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The Electronic Data Preservation Act with Illustrations

  1. Getting Started

As well known, the Electronic Data Preservation Act (hereinafter referred to as “EDPA“) was originally scheduled to take effect from January 2022. However, the application of this act has been postponed to January 2024. There have been multiple revisions made to this act, which has made it difficult to understand what is mandatory and what has been mitigated. In this article, we will focus on electronic transactions and illustrate their position in the EDPA, and how they can be relevant to your business.

  1. Relationship Between Various Tax Related Documents and the EDPA

The overall relationship between the various tax and accounting documents, and the EDPA can be summarized as shown in the diagram (Exhibit-1) below. 

As you can see from the diagram (Exhibit-1) above, under the EDPA, it is only electronic data exchanged through electronic transactions that is mandatory to be stored in an electronic manner. This applies not only to the data received, but to the data sent as well. For tax and accounting documents exchanged other than electronic transactions, either conventional hard copy storage or electronic data storage is permitted.

So, what are the requirements for this method of electronic storage of all electronic transaction data?

Initially, the visibility requirements represented by the truthfulness and retrieval methods were quite strict. However, a review of the system has resulted in relaxed requirements for the storage of electronic transaction data in accordance with the actual conditions of the taxpayer’s IT environment.

Please refer to the flowchart (Exhibit-2) illustrated below to determine the best method of how to store electronic transaction data under the EDPA according to your IT environment.

  1. Flowchart to Determine the Best Electronic Transaction Data Storage Method

HLS has customized a flowchart published by the National Agency in July 2023. This flowchart can help to determine how to store electronic transaction data according to the taxpayer’s IT environment. 

Please refer to the flowchart (Exhibit-2) below. If your company is not determined to be storing electronic transaction data in accordance with the principle rules, you need to take appropriate measures as soon as possible.

  1. Electronic Transaction Data: Requirements Under the EDPA (in principle)

It is necessary to establish an IT environment that satisfies the “Truthfulness Requirement” and the “Visibility Requirement” as described below.

Truthfulness Requirements (Falsification Prevention Measures)

By taking one of the following measures for electronic data, it must be possible to operate in such a way that any data correction history remains and cannot be deleted.

Visibility Requirements

The data should be able to be searched and displayed in the event of a tax audit. Except for the search requirements, the system should have the ability to be handled with a computer and user manuals.

Specific requirements are as follows:

(*1)”Promptly” is generally defined as within seven business days here, or within two months and seven business days if there are Time-Stamping rules in place.

(*2)If electronic transaction data can be downloaded and given to Tax Examiners upon their request during a Tax Audit, ② and ③ are not required.

HLS can provide you with advice on the requirements for electronic storage of electronic transaction data, tailored to your IT environment. If you would like a more detailed explanation, please do not hesitate to contact us

5 Whether the Deferral Methods (Permanent Measures) are Applicable or Not this grace period is permanent. The details of the grace period and its application are as follows:

(*1)“Reasonable cause” should be determined on a case-by-case basis, but it may include, for example, lack of time to develop an IT environment, lack of funds to develop an IT environment, or unfamiliarity with IT operations.

Other measures are also available to mitigate the electronic storage requirements depending on the taxpayer’s situation.

If you would like a more detailed explanation, please do not hesitate to contact us.