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1. In your jurisdiction, what are the legal bases for eliminating double taxation further to a transfer pricing reassessment (European Arbitration Convention, mutual agreement procedures provided for by tax treaties)? In addition to the procedures set forth by such tax treaties, is there any other (formal or informal) domestic procedure in your jurisdiction?
The legal bases of eliminating double taxation are twofold in Japan, i.e.
one is a mutual agreement procedure between the competent authorities of Japan and the counterpart country, pursuant to the mutual agreement provision set forth in the tax treaty between Japan and that country;
while the other is a domestic administrative appeals and in-court litigation procedure, pursuant to the Special Taxation Measures Law (which is the substantive tax law governing transfer pricing matters in Japan).
Generally speaking, with respect to a transaction involving the country where competent authority relief is effective (particularly advanced countries in North America and Europe), taxpayers tend to seek it. However, with respect to a transaction involving a country where competent authority relief is not effective (even if a relevant treaty allows such relief) or not available in the first place (particularly emerging countries in Asia, Africa and South America), the domestic administrative appeals and in-court litigation procedure is often virtually the only option that the taxpayer may seek.
2. In addition – as the case may be – to the European Arbitration Convention, did your jurisdiction sign tax treaties with other States including an arbitration procedure? If yes, can you give the list of such States?
Yes. Tax treaties with some advanced counties that are recently entered into or amended provide for an arbitration procedure, e.g., the United Kingdom, the Netherlands, Sweden, New Zealand, Portugal and Hong Kong. A recent amending protocol to the treaty with the United States and the new treaty with Germany also contain an arbitration procedure, however, these treaties have not yet entered into force.
3. In your experience, in your jurisdiction, how long does it take generally to eliminate the double taxation under the European Arbitration Convention and/or mutual agreement procedures set forth by tax treaties (and/or the domestic procedure if it exists)?
Mutual agreement procedures appear to generally take one to three years. Domestic administrative appeals and in-court litigation procedure could finish in about two years if the taxpayer prevails at the administrative level, but could take five to seven years in total if the matter is brought up to the Supreme Court of Japan. In any event, the length of the period significantly differs depending upon the complexity of the case.
4. In your jurisdiction, what are the starting point and time limit to initiate a procedure to eliminate double taxation resulting from a transfer pricing reassessment?
As to the starting point of the mutual agreement procedure, most of the tax treaty provisions point to time when the action of the Japanese government “results or will result” in taxation not in accordance with the provisions of the applicable tax treaty. However, in practice, in most cases an application for a mutual agreement procedure is filed after a formal transfer pricing assessment is issued by the Japanese tax authorities, and it appears not very common that a taxpayer does so before such transfer pricing assessment (or in the midst of the transfer pricing audit). As for the time limit, a majority of the tax treaties have a statutory limitation of two or three years, where the starting point is interpreted to be the first notice of the transfer pricing assessment.
As to the domestic administrative appeals and in-court litigation procedure, the starting point is when a formal transfer pricing assessment is issued by the Japanese tax authorities. Within two months from this assessment, a taxpayer must file an administrative appeal; otherwise the taxpayer is legally barred from disputing the assessment by the domestic procedure.
In practice, in most cases, the subject taxpayer (i) files a domestic administrative appeal only in order to reserve the track of the domestic procedure in case it becomes necessary in the future (e.g., where the mutual agreement procedure fails), within two months of the assessment, (ii) at the same time files an application for a mutual agreement procedure, and (iii) requests the relevant tax office to hold in abeyance the domestic appeals procedure until the mutual agreement procedure is finalized (whether or not it is successful or fails).
5. If a reassessment is issued by your tax authorities, which State must receive the application for the international procedure to eliminate double taxation
The terms "international procedure to eliminate double taxation" mean the European Arbitration Convention or a mutual agreement procedure set forth by a tax treaty.
(your State? the other State concerned? both States?)
Technically legally speaking, when a taxpayer is subject to a transfer pricing assessment by the Japanese tax authorities, the taxpayer must file an application with the Japanese competent authority. However, in practice, in most cases an application is filed in the state of the counterparty affiliate simultaneously, by coordinating with one another.
6. What are the formal conditions to initiate an international procedure to eliminate double taxation? Is there a list of documents to provide? To which department of the tax authorities (name, address) must the request be sent?
A taxpayer who has been subject to a transfer pricing assessment by the Japanese tax authorities must file an application for a mutual agreement procedure with the Office of the Competent Authority of the National Tax Agency (hereinafter “NTA”). The procedures including required documents are stipulated in the Administrative Guidelines concerning Mutual Agreement Procedures of the NTA as well as in the Instruction on Form of Application for Mutual Agreement Procedures. Among other matters, the taxpayer must explain in detail the facts relating to the transaction that was the subject of the assessment and the taxpayer’s argument to support that the taxation by the assessment is not in accordance with the tax treaty, and must attach the documents to establish the taxpayer’s contentions. Documents in foreign language must accompany a Japanese translation.
7. In which cases would the competent authority of your jurisdiction refuse to engage/participate to the international procedure to eliminate double taxation?
The practice of the Office of the Competent Authority of the NTA is that it generally refuses an application for a mutual agreement procedure if the relevant assessment was made on the ground that the taxpayer made a donation to its foreign affiliate (which is nondeductible). Under Japanese tax law, transfer pricing and donation are separate taxation regimes, and a mutual agreement procedure is treated to be only available for the transfer pricing assessment. This is because a donation is only a matter of domestic tax law and has no relevance to tax treaties, on which mutual agreement procedures are based. Whether an assessment is made on the ground of transfer pricing or donation is made clear in the reasons for the assessment attached to the notice of the assessment. However, many Japanese practitioners comment that it is difficult to draw a clear line between transfer pricing and donation, and some point out that the Japanese tax authorities tend to prefer a donation with a view to effectively precluding taxpayers from a mutual agreement procedure.
Under Japanese tax laws and practice, there is no rule to preclude the taxpayer from a mutual agreement procedure if heavy penalty tax (which is imposed if the taxpayer committed concealment or fabrication of facts) is imposed on the taxpayer. However, as far as transfer pricing assessments are concerned, it is very rare that heavy penalty tax is imposed, and in most cases ordinary deficiency penalty tax is imposed. In this case the taxpayer is not precluded from a mutual agreement procedure.
8. Is tax collection suspended during the procedure?
No. Neither an application for a mutual agreement procedure or a domestic administrative appeals procedure suspends the collection or enforcement. As such, in principle, the taxpayer must once pay the full amount of the tax assessed including penalty (deficiency penalty tax) and interest (delinquency tax). Otherwise, interest (delinquency tax) continues to accrue to add burden.
However, as an exception, when the subject taxpayer files an application for a mutual agreement procedure, it may apply for temporary suspension of collection of the tax assessed, by providing certain eligible security. If the temporary suspension is granted, the collection is not made until the mutual agreement procedure is finalized (whether it is successful or fails), and interest (delinquency tax) does not accrue.
9. Assuming the procedure results in an agreement on a way to cancel double taxation, how is generally such agreement implemented in your jurisdiction?
If a Japanese taxpayer is subject to a Japanese transfer pricing assessment and if a mutual agreement is reached to cancel all or part of the assessment, the Japanese tax authorities issue a reassessment to cancel all or part of the original assessment without any action from the taxpayer.
If a foreign affiliate of a Japanese taxpayer is subject to a foreign transfer pricing assessment and if a mutual agreement is reached so that the foreign transfer pricing assessment is partially sustained, the corresponding taxable income of the Japanese taxpayer has to be reduced. For this purpose, the Japanese taxpayer must file a request for downward reassessment within two months from the mutual agreement so reached, and, based upon that request, the Japanese tax authorities make a corresponding adjustment (or a downward reassessment) to the taxable income of the Japanese taxpayer. The adjustment or reassessment is performed over the financial years reassessed in the foreign jurisdiction. Interest is not generally paid to the Japanese taxpayer in connection with the refund of the tax pertaining to the reduced taxable income.
There may arise an issue of whether or not the Japanese taxpayer should make a so-called secondary adjustment, that is, an actual remittance of money between a Japanese taxpayer and its foreign affiliate corresponding to the reassessment(s) made in accordance with the mutual agreement. Under Japanese tax law, this is not mandatory, and generally there would not arise issues of Japanese withholding tax in connection with such remittance (whereas in some other jurisdictions withholding tax issues may arise on the basis that such remittance may constitute deemed dividends).
10. In your jurisdiction, is it possible to engage concomitantly an international procedure to eliminate double taxation and litigation in front of courts? If yes, is it necessary at some stage to abandon the litigation in order to conclude/finalize the international procedure?
No. The two procedures cannot run simultaneously. If a Japanese taxpayer first prefers a mutual agreement procedure, it will so request with the Japanese competent authority, while pending the domestic procedure. If it turns out that the mutual agreement procedure would unlikely result in elimination of double taxation, the Japanese taxpayer must stick to it, or withdraw the mutual agreement procedure altogether and then turn to the domestic procedure. On the other hand, while a domestic procedure is actively pending at administrative tribunals or courts, an application for the mutual agreement procedure is not generally allowed.
11. Any other interesting aspect not addressed above?
Arbitration is rather new to Japan, so we would have to monitor how the practice develops.