Monday, 6 July 2015

Navigating Japan's donation rules

Many Japanese taxpayers have encountered difficulties in corporate tax examinations, when what are generally considered transfer pricing issues have been challenged by the Japanese tax authorities not under the transfer pricing legislation, but under the "donation rules" of the Japanese Corporate Tax Act.
These challenges may arise even where the taxpayer's transfer pricing is at arm's length, or more dramatically, even where the taxpayer's transfer pricing leaves more than arm's length profit in Japan. In such cases, most taxpayers have trouble understanding the basis for the tax authorities' approach. This confusion can be further compounded by the fact that adjustments made under the donation rules, which typically give rise to double taxation, are not eligible for the mutual agreement process.
To provide some clarity in this area, this article will describe the interaction between the Japanese transfer pricing and donation rules, as well as provide some examples of donation challenges that have arisen in relation to intercompany transactions in recent years. Finally, the article will provide recommendations to taxpayers as to how best to mitigate the possibility of a challenge under the donation rules in future examinations.
Source & more info: PwC