An intercompany loan in the form of a so-called international debt pushdown had been issued to Universal Music Japan to acquire the shares of another Japanese group company. The tax authority found that the loan transaction had been entered for the principal purpose of reducing the tax burden in Japan and issued an assessment where deductions of the interest payments on the loan had been disallowed for tax purposes. The Tokyo District Court decided in favour of Universal Music Japan and set aside the assessment. The Court held that the loan did not have the principle purpose of reducing taxes because the overall restructuring was conducted for valid business purposes. Therefore, the tax authorities could not invoke the Japanese anti-avoidance provisions to deny the interest deductions. In 2020 the decision of the district court was upheld by the Tokyo High Court. The tax authorities then ... Read more

“NGK-Insulators” is engaged in manufacturing and selling parts to the automotive industry (Diesel Particulate Filters or DPF’s) and had entered into an agreement with a group company in Poland granting it licenses to use intangibles (know-how and technology) in return for license/royalty payments. The tax authorities found that the amount of the consideration paid to “NGK-Insulators” for the licenses had not been at arm’s length and issued an assessment of additional taxes. “NGK-Insulators” filed a complaint and the district court set aside the assessment in a Judgment issued in November 2020. An appeal was then filed by the authorities with the Tokyo High Court. Judgement of the Court The Court found that the original judgment from the Tokyo District Court was appropriate and largely dismissed the appeal of the tax authorities. Excerpt (in English) “On the other hand, in this case, as already mentioned above, ... Read more

“NGK-Insulators” is engaged in manufacturing and selling parts to the automotive industry (Diesel Particulate Filters or DPF’s) and had entered into an agreement with a group company in Poland where it granted the Polish company a licenses to use intangibles (know-how and technology) in return for license/royalty payments. The tax authorities found that the amount of the consideration paid to “DPF Corp” for the licenses had not been at arm’s length and issued an assessment of additional taxes. “NGK-Insulators” filed a complaint which the district court. Judgement of the Court The Court ruled in favour of “NGK-Insulators” and set aside the assessment issued by the tax authorities. Click here for English Translation Click here for other translation Japan Tokyo District Court 091910_hanrei ... Read more

“Metal Plating Corp” is engaged in manufacturing and selling plating chemicals and had entered into a series of controlled transactions with foreign group companies granting licenses to use intangibles (know-how related to technology and sales) – and provided technical support services by sending over technical experts. The company had used a CUP method to price these transactions based on “internal comparables”. The tax authorities found that the amount of the consideration paid to “Metal Plating Corp” for the licenses and services had not been at arm’s length and issued an assessment where the residual profit split method was applied to determine the taxable profit for the fiscal years FY 2007-2012. “Metal Plating Corp” on its side held that it was inappropriate to use a residual profit split method and that there were errors in the calculations performed by the tax authorities. Judgement of the Court ... Read more

An intercompany loan in the form of a so-called international debt pushdown had been issued to Universal Music Japan to acquire the shares of another Japanese group company. The tax authority found that the loan transaction had been entered for the principal purpose of reducing the tax burden in Japan and issued an assessment where deductions of the interest payments on the loan had been disallowed for tax purposes. Decision of the Court The Tokyo District Court decided in favour of Universal Music Japan and set aside the assessment. The Court held that the loan did not have the principle purpose of reducing taxes because the overall restructuring was conducted for valid business purposes. Therefore, the tax authorities could not invoke the Japanese anti-avoidance provisions to deny the interest deductions. The case is now pending at the Tokyo High Court awaiting a final decision. Click ... Read more

A tax assessment based on Japanese CFC rules (anti-tax haven rules) had been applied to a Japanese Group’s (Denso), subsidiary in Singapore. According to Japanese CFC rules, income arising from a foreign subsidiary located in a state or territory with significantly lower tax rates is deemed to arise as the income of the parent company when the principal business of the subsidiary is holding shares or IP rights. However, the CFC rules do not apply when the subsidiary has substance and it makes economic sense to conduct business in the subsidiary in the low tax jurisdiction. According to the Supreme Court, total revenue, number of employees, and fixed facilities are relevant in this determination. The Singapore subsidiary managed it’s own subsidiaries or affiliates in other territories, and while the income from services to logistics in those territories represented 85% of its revenue, between 80% and 90% of it’s income came from dividends from its subsidiaries and affiliates. The Supreme Court held that the Singapore ... Read more

C Uyemura & Co, Ltd. is engaged in the business of manufacturing and selling plating chemicals and had entered into a series of controlled transactions with foreign group companies granting licenses to use intangibles (know-how related to technology and sales) – and provided technical support services by sending over technical experts. The company had used a CUP method to price these transactions based on “internal comparables”. The tax authorities found that the amount of the consideration paid to C Uyemura & Co, Ltd for the licenses and services had not been at arm’s length and issued an assessment where the residual profit split method was applied to determine the taxable profit for the fiscal years 2000 – 2004. C Uyemura & Co, Ltd disapproved of the assessment. The company held that it was inappropriate to use a residual profit split method and that there were ... Read more

A Japanese company entered into a transaction with a foreing group company to import English-language learning materials into Japan. The learning materials were then resold to Japanese customers. The Japanese tax authority found that the resale price method should be used for setting the arm’s-length price for the transaction. The arm’s-length price for the controlled transaction was the price at which the Japanese company resold the English-language learning materials to customers, minus a normal profit margin multiplied by the price. The “normal profit margin” in this case was found to be the weighted average ratio of gross margin to the total revenue for multiple transactions, where unrelated parties imported the same as the English-language learning materials, or goods of a similar sort, and then resold them to customers. The tax authority held that unrelated parties importing and selling learning materials should be considered comparable transactions, ... Read more

A tax assessment based on Japanese CFC rules (anti-tax haven rules) had been applied to a “TH Corp”‘s, subsidiary in Singapore. According to Japanese CFC rules, income arising from a foreign subsidiary located in a state or territory with significantly lower tax rates is deemed to arise as the income of the parent company when the principal business of the subsidiary is holding shares or IP rights. However, the CFC rules do not apply when the subsidiary has substance and it makes economic sense to conduct business in the subsidiary in the low tax jurisdiction. Judgement of the court. According to the court, total revenue, number of employees, and fixed facilities are relevant in this determination. The Court held that the Singapore subsidiary had conducted a broad range of businesses – including finance and logistics – with the economically rational purpose of streamlining its ASEAN operations, and thus set aside the CFC taxation. Excerpt “Satisfaction of the substance and control criteria (a) According to ... Read more

In the Yahoo case, the Japanese Supreme Court applied the anti-avoidance provisions “…those deemed to result in an unreasonable reduction of the corporate tax burden…” as defined in Article 132-2 of the Corporate Tax Act (denial of acts or calculations related to reorganisation), where the meaning of “unreasonable” is “abusing the tax provisions related to reorganisation…as a means of tax avoidance” and serves as the criteria for determining the provisions applicability. Click here for English Translation Click here for other translation Japan vs Yahoo SC Case no 085709_hanrei ... Read more

In this case a tax assessment based on Japanese CFC rules (anti-tax haven rules) had been applied to a Japanese Group’s subsidiary on Cayman Islands. According to Japanese CFC rules, income arising from a foreign subsidiary located in a state or territory with significantly lower tax rates is deemed to arise as the income of the parent company when the principal business of the subsidiary is holding shares or IP rights. However, the CFC rules do not apply when the subsidiary has substance and it makes economic sense to conduct business in the subsidiary in the low tax jurisdiction. The Court upheld the tax assessment. Click here for English translation 084760_hanrei Cayman ... Read more

In the Tokyo High Court judgment, dated 13 May 2015, Honda Motor Company Limited, a major Japanese automobile manufacturer, obtained a cancellation of a tax assessment of ¥25.4 billion. The court held that the tax authorities had erred in the selection of companies comparable to the tested party (Honda’s foreign subsidiary in Brazil). The tested party was doing business in the Free Economic Zone of Manaus in Brazil – whereas the selected comparables was located outside the zone. The existence of Manaus Tax benefit was considered a market condition affecting the degree of profitability. Hence profits of the Honda subsidiary in Manaus could not be determined based on similar independent Brazilian companies outside the zone and therefore not comparable. Click here for English Translation JAP case ... Read more

An intermediate Japanese holding company in the IBM group acquired from its US parent all of the shares of a Japanese operating company. The Japanese holdings company then sold a portions of shares in the operating company back to the issuing company for the purpose of repatriation of earned profits. These sales resulted in losses in an amount of JPY 400 billion which for tax purposes were offset against the operating company’s taxable income in FY 2002 – 2005. The Japanese tax authorities did not allow deduction of the losses resulted from the sales referring to article 132 of the Corporation Tax Act of Japan (general anti avoidance regulation). The tax authorities found that the reduction of corporation tax due to the tax losses should be disregarded because there were no legitimate reason or business purpose for the transactions. According to the authorities the transactions ... Read more

A Japanese distributor “Banana Corp” imported Ecuadorian bananas from a group company for wholesale in Japan. The Japanese tax administration ruled that the amount of consideration paid by Japanese distributor had exceeded the arm’s length price and issued an assessment of additional tax and penalties for FY 1999 – 2004. At first Banana Corp brought the case before the regional court who decision in favour of the tax administration. Banana Corp appealed this decision to Tokyo High Court. Tokyo High Court dismissed the appeal and upheld the decision of the regional court. Click here for English Translation Click here for other translation Ban-Co-2013-084405_hanrei ... Read more

A Japanese manufacturing company was issued an estimated tax assessment due to lack of transfer pricing documentation. The District Court ruled in favor of the tax authorities. The Court decided that accounts and documents necessary for calculating arms’s length prices should be presented or submitted to the tax authorities without delay. If sufficient documentation is not submitted, the requirement for an estimated taxation is satisfied. Furthermore, in such cases the burden of proof shifts to the taxpayer side. See the transcripts from the district Court below. The case was then appealed by the company to Tokyo High Court, which also ruled in favor of the tax authorities. Click here for English Translation Click here for other translation Japan-vs-Manufacturing-Co.083647_hanrei See transcripts from the district Court below. Click here for translation – Part 1 Click here for translation – Part 2 Click here for translation – Part ... Read more

The “Banana Group” is based in Ecuador and is engaged in the business of exporting Ecuadorian bananas. The Japanese distributor was part of the Banana Group. An Ecuadorian group company purchases bananas produced on plantations in Ecuador, exports and sells them to another intermediate group company, who in turn sells them to the Japanese distributor for wholesale in Japan. At issue was the arms length price of the bananas imported by the Japanese distributor. The tax administration held that the price paid for the bananas had been to high and issued an assessment for FY 1999-2004. The Japanese company disagreed and brought the case to court. Decision of the Court The Tokyo District court decided in favour of the tax administration and upheld the tax assessment. Click here for English translation Click here for other translation EB 082672_hanrei ... Read more

Adobe Systems Co., a Japanese subsidiary of Adobe Systems Inc., received remuneration from Dutch and Irish group companies for promotion and marketing of Adobe software sold in Japan The remuneration of Adobe Systems Co. was determined as general administrative expenses plus 1.5% of net sales in Japan. A transfer pricing assessment was issued by the Japanese tax authorities where transfer prices were instead based profit margins derived in comparable transactions. Adobe Systems filed an appeal seeking revokal of the assessment. Tokyo High Court held that the tax assessment should be revoked. The burden of proof in relation to the legitimacy of the transfer pricing method applied was on the tax administration. The transfer pricing method used by the tax authority was not consistent with the resale price method. The method applied by the tax authorities “…cannot be said to be “a method equivalent to the ... Read more

Imabari Shipbuilding Co.Ltd., was a Japanese shipbuilding company constructing ships for an affiliate company located in Panama, Panama S.A. The Japanese tax authorities found that prices used in transactions between Imabari Co. and Panama S.A. had not been at arm’s length. A tax assessment was therefore issued where the pricing was based on the comparable uncontrolled pricing method (CUP). Imabari disagreed with the assessement and filed an appeal. At trial, the Takamatsu High Court rejected Imabari’s claim and held that the tax authority’s analysis could be limited to the factors that significantly affected the price, and that not all differences were required to be considered in the calculation of the arm’s length price. A final appeal to the Supreme Court was dismissed 14 April 2007. Click here for English translation Shipbuilding-Oct-2006-034729_hanrei ... Read more

“Guarantee Co. Ltd.” owned all the shares of G, a company located in the Netherlands, and had provided financial guarantees for loans – in the form of so called “keep well agreements” and guarantee agreements. The main issue in this case is whether or not it was possible to calculate an arm’s length price for the consideration for the guarantee issued. Judgement of the National Tax Tribunal The Tax Tribunal came to the conclusion that the price for the guarantees could be determined based on the CUP method and set at 0,10% of the guaranteed amounts. Excerpt “Therefore, a comparative study of the conclusion of each of the Keep Well Agreements, etc. in question and the Bank Guarantee Transactions in question shows that, as stated in (a) of (b) above, the conclusion of each of the Keep Well Agreements, etc. in question is found to ... Read more