Japan's National Diet (parliament) reportedly approved the legislation for the government's tax reform proposals for 2019. The amendments with regard to corporate taxation encompass transfer pricing, earning stripping rule, and Controlled Foreign Corporation (CFC) rules.
Amendments are made to the transfer pricing rules in line with OECD guidelines, including:
- The scope of intangibles subject to the transfer pricing rules is clarified and defined as property other than tangible property or financial assets and investments, for which consideration would be paid for a transfer or lease of the property if the transfer or the lease were carried out between unrelated parties.
- The discounted cash flow recognized under the OECD Transfer Pricing Guideline is added as a new transfer pricing methodology.
- The Japanese tax authorities will be authorized to make an assessment if there is a discrepancy between an outcome and the projected value if the discrepancy is 20% or more without proper documentation.
- The current six-year statute of limitations for transfer pricing will be extended to seven years.
Earning Stripping Rule
The earnings stripping rules are amended, including:
- An extension of the scope of the rules to interest payments to both related parties and unrelated parties;
- A reduction in the deductible interest payments cap from 50% of adjusted taxable income to 20% of adjusted taxable income;
- Changes in how adjusted taxable income is determined for the purpose of the rules; and
- Changes in the de minimis exemptions from the rules
The Bill contains new exceptions to the paper company test for holding company, real estate and resource development CFCs to the extent these certain conditions are met:
- Qualifying shareholding CFCs where the main business of the CFC is holding shares in subsidiaries in the same jurisdiction as the CFC;
- Qualifying real estate CFCs where the main business of the CFC is holding real estate in the same jurisdiction as the CFC; and
- Qualifying resource development CFCs where the main business of the CFC is holding shares in companies performing resource development functions, providing funds from third parties to companies performing resource development, or holding certain real estate in the same jurisdiction as the CFC.
Source: The Government of Japan