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By Brian Yap
Japanese multinational companies worry that filing their first country-by-country reports in 2018 will lead to a barrage of transfer pricing audits by developing countries.
Companies are currently preparing their first country-by-country reports that must be filed with the National Tax Agency by the end of March 2018. Japan adopted country-by-country reporting rules in March and April 2016 based on OECD reporting requirements.
The Organization for Economic Cooperation and Development rules are part of its 2015 base erosion and profit shifting project, requiring companies to document factors such as income, taxes paid, and workforce, broken down by country. The rules under BEPS Action 13 aim to help tax administrations identify where to spend resources to crack down on corporate tax avoidance.
A spokesperson for Japan’s Ministry of Finance told Bloomberg BNA Sept. 19 that there is no difference between Japan’s country-by-country reporting requirements and those under BEPS Action 13.
Japanese multinational enterprises are concerned about making the disclosures stipulated under BEPS Action 13 to developing country tax authorities, Ken Okawara, head of Transfer Pricing and Economic Analysis at Baker McKenzie in Japan, told Bloomberg BNA. The fear, Okawara said, comes from their suspicion that they may be accused of transfer pricing manipulation even though they never had any such intention.
“They believe tax authorities in developing countries could seek to extract personal gains out of this new disclosure requirements by conducting aggressive audits,” the Toyko economist said.
Japanese electronics and automobile manufacturers, as well as trading companies, have expressed the greatest concern about Japan’s country-by-country reporting requirements, said Hiroshi Makuuchi, assistant manager with the Business Infrastructure Bureau at Keidanren, the Japan Business Federation in Tokyo. These companies are already under aggressive audits in developing countries.
“Japanese MNEs are afraid that they will be subject to TP assessments by tax authorities in particular in developing countries without the pre-existence of any detailed functional analyses conducted by the authorities, which is required of them under the BEPS Action 13,” Makuuchi said.
Makiko Kawamura, international tax partner at DLA Piper in Tokyo, said Japanese companies are struggling to comply with tax policies implemented by the Philippines, Malaysia and India.
Companies with operations in these countries often end up taking their cases to court with a view to seeking a favorable outcome, Kawamura said. “But doing so means that these companies could risk suffering from double taxation by both domestic Japanese and overseas tax authorities.”
In addition to the country-by-country report, Japanese multinationals are also required to submit a master file containing standardized information about their global transfer pricing practices. And they must provide the NTA with a local file detailing information relating to specific intercompany transactions, which serve to prove that they have complied with the arm’s-length principle.
The ultimate parent Japanese taxpayer whose consolidated turnover is 100 billion yen (US$900 million) or more in its consolidated financial statements for the immediately preceding fiscal year is required to submit the master file and the country-by-country report with the NTA.
Okawara said Japanese companies, due to their conservative approach towards tax planning, are generally not afraid of domestic tax audit issues compared to their foreign audits.
However, Okawara said the Japanese tax authorities sometimes have unique viewpoints. “They tend to request diagrams for the company’s group capital structure and transactional flows for its main business which include full supply chains from vendors of raw materials through third party customers.”
Japanese multinational companies also are concerned about calls by the European Commission to require public disclosure of their confidential tax information.
Although the tax information contained in the country-by-country reports can only be accessed by Japan’s tax authorities and those in tax treaty partner countries, the potential implementation of a European Commission proposal would be a game changer.
“The concern lies with the Commission’s proposal in April 2016 for a directive, which requires multinational groups to publish on their websites a yearly report on profits and tax paid in each country where they are active,” said Makuuchi.
Japanese multinational companies, including members of his federation, have been arguing that such a proposal goes beyond the BEPS Action 13 requirements, Makuuchi added.
According to legal counsel, many Japanese companies don’t have as many resources or departments for internal tax matters as their U.S counterparts. Tax matters are usually handled by the corporate finance or accounting department within the company.
“Many of them do not have a dedicated tax department and only a few Japanese large multinationals have,” Yushi Hegawa, tax disputes partner at Nagashima Ohno & Tsunematsu in Tokyo, said.
Ryann Thomas, transfer pricing services partner at PricewaterhouseCoopers (PwC) Tax Japan in Tokyo, also pointed out that some Japanese multinational enterprises don’t have a global financial reporting system for their cross-border network of businesses.
“Japanese companies have in recent years been actively carrying out outbound transactions. Their acquired overseas subsidiaries may not yet have merged their financial reporting systems with those of their parents into a global platform,” he said.
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