalties for that reason.

However, the Act on Special Measures Concerning Taxation (“ASMT”) Article 66-4, which is Japan's most important and basic transfer pricing tax law, states in Paragraph (6) that if taxpayers fail to submit the “books and documents” that are considered necessary for calculation of the arm's length price, the tax authority may presume the amount of taxable income, thereby making reassessment; that is called “deemed taxation”.

Regarding the “books and documents”, previously there was no definition, but the 2010 revision of the transfer pricing regulations clarified that the “books and documents” are TP documentation.

Even though the 2010 revision still cannot be interpreted as a formal contemporaneous TP documentation requirement, it surely indicates the National Tax Agency's (NTA) strong message that TP documentation is needed to avoid deemed taxation. Thus taxpayers in Japan must be aware that the very dangerous deemed taxation can be avoided if appropriate TP documentation is prepared prior to tax examination.

A. Previous regulation
ASMT Article 66-4 (7)

Where the relevant official of the NTA or the relevant official of the Tax Office or Regional Taxation Bureau, having jurisdiction over a corporation's place of tax payment has requested the corporation to present or submit the books and documents that are considered to be necessary for the calculation of the arm's length price… in each business year or copies of such books and documents… , if the said corporation has failed to present or submit these books and documents or copies thereof without delay, the district director may presume the amount calculated by the method listed… to be the said arm's length price, and thereby making an assessment… with respect to the said corporation's amount of income or amount of loss for the relevant business year:

B. 2010 revision
ASMT Article 66-4 (6)

The “books and documents” has been changed to the “documents as defined in the Ordinance by the Ministry of Finance”.

C. Documents defined in the Ordinance
Ordinance for Enforcement of the ASMT (“ASMT Ordinance”) Article 22-10 (1)

Added in 2010  

The documents prescribed in ASMT Article 66-4 (6) as “defined in the Ordinance by the Ministry of Finance” are:

1. The following documents describing contents of foreign-related transactions defined in ASMT Article 66-4 (1):

a. Documents containing detail of assets and contents of services related to the subject foreign-related transactions;

b. Documents regarding functions performed and risks born by the corporation subject to the ASMT Article 66-4 (6) and its foreign related party;

c. Documents containing the detail of intangible fixed assets and other intangible assets that the corporation subject to the ASMT Article 66-4 (6) and its foreign related party used for the foreign-related transactions;

d. Contracts of foreign-related transactions and documents for the contents of the contracts;

e. Pricing policy for foreign-related transactions in which the corporation subject to the ASMT Article 66-4 (6) receives from and pay to its foreign-related party, and documents containing the details of price negotiations between the corporation and the foreign-related party;

f. Documents containing the detail of profit and loss for the foreign-related transactions between the corporation subject to the ASMT Article 66-4 (6) and its foreign-related party;

g. Documents regarding analyses of market in relation to foreign-related transactions such as sales and purchase of assets, provision of services etc. and any other matters regarding the market;

h. Documents containing the details of the business policy of the corporation and its foreign-related party with regard to the foreign-related transactions;

i. Whether there are any other transactions closely connected with the foreign-related transactions, and if any, documents containing the details of such transactions.

2. The following documents used by the corporation subject to the ASMT Article 66-4 (6) for the calculation of arm's length prices with regard to foreign-related transactions:

a. Documents containing the selected calculation method defined in the ASMT Article 66-4 (2) and the reasons for adoption of the calculation method, and any other document prepared by the corporation for calculating the arm's length prices;

b. Documents containing the selection of comparable transactions adopted by the corporation and the details of the comparable transactions;

c. If the corporation selected the calculation method prescribed in the ASMT Enforcement Order Article 39-12 (8) (i) (profit split method), then documents for calculation of the amount belonging to both the corporation and its foreign-related party;

d. If the corporation calculates arm's length prices regarding more than one transaction as a single transaction, then documents containing the reason for the calculation and details of each original transaction;

e. If differences are adjusted with respect to comparable transactions, => Documents containing the reasons for adjustments and the adjusted methods.


As the NTA clearly indicates that Japanese transfer pricing regulations follow OECD Transfer Pricing Guidelines, the above-mentioned information in the Article 22-10 (1) of ASMT Ordinance is generally in line with the recommendation in the existing OECD Transfer Pricing Guidelines' Chapter V (Documentation).

ll. Documentation structure required

The above-mentioned Article 22-10 (1) of ASMT Ordinance indicates that the documentation consists of two parts:

• Part 1: documents describing contents of foreign-related transactions, and

• Part 2: documents for the calculation of arm's length prices with regard to foreign-related transactions.


Part 1 contains fact-related information such as industry, organisation, business, controlled transactions and functional analysis, while part 2 includes information and results related to transfer pricing analysis to analyse whether related-party transactions are priced at arm's length. In the transfer pricing documentation both parts are necessary, because part 1 is the base for part 2, and without part 1, the analysis in part 2 cannot be performed.

A. Tiered approach

In the White Paper on Transfer Pricing Documentation issued on July 30, 2013, the OECD recommends “Tiered Approach”. It means that tax authorities should initially focus on higher level information that would be most helpful in undertaking a transfer pricing risk analysis and in confirming taxpayers' good faith efforts to comply with the arm's length principle, and more detailed information would be collected later when conducting audits. Examples of higher level information that should initially be collected shown in the White Paper are:

• material cross-border related-party transactions

• recent business restructuring transactions and transfers of intangibles

• levels of corporate debt and interest expense in relevant countries

• multinational enterprises (MNEs) global transfer pricing policies and financial results of applying these policies

• taxpayer's explanation of how its material transfer pricing arrangements comply with the arm's length principle and local transfer pricing rules.


The White Paper also recommends that a two-tier structure, called the masterfile approach, which is laid out in the EU documentation guidance, has significant potential for simplifying transfer pricing documentation compliance. That is,; EU documentation is made of two parts; one is masterfile, which contains common information among other EU countries, and the other is country-specific documentation including more detailed and specific information belonging to each country. For MNEs having several affiliates in the EU, the masterfile approach can reduce costs for preparing documentation.

Although Article 22-10 (1) of ASMT Ordinance classifies information in the transfer pricing documents in two parts, the Japanese transfer pricing regulations currently do not adopt the tiered approach as indicated in the OECD White Paper.

In practice, however, some Japanese MNE already have utilised the masterfile approach in preparing documentation globally, and the Japanese tax authority does not seem to object to that approach.

lll. Documentation process

In the White Paper, OECD mentions the following technical issues which could impact on preparing TP documentation:

• Certification of documentation by outside auditor

• Mandatory use of consulting firms


Japan does not have such requirements. The OECD criticises such requirements as excessive, so Japan's approach may be in line with OECD.

• Use of local or regional comparables (for inbound perspective)


Japanese tax authority usually does not allow regional comparables, because there are sufficient number of comparable companies in Japan including more than 4,000 publicly listed companies.

• Translation


When reviewing documents made outside of Japan based on foreign country local documentation requirements, Japanese tax authority asks taxpayers to translate into Japanese. In case of English documentation, however, most of the NTA's international tax examiners can read English, so they urge taxpayers to submit original English documentation promptly, and sometimes do not require translation.

• Materiality standard


Even though the White Paper recommends a reasonable level of materiality standard, Japan does not have such standard, due to the lack of a formal documentation requirement.

Most of these issues are not relevant in Japan, as Japan does not have a formal TP documentation requirement and does not have detailed procedures for preparing documentation. However it can be said that Japanese tax authority's actual enforcement is generally in line with OECD recommendations

lV. High risk factors

Of the nine high-risk factors that OECD identified, the most relevant in Japan are “transfer of intangible” and “royalty”.

The population in Japan has been recently decreasing and many companies think that operating in Japan alone prevents growth. Moreover, as many countries have been reducing corporate tax rates, the difference of corporate tax rate between Japan (one of the highest in the world) and other countries has been widening. Thus more and more companies in Japan have been investing overseas, but such movement would reduce Japan's corporate tax revenue and further worsen its fiscal deficit problem. Therefore, Japanese tax authority is very keen on collecting more income from overseas subsidiaries, such as royalty.

As for transactions between a foreign parent company and Japanese affiliates, Japanese tax authority is concerned about Japanese affiliates' excessive debts causing their taxable income to be too low. In 2012, in addition to the existing thin-capitalisation tax regulation that disallows interest payable on related-party debts exceeding three times the amount of shareholders' equity, the government introduced another regulation that disallows net interest payable on related-party debts exceeding 50 percent of corporation's net taxable income.

Takuma Mimura is a managing director of Cosmos International Management Co., Ltd., which belongs to Nagoya-based accounting firm Cosmos Group. Cosmos International Management is also an Alliance Partner of Transfer Pricing Associates group. Takuma may be contacted by email at: