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News (September 1, 2011)


NTA partially revised transfer pricing taxation

The National Tax Agency (NTA) as of August 12 announced a proposed partial revisions of Chapter 11 (Corporate Tax Section) of the Act on Special Measures concerning Taxation (gASMT Circularh) and Commissionerfs Directive on the Operation of Transfer Pricing (gTP Directiveh), both of which make up a primary part of transfer pricing regulations. The proposed revisions, based on the revised laws as of June 30 by the tax reform for 2011 fiscal year, aims to further clarify transfer pricing regulations. The NTA has been requesting public comments due by September 10, and the finalized revisions are estimated to be issued by the end of this year.

Overview of the main points of the proposed revisions

(1) Clarification of armfs length range in case of multiple comparable transactions (ASMT Circular 66.4(3)-4)
The proposed revision follows OECD Transfer Pricing Guidelines and clarifies that if there exists multiple comparable transactions, and prices for foreign related-party transactions are within the range of the multiple comparables, transfer pricing adjustment would not be imposed. So far, tax enforcement has been executed by the various point of view, for example, there was an argument that application of range is considered for Advance Pricing Arrangement (gAPAh), but not for tax examination where one point such as average of several comparables is used. This revision, therefore, could be evaluated positively for taxpayers. However, the definition of range, such as whether the range means usually-used interquartile range, or use of whole range can be allowed, still has not been clarified.

(2) Attention with regard to application of using secret comparables (TP Directive 2-5)
Regarding application of secret comparables etc. (confidential information about the comparable data obtained by tax authorityfs inspection or already owned by tax authority), current pre-condition is, gin case where a corporation is requested to present or submit documents, the corporation fails to submit such documents without delayh. In contrast, the proposed revision additionally defines that ‡@ corporationfs extension of the submission deadline shall be given if there is any rational reasons, and ‡Aapplication of secret comparables should be enforced only in case that the extensions are repeatedly given and after a certain period, the documents are still not presented or submitted by the corporation. However there is nowhere mentioned the specific reasons for being able to allow the delay of submission. In case a corporation does not prepare transfer pricing analysis at the initiation of tax examination, it will usually take at least a few months to newly prepare it, but it could be considered that the request for extension for such a reason may not be allowed. It means that documentation including transfer pricing analysis should be prepared in advance of tax examination.

(3) Advantages of the three transaction-based methods in transfer pricing methods (TP Directive 3-2)
As the FY2011 tax reform revised laws regarding transfer pricing taxation, so called gbest methods ruleh was introduced. However the proposed revision clarified that on the basis of advantages of the three transaction-based methods (calculating armfs length price directly), if any of those methods are applicable, the three transaction-based methods would be gmost appropriate methodh as followed by the OECD guidelines. Accordingly, the revision seems the adjustment of gbest methods ruleh in effect, so the three transaction-based methods still actually have the priority order. In this regard, the proposed revision is just as we indicated in the article of our website (News (December 24, 2010)).

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