Japan’s transfer pricing regulations have now adopted the documentation requirements laid out by the OECD’s BEPS Action Plan 13 released in October 2015. Global companies with annual consolidated revenue exceeding 100 billion yen are required to comply with these new documentation requirements.
However, at HLS, we advise medium-sized companies that do not necessarily meet this threshold to determine intercompany pricing that is acceptable to both Japanese and overseas tax authorities. We then manage transaction prices at headquarters to reduce taxation risk through several transfer pricing services.
To learn more about transfer pricing, please see our Transfer Pricing Seminar for Medium-sized corporations in Japan – a comprehensive series of 11 articles carefully prepared by HLS specialists to outline all the necessary details all medium companies should know about transfer pricing in Japan.
Quantifying and assessing transfer pricing taxation risk.
We analyze related-party transactions (including intra-group service transactions and financial transactions among group companies), and we analyze the related parties’ functions, risks, and use of intangible properties.
After conducting our study, we look for transfer pricing risks, such as unrecognized related-party transactions or pricing gaps between the current transaction pricing and the arm’s-length pricing. If risks are found, we quantify the tax exposure and propose an effective action plan to mitigate transfer pricing risk. This applies to single entities entering the market for the first time as well as established multi-entity corporations in japan.
Developing and executing effective transfer pricing policies.
A company-wide transfer pricing policy informs group companies how to comply with transfer pricing regulations in various tax jurisdictions. The policy includes the transfer pricing methods chosen and how they should be applied; when and how intercompany pricing should be adjusted, and other important factors to facilitate smooth transfer pricing processes.
We take into account the enforcement environment of each country’s transfer pricing regulations as well as the business conditions of the client. Through our comprehensive transfer pricing services, we provide support for the development of effective policies that reduce risk at both headquarters and subsidiaries. We also support the establishment of operational transfer pricing processes and performance review processes, as well as help coordinate the implementation among group companies.
Preparing necessary documents to comply with Japan’s newly implemented three-tiered documentation requirements.
Japan’s 2016 tax reform included an update to its existing transfer pricing documentation requirement. Companies that meet the filing thresholds are now required to prepare certain transfer pricing documentation (CbCR, master file, and local file.)
A Japanese company with group-wide revenue of 100 billion yen or more in the preceding year must file a CbCR.
The CbCR must include the following:
1. Revenue, income before tax, tax paid, tax incurred, capital investments, retained earnings, number of employees, amount of tangible assets (cash and cash equivalents excluded) by location.
2. Names of constituent entities, constituent entities’ residing countries and the headquarters’ residing country (if applicable), and the nature of the main business activities carried out by the constituent entities.
3. References for items 1 and 2.
Japanese companies that are the ultimate parent companies (or the surrogate parent entity) of multinational corporations are required to electronically file a CbCR within one year of the fiscal year end. Through an automatic exchange framework, CbCR will be made available to most tax jurisdictions in which a constituent entity resides.
A Japanese company with group-wide revenue of 100 billion yen or more in the preceding year must file a master file.
A master file must include the following information
• Company organization structure
• A business overview
• Basic financial information for each entity
• Use and ownership of intangible property
• Intra-group service transactions
Japanese companies and permanent establishments that meet the filing threshold are required to electronically file a master file within one year of the fiscal year end.
Japanese transfer pricing regulations require corporations to prepare a local file by the date the income tax return is filed if one of the following conditions exist:
1. The total intercompany transaction amount (during the prior fiscal year) is greater than 5 billion yen
2. The total intangible property transaction amount (during the prior fiscal year) is greater than 300 million yen. Even if the total intercompany transaction amount is less than the threshold, the submission of a local file or its equivalent is required if requested during a tax audit.
The file must be submitted before the deadline determined by the agent (usually within 60 days of the request).
Licensing and transfer of intangible property.
When a significant intangible property owned by a company is transferred to a foreign-related party, the transaction must be performed in accordance with the arm’s-length principle. It is generally evaluated by the discounted cash flow method, which is based on the cash flow from intangible properties that can be expected in the future.
We help our clients understand the complexities of this process in light of transfer pricing agreements and its role as a source of income. Additionally, we provide support for calculating the value of intangible properties, profit allocation, and supporting the necessary reporting requirements.
Avoiding future transfer pricing disputes.
An APA is an agreement created in advance between a tax authority and a taxpayer determining how the arm’s-length price should be calculated during a fixed period (generally three to five years). Taxpayers may choose to obtain bilateral APAs, the most common type of APAs entered today. In practice, the most commonly used approach is to pre-determine a range for the margin ratio (allowable range), and at the end of the APA-covered period, if the tested party’s margin ratio falls within the targeted profit ratio range, there will be no additional transfer pricing taxation by tax authorities.
When applying for an APA, taxpayers are required to establish a proposed range of margin ratios and submit it to the tax authority along with documentation equivalent to a local file. Tax authorities will then examine the application and determine whether or not they agree with the taxpayer’s proposed method. HLS can help you understand this process and make the relevant submissions through our transfer pricing and tax services.
Providing expert support in preparation, negotiation, and closure of transfer pricing audits for companies and corporate groups.
During a transfer pricing audit, if tax authorities determine that a taxpayer’s intercompany transactions were not in line with the arm’s-length principle, they have the power to adjust the taxable income to reflect arm’s-length pricing. This will result in additional tax implications.
HLS Global’s transfer pricing team helps you to avoid these situations through our team of professionals with years of service at Japan’s National Tax Agency, working in international taxation and transfer pricing regulations. This allows our clients to perform every intracompany transaction in Japan with confidence.
With our comprehensive and tailored transfer pricing services, we support our clients in their negotiations with tax authorities throughout the transfer pricing audit, including planning for the audit; sitting-in during the audit; answering questions from tax authorities, and providing written responses and explanations.
HLS Global provides advice to companies requesting mutual agreement procedures to address or dispute a potential double taxation situation. We also support the preparation of mutual agreement procedure applications and transfer pricing analyses.
Recently, the following activities between taxpayers and their foreign related parties have been intensively scrutinized during tax audits:
1. Whether any portion of expat salaries are borne by the entity loaning the employee
2. How related-party service fees are determined
3. Uncollected royalties due to misunderstandings about sharing technical know-how
4. Incorrectly calculated interest rates on loans between related parties.
For expat salaries in particular, it is important to have a proper secondment agreement between the assigning company and the assigned company. The terms of the agreement must be carried out accordingly.
Keep up with the latest transfer pricing policies and strategies on our blog.
Our network of overseas affiliates and alliance partners provide international transfer pricing services that comply with each country’s legal requirements:
HLS Global has partners and clients in over 10 countries. Our operations extend to Brazil, China, Hong Kong, Taiwan, Singapore, Thailand, Indonesia, and more.
The ultimate goal of transfer pricing compliance is minimizing the transfer pricing taxation risk. Prior to preparing the documents required by transfer pricing regulations, it is important to understand the existing transfer pricing risk and to sort out the transaction details (pricing, profit allocation, contracts) between taxpayers and their related parties. At HLS Global, we provide services beyond compliance; we believe it is important to tackle the fundamental risk of transfer pricing taxation.
Keeping in mind how tax authorities typically approach transfer pricing audits, we help our clients establish a transfer pricing policy that is acceptable to the relevant tax jurisdictions. For example, in intangible property licensing agreements, royalties are typically fixed at a certain percentage. Instead, we can help establish a variable royalty structure, where the amount of royalty varies depending on the amount of profit the licensed intangible property generates. By tweaking an existing royalty agreement in such a way, we can help our clients establish a royalty policy that is acceptable to both the licensor’s and the licensee’s tax authorities.
At HLS Global, we have abundant experience dealing with Japanese multinationals and foreign companies’ transfer pricing. We have deep knowledge of the transfer pricing issues faced by many companies. We have a rich portfolio of clients from a variety of different industries, such as manufacturers (automobile parts, foods, chemicals), service providers (freight forwarding, entertainment, IT solutions), restaurants, and retailers.