JAPAN Law and Practice Contributed by: Junichi Ueda, Etsuko Hara, Nobuto Shirane, Takahiro Hayase, Yutaka Shimoo and Miki Goto, Anderson Mori & Tomotsune
the payer’s average interest-bearing debt to the foreign controlling shareholder in the financial year exceeds three times the value of the foreign control - ling shareholder’s equity interest in the payer in the said financial year, the interest income related to the excess debt will not be deductible from the payer’s taxable income. However, a domestic corporation may apply a differ - ent debt-to-equity ratio (instead of three times) if it can prove that a different ratio is appropriate in light of the debt-to-equity ratio of similar corporations. A domestic corporation may also benefit from the safe harbour provision if the average aggregate debt in the financial year does not exceed three times the value of the equity interest in the payer in said financial year. In addition, under the earnings-stripping rules – with some exceptions – when interest payments (exclud - ing those that are included in the taxable income of a recipient under Japanese tax laws) exceed 20% of the statutory adjusted income of the payer, the portion of interest payments exceeding 20% of the statutory adjusted income of the payer is generally not deduct - ible from the payer’s taxable income in the financial year. The earnings-stripping rules are also applicable to the calculation of a foreign corporation’s Japan- sourced income, even if such income is not attribut - able to the permanent establishment of the foreign corporation in Japan or if the foreign corporation has no permanent establishment in Japan. However, the excess portion is carried forward for seven financial years (ten financial years for the financial years starting from 1 April 2022 to 31 March 2025) and can be used as deductible expenses until the total amount of deductible expenses reaches a 20% threshold in each of the following seven financial years. 5.6 Transfer Pricing Under Japanese transfer pricing rules, a domestic corporation that transacts with related foreign enti - ties (such as a foreign parent corporation) will – if the transaction involves non-arm’s length consideration – be liable for tax calculated based on an arm’s length consideration imputed on the transaction. In calculat - ing the appropriate arm’s length consideration, the tax
authority will apply the most suitable statutory method of calculation available. The tax authority will typically request further informa - tion from the taxpayer in order to help the authority calculate an appropriate arm’s length consideration. Where a taxpayer fails to adequately respond to these requests, or does not promptly provide this informa - tion, the tax authority will have the right to determine the arm’s length consideration as it deems fit based on reasonable assumptions applicable to the relevant statutory method of calculation. In addition, in terms of transfer price documentation, four types are required: • a Notification for Ultimate Parent Entity (NUPE) form; • a CbC report; • a master file; and • a local file. Of these, the former three types of documentation are applicable to subsidiaries or branches in Japan that are constituent entities of a specified multina - tional enterprise (MNE). The local file is applicable to all corporate taxpayers engaging in transactions with foreign affiliates. 5.7 Anti-Evasion Rules Japanese tax laws contain general avoidance rules such as the disallowance of acts or calculations: • by family-owned corporations; • in relation to organisational restructuring; • by corporate groups of the group calculation framework; and • regarding foreign entity profits that are attributable to a permanent establishment. These anti-evasion rules have recently been applied especially to several corporate intra-group reorganisa - tions. Those cases subsequently developed into tax disputes. 5.8 Tariffs Tariffs are imposed on various types of imported goods. However, certain goods, such as iron ore,
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