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SMEs and Transfer pricing Taxation (Japanese tax)
To what extent do so-called small and medium-sized enterprises (like, annual sales of about several billion yen) face the risk of being taxed by transfer pricing taxation, and to what extent should they be prepared to deal with it?
My feeling is that the answer to this question varies from expert to expert to person, and I have never received a convincing answer. However, this is the first time I have received a persuasive answer, which I would like to share with you.
A respondent is a man in his late 50s who is currently working for a private tax consulting firm. His previous job was as a tax inspector at the National Tax Agency, and he has a 10-year career as a specialist transfer pricing inspector.
There is no taxation risk due to transfer pricing if you are a small or medium-sized corporation with 100 million yen or less capital.
Reason(1)
The National Tax Agency (Kokuzei kyoku) is an administrative body that provides guidance and supervision to the tax offices (Zeimusho) within its jurisdiction and conducts its own on-site tax audits for large taxpayers.
The National Tax Agency deals with large corporations, while the Tax Office deals with other companies and individuals.
The Tax Office conducts tax audits of small and medium-sized companies with 100 million yen or less capital. Still, the Tax Office does not have the authority to decide transfer pricing taxation (*).
Reason (2)
Even if an investigator with transfer pricing authority from the National Tax Agency gets involved in the tax investigation, they do not want to bring the case to a “mutual consultation” (Sougo kyogi), so they still want to avoid additional taxation based on transfer pricing.
Mutual consultation means that, for example, if a company is taxed as a result of a transfer pricing investigation in Japan, it will be subject to double taxation: taxation in Japan and taxation in the foreign country, but the countries will consult with each other to adjust this double taxation. To reconcile this situation, the two countries hold consultations.
The number of national tax officials assigned to these consultations is too small to handle the volume of mutual consultations.
As I understand it, taxation based on transfer pricing is almost impossible for small and medium-sized enterprises (SMEs).
However, the tax office will instead treat it as a donation to a foreign-related party and tax it.
In response to this, the ex-inspector said that even if the tax office claims that the donation is taxable, his/ her insistent for the taxation is wrong. The companies should insist that it is a transfer pricing issue rather than a donation. If it becomes an issue of transfer pricing, transfer pricing taxation is not possible by the tax office.
I see. So we should argue that it is a transfer pricing issue, not a donation issue.
I had thought that the distinction between donation taxation and transfer pricing taxation would not make much of a difference since both are subject to taxation. Still, it turns out to be extremely important.
But what is the distinction between donations and transfer pricing issues? I tried to look it up on the Internet, but I don’t really know. I need to sit down and do some research. I hope to introduce the difference between the two in the future.
Then, to what extent do small and medium-sized companies need to prepare for transfer pricing taxation?
According to a former tax investigator, it is unnecessary to have legal documents such as local files. Still, as long as the company has an internal transfer pricing policy and determines the prices of transactions with overseas related parties based on this policy, that would be desirable.
That is the same as saying that small and large companies have the same things to do. I wanted him to say that you don’t need to be afraid of anything or take any action if you are a small or medium-sized company.
My feeling is that the answer to this question varies from expert to expert to person, and I have never received a convincing answer. However, this is the first time I have received a persuasive answer, which I would like to share with you.
A respondent is a man in his late 50s who is currently working for a private tax consulting firm. His previous job was as a tax inspector at the National Tax Agency, and he has a 10-year career as a specialist transfer pricing inspector.
There is no taxation risk due to transfer pricing if you are a small or medium-sized corporation with 100 million yen or less capital.
Reason(1)
The National Tax Agency (Kokuzei kyoku) is an administrative body that provides guidance and supervision to the tax offices (Zeimusho) within its jurisdiction and conducts its own on-site tax audits for large taxpayers.
The National Tax Agency deals with large corporations, while the Tax Office deals with other companies and individuals.
The Tax Office conducts tax audits of small and medium-sized companies with 100 million yen or less capital. Still, the Tax Office does not have the authority to decide transfer pricing taxation (*).
Reason (2)
Even if an investigator with transfer pricing authority from the National Tax Agency gets involved in the tax investigation, they do not want to bring the case to a “mutual consultation” (Sougo kyogi), so they still want to avoid additional taxation based on transfer pricing.
Mutual consultation means that, for example, if a company is taxed as a result of a transfer pricing investigation in Japan, it will be subject to double taxation: taxation in Japan and taxation in the foreign country, but the countries will consult with each other to adjust this double taxation. To reconcile this situation, the two countries hold consultations.
The number of national tax officials assigned to these consultations is too small to handle the volume of mutual consultations.
As I understand it, taxation based on transfer pricing is almost impossible for small and medium-sized enterprises (SMEs).
However, the tax office will instead treat it as a donation to a foreign-related party and tax it.
In response to this, the ex-inspector said that even if the tax office claims that the donation is taxable, his/ her insistent for the taxation is wrong. The companies should insist that it is a transfer pricing issue rather than a donation. If it becomes an issue of transfer pricing, transfer pricing taxation is not possible by the tax office.
I see. So we should argue that it is a transfer pricing issue, not a donation issue.
I had thought that the distinction between donation taxation and transfer pricing taxation would not make much of a difference since both are subject to taxation. Still, it turns out to be extremely important.
But what is the distinction between donations and transfer pricing issues? I tried to look it up on the Internet, but I don’t really know. I need to sit down and do some research. I hope to introduce the difference between the two in the future.
Then, to what extent do small and medium-sized companies need to prepare for transfer pricing taxation?
According to a former tax investigator, it is unnecessary to have legal documents such as local files. Still, as long as the company has an internal transfer pricing policy and determines the prices of transactions with overseas related parties based on this policy, that would be desirable.
That is the same as saying that small and large companies have the same things to do. I wanted him to say that you don’t need to be afraid of anything or take any action if you are a small or medium-sized company.
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