Support for Local File preparation

In Japan, all taxpayers who engage in cross-border related party transactions are required to submit a Local File upon request as part of an audit. Additionally, certain taxpayers are required to prepare their Local File contemporaneously (i.e. by the due date of the tax return, which is typically three months after the fiscal year end). Even if the amount of your cross-border related party transactions is below the threshold for contemporaneous preparation, you will still need to submit a Local File if requested during an audit.

When selecting companies to audit, Japanese tax authorities are relying more and more on information provided by Local Files. Tax examiners have also been aggressively enforcing the deadline for the submission of the Local File as part of a tax audit. This aggressive enforcement applies regardless of the contemporaneous preparation requirement (i.e., regardless of the amount of intercompany transactions). If a company fails to meet the submission deadline, tax examiners can (and do) use presumptive taxation or secret comparables to raise their assessment.

PwC Tax Japan’s Transfer Pricing Team can help you with:

  • all aspects of transfer pricing documentation—from the Local File to the Master File and country-by-country report
  • preparation of a Local File in compliance with Japanese transfer pricing legislation—either from scratch or by using template reports and relevant documents provided by your ultimate parent entity, and
  • reviews of the Local File and Master File centrally prepared by your parent entity, including comments on compliance with Japanese transfer pricing legislation.

Japanese transfer pricing legislation

The basic elements of Japanese transfer pricing legislation are the Local File, the notification for the ultimate parent entity (NUPE), the country-by-country report (CbCR) and the Master File.

Local File

  • There is no minimum threshold for the preparation of the Local File or local transfer pricing documentation in Japan. Contemporaneous preparation is required unless both of the following conditions are met for the previous tax year: (i) the company did not conduct transactions equivalent to JPY5bn or more with any single foreign related party and (ii) the company did not conduct intangible property transactions equivalent to JPY300m or more with any single foreign related party.
  • The Japanese subsidiary is responsible for maintaining the Local File, whether the file is initially prepared by the Japanese subsidiary or the parent entity. This means that the Japanese subsidiary is legally responsible for preparing the Local File by the tax return due date, unless the above exemption to the contemporaneous preparation requirement applies. If requested as part of an audit, the Local File must be submitted no later than the date specified by the tax examiner. This date must be within 45 days, or within 60 days if the contemporaneous preparation exemption applies.
  • There is no monetary penalty for failure to prepare the Local File contemporaneously, or for failure to submit the Local File within the period specified by the tax examiner when requested during an audit.
  • However, failure to submit the Local File in a timely manner may result in the tax examiners using the ‘presumed method’ (which allows them to raise the assessment based on their own estimation) or secret comparables.
  • Thus, for taxpayers who fail to submit the Local File on time, the use of the ‘presumed method’ or secret comparables is the effective ‘penalty’.

NUPE

  • Japanese companies are required to file a NUPE if they belong to a multi-national entity (MNE) group with revenue that exceeds EUR750m or JPY100bn in the immediately preceding fiscal year.
  • This document must be prepared and filed by the Japanese subsidiary (in Japanese) by the end of the ultimate parent entity (UPE)’s fiscal year. Accordingly, assuming a January-December fiscal year, the Japanese subsidiary of a MNE group must submit the NUPE electronically to their local Japanese tax office by 31 December.
  • No specific penalty is imposed for failure to file the NUPE in a timely manner. However, without submission of the NUPE, the Master File cannot be submitted to the tax office.

CbCR

  • The threshold for the requirement to prepare a CbCR in Japan is the same as for the NUPE.
  • Whereas the NUPE is submitted by the Japanese subsidiary, the CbCR must be prepared and submitted in English by the ultimate parent entity (UPE), in line with the relevant OECD recommendations. Japanese regulations stipulate that the CbCR must be filed within one year of the close of the UPE’s fiscal year. Accordingly, for an MNE group with a January-December fiscal year, the CbCR for FY2020 must be filed by 31 December 2021.

Master File

  • The threshold for the requirement to prepare a Master File in Japan is the same as for the NUPE and CbCR. Accordingly, assuming a January-December fiscal year, a Japanese subsidiary of an MNE group must obtain the Master File for FY2020 from its ultimate parent entity (UPE) and submit it electronically to their local Japanese tax office by 31 December 2021.
  • The Master File must be prepared in English or Japanese by the UPE, with contents in line with the relevant OECD recommendations. It must then be filed locally by the Japanese subsidiary. 
  • A penalty of up to JPY300,000 will be imposed for failure to submit this file in a timely manner.

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Partner

daisuke miyajima
Daisuke Miyajima

PwC Tax Japan Partner

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