Tax controversy update vol. 3 - Up to 45 days of leeway for Local File submission requests?

Recently, we have seen a particular question consistently come up while assisting clients with preparing for their upcoming tax examinations. The question revolves around whether it is acceptable to submit mandatory Local File documentation up to a maximum of 45 days from when the submission request arrives from the tax examiners. Clients with this question are likely focusing too strongly on the provided wording of “45-day period of submission for mandatory document requests, 60-day period of submission for non-mandatory document requests,” although a closer look at the full text tells a different story.

Article 66-4-8 of the Act on Special Measures Concerning Taxation (ASMT) states that “..a mandatory Local File　should be submitted by the date designated by the tax examiner, which has been set with consideration of the number of days which would normally be required for such a request, and which will be a period not exceeding 45 days..” It goes without saying that mandatory Local Files are prepared by the original filing deadline and on hand. Therefore, the deadline for submission requests of such documents is often set to between one and two weeks. In contrast, it is not strange for companies to request the full 60-day period for submission of documents that are not mandatory, as there is no requirement for the documents to be prepared by the original filing deadline.

Speaking from our extensive experience with tax examinations, the standard used by the authorities for determining the Local Files being submitted is not usually whether the documents were mandatory or not, but whether the transactions in question may have given rise to profit shifting. Therefore, the taxpayer may also be required to submit non-mandatory documentation in such instances and they must spend up to two months for the creation and submission.

Regardless, failure to comply with the deadlines set by the tax examiners triggers the presumptive assessment rule stipulated in the same Article 66-4 of the ASMT, and as such the ability to comply with such deadlines is a key factor during tax audit.