As in many countries, Japan's tax authorities have focused on transfer pricing in tax audits. These audits are separate from general tax audits, although, like in the U.S., the corporate agent may collect transfer pricing documentation and provide it to the specialists. Apart from 2009 (presumably due to tsunami), the number of transfer pricing audit cases has increased steadily, almost tripling since 1997. The National Tax Agency (NTA) has long been known for its use of "secret comparables," putting taxpayers at a disadvantage, particularly if they are not prepared for audit.
In 2010, the transfer pricing documentation requirements were clarified. Starting in 2013, new rules become effective. These rules include a requirement that taxpayers provide a complete an accurate transfer pricing report, compliant with the regulations. This report must be provided "without delay" once requested by the NTA.
Transfer pricing documentation should contain enough (and complete) information to establish the arm's length price for intercompany transactions and should include financial statements and tax returns, written pricing policy, description and rationale of the pricing methods and supporting documents prepared by the taxpayers such and invoices. These are similar to the U.S. requirements, in substance.
While there are no monetary transfer pricing penalties, per se, the (real) threat of a tax adjustment which would be driven by governmental auditors, should be reason enough to be proactive in preparing transfer pricing documentation for Japan, and other countries, too.
For more information about these new rules or to find out how your company can become compliant, please contact Mary D. Richter or Cynthia J. Hoffman.
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