Tax controversy update vol. 1 - The state of tax examinations amidst (after) the pandemic

With the end of the summer holidays and the Olympics, tax examinations are finally in full swing. Unlike just a year ago, it seems that the National Taxation Agency (NTA) has become somewhat accustomed to COVID-19. The tradition of NTA examiners physically visiting companies for examinations is deep-rooted, and indeed in-person examinations are being conducted again.

About one month ago on 3 August, the new commissioner of the Osaka Regional Taxation Bureau had a press conference and reported on NHK News. The majority of the  conference was focused on the difficulties taxpayers were having, but there were also some comments related to tax examinations. The comments essentially said that "the number of examinations had decreased due to COVID-19, but this wasn’t the case when it came to high net worth individuals and international transactions.” Indeed, this seems to be the thinking of the NTA as a whole and not just the Osaka Bureau. This also seems to align with what we are seeing on the ground.

In addition, the examination framework of the NTA was updated last July. From the surface it appears not much has changed, but we feel the details related to corporate tax examinations are definitely changing. Specifically, since its inception in 1986, the NTA has always had transfer pricing examinations (full-scale examinations and not just those for simple matters such as interest rates and services) done only by the transfer pricing teams. However, beginning from last July, the regular examination team can now handle (full-scale) transfer pricing examinations. This is why recently our team members have seen an increasing number of cases in which the volume of requests for transfer pricing-related materials has increased during the regular tax examination conducted every few years, as well as in which transfer pricing functions and risks are now discussed during the initial overall interview stage of the examination. When it comes to transfer pricing matters, a delicate touch is often required when providing answers to questionnaires and requests. This is why we feel it is more critical than ever to confirm whether an examiner’s request is a transfer pricing issue or not. If you would like more details on this topic, please refer to the magazine article written by one of our members: "Latest Status of Transfer Pricing Examinations" (Junkan-Keiri-Joho 2021.2.10 (No.1602)