JAPAN Law and Practice Contributed by: Junichi Ueda, Etsuko Hara, Nobuto Shirane, Takahiro Hayase, Yutaka Shimoo and Miki Goto, Anderson Mori & Tomotsune
In addition, under the group calculation frame - work, taxation on profits from intra-group trans - fers of assets is deferred until those assets are transferred outside the group. Intra-Group contributions, donations and dividends are also disregarded under the group calculation frame - work. 5.5 Thin Capitalisation Rules and Other Limitations Japanese tax law includes thin capitalisation rules. Under these rules, if interest is paid to a foreign controlling shareholder by a domestic corporation while the payer’s average interest- bearing debt to the foreign controlling share - holder in the financial year exceeds three times the value of the foreign controlling 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 tax - able income. However, a domestic corporation may apply a different 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 provi - sion if the average aggregate debt in the finan - cial 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 (excluding 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 deductible 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 attributable 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 domes - tic corporation that transacts with related foreign entities (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 calculating the appropriate arm’s length consideration, the tax authority will apply the most suitable statutory method of calcula - tion available. The tax authority will typically request further information 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 information, 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 rel - evant statutory method of calculation. In addition, in terms of transfer price documen - tation, four types are required:
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