Worldwide transfer pricing reference guide 2014

Japan
Taxing authority and tax law
Taxing authority: National Tax Agency (NTA).
Tax law:
• Special Taxation Measures Law (STML) Article 66–4/66–4–2 — Special Provisions for Taxation of Transactions with Foreign Related
Persons
• STML Article 68–88/66–88–2 — Special Taxation Measures of Transactions between Consolidated Corporations and Foreign Related
Persons
Relevant regulations and rulings
• STML — Enforcement Order 39–12, 39–12–2/39–112, 39–112–2
• STML — Enforcement Regulations Article 22–10, 22–10–2/22–74, 22–75
• STML — Circulars 66–4–(1)–1 to 66–4–(9)–2/68–88(1)–1 to 68–88(9)–2
• Commissioner’s Directive on the Establishment of Instructions for the Administration of Transfer Pricing Matters (Administrative
Guidelines)
• Commissioner’s Directive on the Establishment of Instructions for the Administration of Transfer Pricing Matters for Consolidated
Corporations (Administrative Guidelines for Consolidated Corporations)
• Commissioner’s Directive on Mutual Agreement Procedures
OECD Guidelines treatment
The NTA refers to the OECD Guidelines for direction, and the Japanese transfer pricing Administrative Guidelines contain the following
statement in Para. 1–2(3).: ‘In light of the importance of a common understanding regarding transfer pricing by each country’s tax
authorities for the resolution of international double taxation that arises due to taxation pursuant to the transfer pricing tax system,
appropriate administration shall be carried out by referring to the OECD Guidelines to the extent necessary in examinations and in reviews
of requests for APAs.’
Under audit, however, tax examiners often point out that Japan is not directly bound by the OECD Guidelines and that they will follow
their interpretation of Japanese tax laws and regulations, even where there may be a disagreement over whether or not their approach is
consistent with the OECD Guidelines. On the other hand, the most recent US–Japan tax treaty explanation refers extensively to the OECD
Guidelines. Furthermore, changes were made to the Japanese transfer pricing rules in 2011 that were explicitly linked to similar changes
in the OECD Guidelines, possibly suggesting greater harmonization in the future.
Priorities/pricing methods
Historically, Japanese tax authorities have required that the CUP, Resale Price, and cost plus methods be used whenever possible, only
allowing the use of other methods (e.g., Profit Split and TNMM) after the first three have been discounted. However, triggered by similar
changes in the OECD Guidelines, STML 66–4 and 66–4–2 were amended to eliminate the hierarchy of methods in favor of the most
appropriate method approach, for tax years beginning on or after 1 October 2011.
Transfer pricing penalties
Transfer pricing assessments are subject to the same penalties that apply to general corporate tax assessments. There are two types of
penalties:
• Underpayment penalty tax — computed as either 10% of the additional assessed tax (up to JPY500,000), or 15% of the additional tax,
depending on the amount of underpayment
• Delinquency tax (interest) accrues in two parts:
• The first part of delinquency tax accrues for one year following the due date of the original tax return at a rate of 4% per year plus the
official discount rate as of 30 November of the prior fiscal year
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