On November 8, the National Tax Agency ("NTA") released a summary of corporate tax examination results for the fiscal year ("FY") 2018. According to the report, the number of examination cases was 257 (178 in the previous FY 2017), a significant increase of 144.4% compared with FY 2017, 105.3%.
In FY 2018, the transfer price documentation was introduced in Japan by the 2016 tax reform. It was the first year to examine corporations under the new documentation system.
In other words, the NTA was able to conduct examinations after checking local files prepared by taxpayers as
By the taxpayers' preparations of local files in advance, it seems that the NTA's examiners were much more accessible to the examinations. Because it became clear at a glance if examiners looked at the local file where the foreign-related parties were doing, what kind of business they were doing, and what kind of transactions were going on.
On the contrary, it is possible to grasp without questioning how much the appropriate profit rate was and what the taxpayer's actual value was, and as a result, whether or not the actual profit value was included within the appropriate profit rate range.
Before FY 2017, transfer pricing examinations had been conducted mainly for medium and large corporations under the jurisdictions of the Regional Taxation Bureaus. However, if corporations prepare local files, it is easy to consider whether there is a transfer pricing problem that happened, as mentioned above.
Examiners could examine in the short term. There is no need to create a bias. They can audit not only medium and large corporations but also small corporations. That means the NTA policy for the transfer pricing examination had just changed.
Depending on the examination cases, the transfer price may be corrected by several billion yen or 10 billion yen in terms of income. Therefore, if there is one large-scale case, the impact is so huge for the amount per case in the year. Thus, the analysis with a weight on this point would not be instrumental. One of the most important things is what is worrisome, the corrected contents.
The data reported by the NTA compiled full-scale transfer price examination cases, intra-group services (so-called "IGS") cases, and loan interest rate cases.
A full-scale transfer pricing case is different from IGS and interest rate cases, because of the volume of each trade. Therefore, we are worried about what the target transaction was. Considering the number of additional amount income per case, which was over one million yen, and the total amount was 36.5 billion yen, it may have included many IGS and interest rate cases.
The concept of transfer pricing is simple in itself, by recalculating controlled transactions to uncontrolled transactions by an independent third-party. For transfer pricing specialists, we think that it is complicated to judge and evaluate what factors will affect transfer pricing issues such as the transactions indeed.
It is a significant matter when examiners under the Tax Offices impose small corporations. Because if they are lacking experiences and knowledge about transfer pricing examination procedures as mention above, they will only impose them with high or low rates compared to the actual corporations' prices or rates.
We should focus on these matters.