Tax controversy update [Special Edition] New NTA fiscal year and upcoming tax examinations

On July 10, the NTA’s annual personnel reshuffle took place, which included staff at regional tax bureaus and tax offices.

For those tax examinations commencing soon after the new fiscal year begins in July, many companies surely have upcoming examinations dates already finalized. The new norm of examining transfer pricing items alongside tax examinations was introduced several years ago, and ever since, it has become quite normal for tax authorities to ask for multiple transfer pricing related documents in advance of examinations. However, we often hear feedback that suggests many taxpayers are confused as to whether such requested documents are actually transfer pricing related documents or not. Depending on the details, responses to certain tax authority requests may require a particularly cautious approach (which of course also applies to requests regarding matters other than transfer pricing).

Another aspect of the examination that requires prudence is the interview regarding the company overview, which is usually conducted at the beginning of the examination. Since the implementation of the tax examination framework that simultaneously examines transfer pricing items, taxpayers can also be caught off guard with interview questions about the functions and risks of their foreign subsidiaries, parent company and other affiliated companies. When it comes to functions and risks, the ideal profit levels in the eyes of the authorities can dramatically change depending on the taxpayer’s explanation. The authorities will also expect an explanation which is consistent with documentation such as the local file and master file.

Additionally, Japan differs from other G7 countries in that it often applies donation tax treatment rather than transfer pricing tax treatment in many foreign related party transactions. Donation taxation makes it nearly impossible to eliminate double taxation through mutual agreement procedures (MAPs). If the donation tax has the potential of being a large amount, it will not only have a substantial impact on the financial performance of the entities subject to such tax, but even more so, it will require those entities to take strategic measures on how to avert this treatment for similar transactions in the future.

As of two years ago, we began asking companies to share with us the information request lists they receive from the authorities so that we may provide our general comments on the items within (whether TP-related or not) at no extra charge to the client. As you can imagine, many companies are happy to take advantage of this service, and we extend the same offer to any of our readers. For more information, please reach out to your company’s contact here at EY, or please send an email to taxcontroversy@jp.ey.com.