2010 Tax Reform (International Taxation)
The Japanese government released an outline of the 2010 tax reform proposals on 22 December 2009 and there included amendments on international taxation.
1. Amendment on controlled foreign corporations (CFCs) taxation (“Anti-tax haven rules”)
In an effort to respond to changes of business structures of Japanese corporations operating overseas and global trend towards reducing corporate income tax rates, and thus to cope with anti tax avoidance actions, following measures are proposed.
1) Reduction of threshold tax rate
The “threshold tax rate” (or “trigger rate”) which is used to determine if CFC is qualified as a specified foreign subsidiary (SFS) in imposing aggregate taxation on its shareholders will be reduced from 25% to 20%.
2) Amendment on exemption conditions
If SFSs are controlling companies with substantial business activities (e.g. operating holding companies, logistics holding companies, etc) those income will be exempted from aggregate taxation.
3) Amendment on passive income taxation
Even if CFCs satisfy exemption conditions above, passive income such as interest on bonds, capital gains and royalties received by CFCs is subject to aggregate taxation.
2. Amendment on transfer pricing
1) When computing and validating an arm’s length price, if there is a need to consider the price negotiation process with foreign affiliates, administrative guideline will be clarified as to what points needs to be put into account in such cases.
2) As for a presumptive taxation rule under which the tax authority can “presume” arm’s length prices when necessary documentation isn’t presented by the taxpayer in determining arm’s length prices, types of documentation required will be specified for the following categories;
(1) Documents detailing transactions with foreign affiliates
(2) Documents detailing arm’s length price computed regarding transactions with foreign affiliates
