Current Transfer Pricing Tax Investigations in Japan

Transactions with “foreign related parties”are subject to transfer pricing taxation.

Foreign related parties are foreign corporations that own 50% or more of the outstanding shares of the foreign corporation or foreign corporations that are virtuallycontrolled by the foreign corporation (e.g., highly dependent on its transactions or highly dependent on its funds).

In other words, if your clients is located overseas, the transaction may be subject to a transfer pricing tax audit.

Specific examples.

 Sales of products to a foreign subsidiary
 Purchase of products from a foreign subsidiary
 Provision of services to a foreign subsidiary
 Receipt of services from a foreign subsidiary
 Lending money to/from overseas related parties
 Licensing agreements with overseas related parties

In addition to the above, various transactions with foreign related parties are subject to transfer pricing taxation.

Scale of transactions subject to investigation.

The National Tax Agency has not clearly indicated the size of transactions subject to investigation for transfer pricing taxation.

However, in general, transactions of 100 million yen or more per year are likely to be subject to investigation.

At the moment, your company is not subject to transfer pricing. But in longer terms, business contracts between companies should be prepared to ensure the determined prices between companies is appropriate.
If there is already a master file between group companies, it would be a good idea to create local rules in Japan.

In future trends, the legitimacy of transactions with foreign-related parties will be subject to investigation, so it is a good idea to clarify how intercompany profits are calculated in the contract at first.