Manufacturers in Japan Struggle as Super Tax Treaty Looms

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By Brian Yap

Manufacturers in Japan are bracing for the broader definition of a taxable presence that is included in the forthcoming super-tax treaty from the OECD.

The multilateral instrument (MLI), or the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, takes effect July 1.

The permanent establishment provision of the MLI could now ensnare Japanese companies that do significant business in Europe, like those that manufacture cars and electrical appliances.

Permanent establishment is the taxable presence of a foreign entity not registered in a jurisdiction. To avoid tax liabilities in new jurisdictions, some Japanese companies are considering overhauling their business model to avoid larger tax liabilities, practitioners told Bloomberg Tax.

The MLI is a master treaty that will modify more than 1,200 existing bilateral tax treaties between ratifying countries. It is a key component in the OECD’s plan to fight tax avoidance.

India has chosen to adopt the new PE definition. According to Hiroshi Makuuchi, manager of tax policy at Tokyo-based business federation Keidanren, this has created concern among Japanese companies with business in India, that “Japanese subsidiaries engaging in sales and promotion activities in the country could now be deemed PEs.” Keidanren.

Changing Systems

A commissionaire structure allows companies to sell products of foreign entities for a fee. This then allows them to avoid having a permanent establishment to which sales are taxed. Commissionaire structures will be considered permanent establishments under the MLI.

Companies that use commissionaires for overseas operations are now considering whether to convert to a buy-sell distributor structure, a trend that will likely accelerate, Jonathan Stuart-Smith, a partner at EY in Tokyo, told Bloomberg Tax June 22.

A distributor sells products to customers that it buys from an enterprise, but neither works on behalf of the enterprise, nor is it selling property owned by the enterprise.

The commissionaires employed by those companies are largely based in European countries like Switzerland, Belgium, and Ireland, Stuart-Smith said.

“We have also seen commissionaire structures aggressively challenged in other European jurisdictions including Italy, Spain, and France,” Stuart-Smith said. He added that German tax authorities are also known for being quite aggressive in their pursuit of permanent establishment cases.

But a reorganization could bring major compliance costs, and potentially capital gains tax, Stuart-Smith said.

“Based on the current pace at which these companies are preparing for MLI (PE) compliance, it is very likely that they will not have completed such preparation by the time the MLI kicks in,” Stuart-Smith said.

To contact the reporter on this story: Brian Yap in Tokyo at

To contact the editor responsible for this story: Penny Sukhraj at

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