Japan

Introduction

The main Japanese Transfer Pricing legislation is stated in Article 66-4 of the Special Tax Measures Law and Article 39-12 of the Enforcement Order of the Special Tax Measures Law. The Japanese National Tax Agency (NTA) published detailed interpretations concerning these statutory provisions in Chapter 12 of the Basic Circular of the Law and the Commissioner’s Directive on Transfer Pricing Operation.

In March 2019, the Japanese government approved its Tax Reform Proposals 2019. In June 2019, the Administrative Guide on Transfer Pricing was also updated, which provides further interpretation and explanation of the new legislation.

On June 28, 2020, the Japanese Tax Agency published its commentary on the Special Tax Measures Law Circular, providing additional explanations and rationale for the performed amendments. During the same month, the NTA updated the Guidance entitled “Documents Recognized as Necessary for the Arm’s Length Pricing.”

Arm’s Length Principle

The Arm’s Length Principle is based on the independence and equality embodied in the transactions carried out by the different parties. In this regard, the price of transactions between associated enterprises must be similarly set as independent enterprises operating on arm’s length terms, participating in transactions under equally applied economic conditions and circumstances.

Related Parties

A “foreign related party” is a foreign corporation related to another corporation.

An “associated” corporation has 50% or more of the total number of issued shares or the investment amount of the other corporation.

Transfer Pricing Methods

The following methods apply to tangible property transactions, including the sale of inventories:

Comparable Uncontrolled Price Method.
Resale Price Method between Independent Parties.
Cost Plus Method.
Profit Split Method.
Transactional Net Margin Method.

The methods equivalent to those listed above apply to transactions other than tangible property transactions, namely intangible property transactions, service transactions, and loans or advances.

Transfer Pricing Documentation

Master File (Submitted in Japanese or English)

Multinational groups with total consolidated revenues for the previous fiscal year of the Ultimate Parent Entity of less than 100 thousand million yen.

To file to the relevant District Director within one year following the day after the end of the fiscal year of the Ultimate Parent Entity.

Local Report (no language requirement)

Corporations are exempt if:

The number of transactions (total receipts and payments) with the related foreign party during the preceding business year (the current business year if not the preceding one) was less than five thousand million yen, and.
The number of intangible transactions (total receipts and payments) with the related foreign party during the preceding business year was less than 300 million yen.

Preparation Period: To be prepared by filing the final statement due and maintained for seven years.

Filing Deadline: To be filed or submitted within a specified period if requested throughout a tax audit.

Country by Country Report (in English)

Multinational groups with total consolidated revenues for the previous fiscal year of the Ultimate Parent Entity of less than 100 thousand million yen.

Filing Deadline: To be filed with the competent District Director within one year from the day following the day the fiscal year of the Ultimate Parent Entity ends.

Notification deadline: To be notified to the competent District Director no later than the last day of the fiscal year of the Ultimate Parent Entity.

Penalties

In case of failure to file the Master File and CbCR, the fine will amount to ¥300,000 if companies fail to file with the District Director before the deadline without a proper reason.

In case of failure to file the Local Report on the specified date, the tax authorities may impose an estimated fine.

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