Cosmos International Management Co., Ltd.



News (July 15, 2011)


Implementation of tax revision for 2011 fiscal year -international taxation area-

Japanfs tax reform proposal had been delayed to be finalized due to the disastrous earthquake in eastern Japan and political confusions, but as of June 30, 2011, some parts of the proposal were finalized and the relating tax laws and orders were issued. The overview of the reform regarding the international taxation area is as follows.

(1) Transfer pricing taxation
Under the current tax law, the three transaction-based methods (comparable uncontrolled price (CUP) method, resale price method, and cost plus method) are preferably applied. Along the revision of the OECD transfer pricing guidelines last year, the revised law has abolished this priority order and has given the option to choose the most appropriate method for calculating the armfs length price depending on the case (will be applicable to business years beginning after Oct. 1, 2011).

In addition, according to the abolishment of the priority order, the comparable profit split method, contribution profit split method and residual profit split method, which are currently recognized by the OECD guidelines as the sub-classified profit split methods, have been defined (will be applicable from Oct. 1, 2011).

(2) Foreign Tax Credit
Where the applicable tax rates vary depending on agreements with local taxing authorities (e.g. corporate tax in British Isle of Guernsey), any taxes in excess of the amount computed using the lowest applicable rate have been excluded as foreign corporate tax or foreign income tax for the purpose of applying foreign tax credit or the anti-tax haven rules (will be applicable to foreign corporate tax paid after Jun. 30, 2011).

For the purposes of computing the foreign tax credit limitation, income of a corporation which may be taxed in a foreign country in accordance with the treaty between Japan and that foreign country has been deemed to be treated as foreign source income, even if the same income are deemed as domestic source income under the Japanese domestic tax rules (will be applicable to business years beginning after Apr. 1, 2011).

(3) Revision of Anti-Tax Haven (gCFCh) Rules
The revised law clarified, for regional headquarters companies with mainly operating as investment holding, that the exemption conditions other than Business Purposes Test (i.e., Substance Test, Administration and control Test, and Local Country Test or Unrelated Party Test) will be judged based on the headquarters activities. As a result, this revision has clarified the rules set in the tax reform FY2010, in which regional headquarters companies that meet certain requirements can be exempted from the application of the anti-tax haven rules (will be applicable to the amount to be included as taxable income of domestic corporationsf business years ending after Apr. 1, 2011).

For the purpose of computing the effective corporate tax rate for CFC purposes, the revised law has abolished shareholding requirements in order to exclude foreign dividends generated from locations outside of the recipient foreign corporations from the non-taxable foreign income. In addition, it has clarified that when a foreign corporationfs taxable income is nil, the nominal corporate tax rate of that foreign country will be used for the judgment of the threshold rate (gtrigger rateh) of the anti-tax haven rules (will be applicable to foreign related corporationsf business years beginning after Apr. 1, 2011, in case calculating the amount to be included as taxable income of domestic corporationsf business years ending after Apr. 1, 2011).

Other revisions regarding anti-tax haven rules include clarification of computation methods regarding asset-based income and also the clarification of the current exception standards.

There are several items included in the reform proposal but not included in the announced revisions, for example, clarification of armfs length range and use of secret comparables (transfer pricing), reduction of the threshold of ghigh corporate tax rateh, over which are excluded from a foreign tax credit, and exclusion of non-taxable foreign source income from foreign source income (foreign tax credit), but those are expected to be reflected in the incoming circulars and guidelines etc.


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