Japanese tax audits focus on transfer pricing compliance

Transfer Pricing News
September 30, 2021

Due to the COVID-19 pandemic, Japan’s large metro areas – such as Tokyo, Osaka, and Nagoya – have been under government-imposed states of emergency on and off for the past year and a half. The most recent (fourth) state of emergency has been in effect since July and expanded several times.

This has correspondingly slowed the Japanese tax authorities’ audit activity, as they have needed to cut back on in-person meetings with taxpayers, and taxpayers’ ability to gather information to respond to requests have been hampered. In particular, transfer pricing audits, which tend to be time consuming even under normal circumstances, are taking much longer to complete. As a result, the number of new transfer pricing audits being initiated by the Japanese transfer pricing examiners has declined.

Although slowed, regular corporation tax audits continue to be initiated and, perhaps related to the slowdown in transfer pricing audit activity, we have noticed that the regular corporate tax examiners have, over the past several months, increased and expanded their requests for transfer pricing related documentation and information. As such audits are conducted regularly, and potentially on short notice, this development increases the importance of both advance preparation of transfer pricing documentation and support for any extraordinary results caused by the pandemic.

This newsletter summarizes the Japanese tax authorities’ audit activity under the COVID-19 pandemic and suggested actions that should be taken in preparation for an audit.

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