February 21, 2014
Committee on Fiscal Affairs
The Organisation for Economic Co-operation and Development

International Tax Committee
Japan Machinery Center for Trade and Investment

Comments on Action 13 of the Action Plan on Base Erosion and Profit Shifting,“Discussion Draft on Transfer Pricing Documentation and CbC Reporting”

Japan Machinery Center for Trade and Investment (“JMC”) is a non-profit organisation thatwas established in 1952 to promote sound development of foreign trade relating to machinery inJapan by multi-national entities (“MNE”), and includes the major machinery manufacturers,
trading companies, and engineering companies. To enhance the international competitive
strength of the machinery industry in Japan, an international tax committee was established in
beginning of 1990 to study and encourage the developments of domestic and foreigninternational taxation systems.
URL：http://www.jmcti.org/jmchomepage/english/index.htm
JMC has decided to submit an opinion on Action 13 of the Action Plan on BEPS as it has asignificant impact on JMC members, composed of companies engaging in extensive export ofmachineries and exporting vendors making investments.

Our opinion is based on the“Comments on Discussion Draft on Transfer Pricing Documentation and Country by Country
Reporting” submitted by KEIDANREN to the OECD with full agreement and support, alongwith JMC specific issues.

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I. Comments from JMC<General Comment>
1.

JMC is expecting an enhancement of transparency with reduction in the compliancecost for businesses through a standardized template, and more clarity regarding
standards with the framework of the two-tiered approach of master file and local file
as proposed by the OECD in “Public Consultation DISCUSSION DRAFT ON
TRANSFER PRICING DOCUMENTATION AND CbC REPORTING” issued on
January 30, 2014.
However, JMC would like to make following comments based on the fact that thecurrent proposal includes an approach, which is doubtful in its applicability frompractical perspective, and the content required resulting in excessive administrative
burden on the taxpayers.

2.

JMC is composed of over 250 Japanese exporting vendors of machinery
representing leading manufacturers, trade companies, and engineering companies.
Each member company manages its operation with “appropriate tax payment” as oneof the key social responsibility, placing serious weight on tax compliance. Under theCFC (tax haven) rules in Japan, tax avoidance schemes conducted by some Western
MNE, indicated in the BEPS report as examples, cannot be accepted; and no actual
example of practice of aggressive tax planning with intentional transfer of intangibles
and profits to low tax jurisdiction, as raised as part of the BEPS discussions, has been
observed.
Rather, although double non-taxation arrangements are focused on and arediscussed as a core issue of the BEPS project, we would request the OECD toremember the fact that many companies have suffered from double taxation issues inpractice and that, even if the tax treaty exists, the mutual agreement procedures forrelief from double taxation do not work in some cases. We would insist that, inconsidering the BEPS issues, the OECD should also discuss the above problematic
issues on the relief measures of double taxation.

＜Specific Comments＞
3.

Regarding the master file2

①

Definition/standard of the master file
JMC requests the following points to be clearly stated for the preparation ofmaster file. In case the definition/standard applied (i.e. applied accounting standard,scope of related party, principle of materiality) is not clearly stipulated by theOECD, the taxpayer may apply the standard in the jurisdiction of the parent entity.
In addition, in the case both parent and the subsidiary are publicly listed companies,
both companies should be liable to prepare the master file for their own business,and it is inappropriate for the parent company to be solely responsible for thepreparation of the master file.
②

Content of the master file

Information regarding the APAs and Rulings as well as MAP is listed as part ofthe information to be included in the master file. However APAs and Advancerulings as well as MAP with certain tax authorities are conducted with a high degreeof confidentiality. As such, without a rational reason for unrelated tax authorities toobtain such information, we request the requirement to be deleted from theinformation to be included in the master file.
Other than the information above, the following information should be deleted
from the list of information to be included in the master file given the highly
confidential nature of the information, and the applicability of such information isquestionable.
Chart showing supply chain for material products and services

A description of important business restructuring transactions, acquisitions
and divestitures occurring during the fiscal yearA list of important related party agreements related to intangibles, including
cost contribution arrangements, principal research service agreements andlicense agreements

A description of the group’s transfer pricing policies related to R&D andintangibles

A description of any material transfers of interests in intangibles amongassociated enterprises during the fiscal year concerned, including the entities,
countries, and compensation involvedA description of the MNE’s general transfer pricing policies related tofinancing arrangements between associated enterprises(The information above can be noted in the local file as necessary)3Countries that are located in the main office and title of each of the 25 mosthighly compensated employees in each business field

It is to be noted that the functional analysis written business overview of MNE
should be sufficient to be described by reference to the range of information that has
been disclosed in the annual securities reports, annual reports, and other financialreports.
4.

Regarding CbC report①Implementation
The following comments are requested in the box under “E. Implementation” ofChapter V

Comments are requested regarding the most appropriate mechanism for making themaster file and country-by-country reporting template available to relevant tax
administrations. Possibilities include:
・The direct local filing of the information by MNE group members subject to tax inthe jurisdiction;
・Filing of information in the parent company’s jurisdiction and sharing it under
treaty information exchange provisions；・Some combination of the above.
This point is highly critical and from our perspective, even if country-by-country
reporting is unavoidable, it should be sufficient that the parent company submit thisreport to the authorities of the country where the parent company is. In addition, if thecountry-by-country report information of a company is required by the authorities of
the country where the subsidiary company is located, this information should beshared in accordance with the exchange of information provisions in the tax treaty orother agreement with the authority of the country where the parent company is located.
In this case, it may be pointed out that it is difficult to exchange the information withcountries and regions without any valid information exchange provisions. Rather fromour perspective the role of the OECD is per se to encourage prevention of double
taxation by proactive conclusion of tax treaties and information exchange agreements.
It must clear that the local file must not be shared.
We oppose the concept that the subsidiaries of multinational companies are required4

to submit this report to the authorities in the countries where multinational companies
have business, for the following reasons:(1) Security/confidentiality concerns
Country-by-country reporting is likely to require highly-confidential information
including sales, pretax income, taxes paid, number of employees, payroll, total assets,etc. Usually, since only the parent company is possibly able to keep all of thisinformation, the subsidiary only obtains the information relating to itself andsubsidiaries under this subsidiary, except for public information like the annual reportwhich the parent company discloses. If subsidiaries are required to submit thecountry-by-country report to the authorities where these subsidiaries are located, it
will have a material influence on the corporate governance of multinational companies
since the subsidiaries will know and hold the above highly-confidential information.
We also believe that the information relating to MAP and APA that are discussed withthe tax authorities in a specific country is extremely confidential information.
(2) Administrative burden
An affiliated group of companies can include several purely domestic companies
which do not or rarely have transactions with an overseas affiliated company andseveral companies which are not subject to documentation obligations under thetransfer pricing system. If information relating to all of the affiliated companies
globally is required to be submitted under county-by-country reporting, theadministrative burden for this report will be unimaginably enormous. We think that it
is impossible to collect and record this information completely.
For example, in the case MNE has various business operations within the group,though a significant portion of master file may be irrelevant to many parts of the CbC
report of each entity of this group, the entity will be requested to explain the detail ofinformation submitted to the tax authority with the responsibility of the each entity.
Thus, the required administrative burden is far beyond expected and enormous.
In addition, the definition of a foreign affiliated person under the transfer pricing
provisions is different in each country. Therefore, it is essential for multinational
companies which have operations in each country and region to clarify the definitionof a “subsidiary” that is subject to country-by-country reporting. If country-by-country
reporting is required in compliance with the transfer pricing provisions of each5

country, it is impossible to maintain consistency with the purpose of the action plan ofreporting uniform and standardized information by using a template. It should beclarified as to what should be the uniform reporting standard and the reasons for suchstandard.
②CbC report: Concerns regarding the necessity and unintended use of the report
As mentioned above, we have strong doubt about the approach. We believe that theapproach of requiring all companies to submit additional information that places
excessive burden on them, without it being clear as to the usefulness of information
provided, is wrong.
Many of our member companies are actively engaged with business in Asianemerging countries, establishing manufacturing and distribution subsidiaries in theseemerging countries. In the recent years, these emerging countries have trended
towards the implementation of transfer pricing system allocating more profit to MNE
affiliates operating in these emerging countries on the basis of market specificfeatures such as location savings and market premium.

Under such conditions, weare afraid that the required provision of information related to global allocation ofincome as well as taxes paid among countries/jurisdiction of MNE may generateinaccurate risk assessments and result in arguments between tax authorities andtaxpayers in certain emerging countries. Annex III provides “A Model Template ofCountry-by-Country (“CbC”) reporting (Overview of allocation of income, taxes andbusiness activities on a country-by-country basis)”and we are concerned that the riskof double taxation may rise as the information may simply be used as a split factor inapplying profit split method. Thus, for the reasons above, we are against the conceptof including CbC report as part of the master file.
We are concerned that BEPS issues, which were initially discussed as tax
avoidance problems by some MNE in Europe, might turn to be discussed in different
contexts, such as tax conflicts between emerging countries and industrial countries.

II. Synopses strongly agreed by JMC regarding the issues addressed in
the “Comment on Discussion Draft on Transfer Pricing
Documentation and Country by Country Reporting” submitted by
KEIDANREN.

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1.

We believe that the best way for tax administrations to gain a comprehensive “bigpicture” understanding of a taxpayer’s global value chain is through direct, open andtransparent dialogue with the taxpayer. After such direct dialogue, rather than relying
on the country-by-country reporting information which may only provide confusion,
the tax authority would be able to request information on specific transactions where
they consider that there may be a transfer pricing risk.

2.

An approach is far more preferable than moving directly to country-by-country
reporting for all taxpayers, regardless of their compliance history or risk, which would
result in a reduced compliance burden and more appropriate risk assessment.
Therefore, it would be a reasonable approach to do a Gateway Test that a tax
administration would determine whether they would request additional information toa company in its jurisdiction depending on the result of the risk assessment throughcooperative relationship with the company.

3.

Since country-by-country income and taxes of multinational companies and otherdata relating to the measurement of economic activities are not available immediately
and there are questions about the usefulness of such information, we oppose theintroduction of a new system for obtaining such information. Even if it is inevitable tointroduce this system, for example, it should be permitted to use public accounting
information in order to minimize the increased additional administrative burden tomultinational companies. Further, this new system must not create a requirement forthe collection of new data which companies do not currently gather.

JMC is submitting the above comments to the OECD Public Consultation for the first time
because the topic is of significant importance for many exporting companies of Japan. We
highly appreciate the opportunity to provide these comments.

Japan Machinery Center for Trade and Investment
Kikai-Shinko Kaikan
3-5-8 Shiba Koen, Minato-ku, Tokyo 105-0011, JAPAN
Tel: +81-3-3431-9348 / Fax: +81-3-3436-6455
E-Mail: taniguchi@jmcti.or.jp / shibaoka@jmcti.or.jp

7Japan Machinery Center for Trade and Investment
International Tax Committee
Member Companies

Chair : Canon Inc.
Vice Chair : Hitachi, Ltd.
Committee members as follows ;Itochu Corporation
Olympus Imaging Corporation
Kawasaki Heavy Industries, Ltd.
Komatsu Limited
Sharp Corporation
SINFONIA TECHNOLOGY CO., LTD.
Sumitomo Corporation
Seiko Epson Corporation
Sony Corporation
Toshiba Corporation
Nikon Corporation
NSK Ltd.
NEC Corporation
Pioneer Corporation
Panasonic Corporation
Fujitsu Limited
Fujitsu General Limited
Marubeni Corporation
Mitsubishi Heavy Industries, Ltd.
Mitsubishi Electric Corporation8