Support for transfer pricing tax audits

Common areas of focus

COVID-19

• Documenting the impact
  • COVID-19 may have caused reduced profits or losses for Japanese affiliates of foreign multi-national entities (MNEs).
  • The Japanese tax authorities are likely to challenge claims of reduced profits for limited-risk entities, such as limited risk distributors.
  • Taxpayers need to determine and document the quantitative impact of COVID-19 on their business and prepare rationale for a limited-risk entity sharing in the impact.
  • Typical benchmarking support will be difficult for FY2020, since comparable data reflecting COVID-19 will not soon be available. Taxpayers should therefore consider alternative approaches, such as making adjustments to the tested party’s financial data.

Other areas of focus for audits

• Intercompany interest payments
  • Intercompany interest payments are not historically an area of focus, so supporting documentation (e.g. benchmarking) is often ignored.
  • Given the increased focus on intercompany interest payments in audits, taxpayers should be sure to have supporting documentation in place.
• Intragroup services (IGS)
  Taxpayers should be ready to provide:
  • evidence to show the economic benefit to the service recipient, such as
  • functional analysis or
  • documentary support, such as emails and meeting minutes.
  • costs included in the cost pool and appropriate rationale
  • allocation methodology and rationale and
  • benchmarking support for any markups
• Penalties
  • If a tax assessment by the Japanese tax authorities reveals any underpayment, an underpayment penalty of 10-15% of the additional tax due and a delinquent tax (2.5% interest rate per annum for the period on and after 1 January 2021) are imposed.