Following the December 22 2009 outline of the 2010 tax reform proposal, Japan’s Ministry of Finance released a revision to the Special Taxation Measures Law Enforcement Regulation on March 31 2010. This revision to the regulation is effective April 1 2010 and provides the legal framework for the documentation items that taxpayers are expected to provide to the tax authorities in case of a transfer pricing examination.

The revision for the first time clarifies what types of documents must be timely submitted under audit to avoid the potential application of presumptive taxation. Presumptive taxation refers to a case where the tax examiners are authorised (due to the taxpayer’s failure to submit requested data without delay) to conduct their own transfer pricing analysis, possibly based on secret comparables, and to use this analysis in computing a tax assessment. Secret comparables are non-public transactional data on prices and profit margins of unrelated parties for use in calculating potential transfer pricing assessments.

Previously, the legislation stated only that the taxpayer must submit “documents or accounting books” without specifying what was meant by “documents or accounting books.”

The new rules do not prescribe any penalty for failure to provide documents and do not exempt taxpayers who provide all the documents from penalties. Instead, Japan will continue to impose the same penalties and interest that apply generally to corporate tax assessments. These include underpayment penalties of 10% to 15% of the additional tax due as well as interest of just over 4% (14.6% for interest accruing two months or more after the deadline for payment of a tax assessment). The revision also does not specify any deadline or timing for preparing such documents.

The types of documents expected to be made available to the tax authorities during a transfer pricing examination now include documents detailing the content of transactions with foreign related parties and documents detailing the arm’s-length price calculated by the taxpayer. Following are some of the major categories of documents listed in the revised regulation.

First, taxpayers are expected to prepare documents describing the type and details of the intercompany transactions, including tangible and intangible assets and services. This should also cover an analysis of the functions performed and risks borne by each of the related parties involved in the transaction, underlying business policies and a Japan-specific market analysis.