The Japanese tax authorities are increasingly active in enforcing Japan’s transfer pricing rules. Unfortunately, dealing with a transfer pricing tax audit requires significant time and expense. If an assessment is made, obtaining relief from double taxation through mutual agreement procedures (competent authority negotiations) also requires significant effort, and in some cases double taxation cannot be eliminated. To cope in this increasingly difficult environment, it is advisable for taxpayers to undertake an analysis of their transfer pricing tax risk, and to prepare documentation supporting their transfer pricing policies and procedures. In appropriate cases, an advance pricing arrangement can be an effective measure for eliminating future transfer pricing tax risk.
The PwC Tokyo Transfer Pricing Consulting Group, in conjunction with PwC transfer pricing teams located worldwide, provides various services to assist our clients in managing their global effective tax rate while limiting their transfer pricing audit exposure.
- Analysis of transfer pricing risk and preparation of supporting transfer pricing documentation
Under Japan’s 2003 tax reform legislation, taxpayers are now required to disclose the transfer pricing methodology they used to set their transfer pricing with affiliated foreign entities. The disclosure is required on Schedule 17(3), “Detailed Statement Regarding Foreign Affiliated Companies," which is filed with the taxpayer’s annual tax return. In effect, this requirement means that taxpayers must now prepare transfer pricing documentation and relevant supporting evidence.
Our services include assessment of the clients’ transfer pricing risk in light of its transfer pricing policies and practices. We also assist our clients in developing and documenting effective and efficient transfer pricing policies. For this purpose, we analyze the functions and risks of the parties to the foreign affiliated transactions and present the arm's length price using the most appropriate transfer pricing methodology, taking into account the market conditions within the client’s industry.
- Support for transfer pricing tax audits
Generally, Japanese transfer pricing audits take from one to two years. During the transfer pricing audit, the tax authorities request significant amounts of documents and information. Differences of opinion on issues with no clear answer frequently occur. Taxpayers should be able to provide to the tax examiners clear explanations of their transfer pricing policies and practices. To do so, taxpayers must prepare documentation that presents their transfer pricing in the most strategically favorable light.
The PwC Tokyo transfer pricing team attends meetings with the tax examiners, and assists the client in preparing and providing appropriate responses to the tax examiners’ requests. Our transfer pricing professionals have significant experience in assisting clients in responding to the tax authorities’ inquiries, developing strategy and presenting counter-arguments to the tax authorities’ positions, and negotiating with the tax authorities within the framework of the audit defense strategy.
- Support for claim for relief from double taxation
In the event the tax authorities issue a transfer pricing assessment, the taxpayer may submit a request for mutual agreement procedures with Japan’s competent authority (CA), requesting that the Japan CA negotiate with the CA of the country of the affiliated entity to eliminate international double taxation. In order to achieve the earliest possible resolution of the CA negotiation, the taxpayer should prepare and provide to the CAs of each country a persuasive proposal for resolution of the matter, and work closely with the tax authorities of both countries.
We support the CA negotiation process in both countries, utilizing the PwC global network of experienced transfer pricing professionals. Our services include preparation of the CA application, preparation of transfer pricing analyses and supporting documentation, explaining the analyses and the client’s position to the tax authorities, and assisting in the preparation and filing of the claim for tax refund after the CAs reach agreement.
- Support for advance pricing arrangements
Advance Pricing Arrangements (APAs) are effective tools for eliminating transfer pricing audit risk and are becoming increasingly popular among taxpayers. Because the taxpayer initiates the APA filing, the process is more flexible and constructive than an audit. In order to avoid international double taxation, we generally recommend that the taxpayer and its affiliated entity enter into the APA with both Japan and the country of the affiliated entity (i.e., a “bilateral APA”).
We can assist clients in determining whether an APA would be beneficial by assessing their transfer pricing risk, and in presenting our findings to the clients’ foreign parent company. Our services also include preparation of the APA application documents, attendance at the tax review conducted by the tax examiners, and assisting in the bilateral CA negotiation process. After the APA is concluded, we can also prepare necessary compliance reports required under the APA.
- Support for global tax cost management
In order to maintain international competitiveness, it is essential that companies strategically plan transfer pricing compliance for complex cross-border affiliated transactions. To achieve this, appropriate allocation of profit among group members must be considered and a strategic plan for management of the global group, considering the various tax incentives available, must be developed and implemented.
We can assist clients in analyzing their global transactions and the group functions related thereto, and can provide tax planning advice and implementation support to achieve a reduction of the group’s global effective tax rate while limiting transfer pricing exposure.
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