Japan’s New Transfer Pricing Checklist
Japan's National Tax Agency (NTA) has recently been increasing its focus on internal corporate governance for tax-related matters. In light of this trend, the NTA began issuing questionnaires on general internal risk policies to large corporate taxpayers. This questionnaire is generally issued by the NTA when visiting relevant companies, and contains 27 questions on internal tax and accounting risk management policies. The questionnaire is divided into the following five areas:
- The involvement of top-level management in corporate governance matters
- Current circumstances regarding the accounting/audit department
- Establishment of effective internal control systems for tax and accounting procedures
- The company's efforts in raising awareness in tax-related matters Internal disciplinary measures for employees engaging in tax or accounting fraud.
The NTA has also recently issued a questionnaire entitled, "Check Sheet for Confirmation of Efforts and Achievements on Transfer Pricing" (the checklist) relating specifically to Japan's transfer pricing rules. The checklist contains 31 questions on the company's knowledge of, and internal management and compliance with, the rules. The company is required to self-assess its awareness of each point on a scale of 1 (unaware) to 4 (high level of awareness). The checklist is divided into the following 7 areas:
- Understanding of Japan's transfer pricing rules
- The involvement of top-level management in transfer pricing matters
- Identification or knowledge of issues relating to foreign related transactions
- The existence of a global transfer pricing policy
- The arm's-length nature of the company's intercompany transactions with foreign related parties
- The parent company's involvement in transfer pricing issues involving foreign related parties
- Level of communication with the tax authorities.
The checklist is intended to identify and evaluate how large corporate taxpayers are managing their transfer pricing and assess compliance with the Japanese transfer pricing rules. It is understood that the questionnaires will be used by the NTA to raise awareness of transfer pricing requirements in Japan in order to improve compliance and also as an indicative tool to assess whether further investigation of the company is necessary (e.g. future tax audits).