Worldwide transfer pricing reference guide 2014

Japan (continued)
Transfer pricing penalties (continued)
• The second part of delinquency tax accrues from the date following the date of the assessment notice until the date the additional tax
is paid. For the first three months following the date of the assessment notice (including the one month period from the date of the
notice until the payment deadline and two months following the deadline) the rate of delinquency tax is 4% per year plus the official
discount rate as of 30 November of the prior fiscal year. For any delinquency tax accruing after this period, the rate increases to 14.6%
per year
There is no separate penalty for failure to prepare and maintain transfer pricing documentation. However, unlike in many other countries,
preparation of sufficient documentation does not lead to penalty relief in case of an assessment.
Penalty relief
There are no specific provisions for reductions in underpayment penalties.
However, the 2007 tax reforms allowed for the provision of a grace period for the payment of assessed taxes — including penalty taxes —
for taxpayers submitting an application for mutual agreement procedures. The taxpayer must submit a separate application to be
entitled to the grace period. The grace period is the period starting on the initial payment due date of assessed taxes (if the application
submission date is later than the initial payment due date, the submission date is applicable) and ending one month after the day on
which the “correction” based on the mutual agreement has been made (or the day on which a notification was issued that an agreement
could not be reached). Any delinquency taxes accrued during the grace period will be exempted. However, under STML Article 66–4–2(2)
(which grants a postponement of tax payment), the tax authority requires the taxpayer to provide security equivalent to the amount of
the tax payment (i.e., collateral). This new transfer pricing rule applies for applications for a grace period made on or after 1 April 2007.
Documentation requirements
The 2010 tax reform effective 1 April 2010 clarified expectations around documentation, by amending the STML to state that
documents listed in the ministerial ordinance should be provided without delay when requested during the course of an examination.
The ministerial ordinance in question (STML Enforcement Regulations Art. 22–10, 22–74) was in turn amended to include a detailed
list of documents to be submitted. The previous version of the STML had required that “documents or accounting books” be rendered,
without specifying what types of documents and books were required. The substance of the new list in the ministerial ordinance is largely
identical to a list previously disclosed in the Administrative Guidelines (an advisory document), but the promotion to the ministerial
ordinance, coupled with the citation in the STML, gives this list the force of regulation.
The list of documents is now formally linked to existing language in the STML stipulating that failure to provide appropriate materials
in a timely manner upon request can trigger the tax examiner’s authority to collect transactional data from comparable firms to use
as “secret comparables” for the taxpayer. That is, the comparables are not disclosed to the taxpayer because the transactional data of
the companies are confidential. Alternatively, an examiner can resort to “presumptive taxation,” presuming an arm’s length price with
reference to profit ratios of other corporations in the industry which carry out similar activities.
Documentation deadlines
The taxpayer is required to provide the tax authority with documentation (i.e., information and records) relevant to the establishment of
the arm’s length price in a timely manner upon request. There is no exact deadline specified.
Statute of limitations on transfer pricing assessments
The statute of limitations in Japan on transfer pricing assessments is six years from the deadline for filing tax returns for a fiscal year
(STML Article 66–4(16)).
A corporation must maintain corporate tax records for seven years from the fiscal year end (Corporation Tax Law Art. 126 and 150–2;
Corporation Tax Law Enforcement Regulation, Article 59 and 67).
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