Provisional Translation

APA Program Report 2007

October 2007

National Tax Agency

Provisional Translation

Contents
1

Recent Development（1）

Recent Development of Mutual Agreement Procedures (MAP)（2）

Recent Development of BAPAa.

The Number of Disposed BAPAs –by Industryb.

The Number of Disposed BAPAs –by Transaction Typec.

The Number of Disposed BAPAs –by Transfer Pricing Methodd.

The Number of Disposed BAPAs –by Regione.

Time Required per BAPA Case

（3）

1

Recent Discussions

2

Introduction

63What Are Advance Pricing Arrangements (APAs)?

7

4

History of APAs in Japan and the World

85

Address at PATA

9

6

Overview of APA in Japan10（1） Definition of APA（2） Relationship between APA and MAP（3） Relationship between APA and Transfer Pricing Examinations（4） Request and Review Procedures（5） Review of APA Requests（6） Effects of APA（7） Examination of Compliance Conditions（8） Compensating Adjustments（9） Revisions, Cancellations, and Renewals（10） Rollbacks（11） Procedures for Consolidated Corporations（12） Pre-filing Consultation
7

APA Process（1）

Submission of APA Request（2）

Review by the Regional Taxation Bureau (RTB) APA Review Group（3）

MAP Negotiations and Agreement（4）

Review of Annual Compliance Reports, etc.

16

Provisional Translation【Chart】Flowchart of BAPA Procedure
89Staff in Charge of BAPA Cases（1）

Staff in MAP Staff（2）

APA Review Groups

Taxpayer Cooperation in APA

Attachment 1 Partner Countries of Mutual Agreement Procedure
Attachment 2 Summary of MAP Statistics
Reference

Japan’s Tax Convention Network

19

21

Provisional Translation

1. Recent Developments(1) Recent Developments of Mutual Agreement Procedures (MAP)
The number of MAP cases tends to increase in recent years, and more than 90% of the cases are
related to transfer pricing. In particular, the number of Bilateral Advance Pricing Arrangement(BAPA; APA accompanied by MAP) shares a major part of the increase in the number of MAP cases.
During the business year 2006 (from July 2006 until June 2007), the National Tax Agency (NTA)
received 154 MAP cases.

Among those, the number of transfer pricing related cases was 141, outof which the number of BAPA cases was 105.

Compared to the statistics of ten years before (thebusiness year 1996), the number of MAP cases has increased approximately four times and thenumber of BAPA cases has increased approximately six times.
Chart 1 below indicates the trend in the number of MAP cases, and the number of BAPA cases forthe past ten (10) years.

Chart 1 Trend in the number of MAP and BAPA

Number
180

154

160

MAP
140

BAPA

120

105
100
80

60

40
40
20

18
0
1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Business Year

(Note)
1 Business year is from the beginning of July through the end of June of the following year.
2 The number of MAP cases consists of both those cases which the NTA received the MAP
requests from taxpayers in Japan and those cases which the NTA received the MAP
requests from foreign tax authorities.
3 MAP cases on compensating adjustments and amendments of the previously agreed APA
are counted as an individual MAP request, separated from their original APA cases.

1

Provisional Translation(2) Recent Developments of BAPA
The number of disposed BAPA cases was 84 in the business year 2006, and Charts 2 through 5
below indicate the details.
a. The Number of disposed BAPA cases – by Industry
The number of BAPA cases disposed is categorized by industry of taxpayers’ as in Chart 2 below.
While the number of manufacturing companies was 20 and the number of wholesale / retailcompanies was 4 in the business year 2001, that of manufacturing companies is 50 and that ofwholesale / retail companies is 28 in the business year 2006.
companies has substantially increased.

The number of wholesale / retail

Further details of each industry are described in Chart 2-2

below.

Number60

2001 Business Year

Chart 2-1 The Number of Disposed BAPA -by Industry

2006 Business Year

50

50
40

28

30

20

20
10

4

6

1

0
Manufacture

Wholesale/Retail

OthersChart 2-2 The Number of Disposed BAPA -by Industry

2001 Business Year2006 Business Year

Number
25
18

20
15

12

11

10
5

17
11

10

9
6

2

6
3

2

1

1

0
Manufacturingindusｔｒｙ(Note 1)

Manufacturingindustry(Note 2)

Manufacturingindustry(Note 3)

Miscellaneous
manufacturingindustries

Tradeindustry

Miscellaneous
wholesale tradeand retail trade(Note)
1 Manufacture of household electric appliances and electric bulbs
2 Manufacture of transportation equipment
3 Manufacture of industrial electrical apparatus

2ServicesProvisional Translationb. The Number of disposed BAPA cases – by Transaction TypeThe number of disposed BAPA cases is categorized by transaction type as shown in Chart 3 1 below.
While the number of Tangible Property Transactions was 24 and that of Provision of Services was 9
in the business year 2001, the number of Tangible Property Transactions is 73 and that of Provisionof Services is 24 in the business year 2006.

Chart 3 The number of Disposed BAPA-by Transaction Type2001 Business Year2006 Business Year

Number

90
80
70
60
50
40
30
20
10
0

73

30

24

24

11

9
Tangible
Transactions

Provision ofServices

7

Intangible
Transactions

Othersc. The Number of disposed BAPA cases – by Transfer Pricing Method
The number of disposed BAPA cases is categorized by transfer pricing method as shown in Chart 4 2
below.

In the business year 2006, the number of TNMM (Transactional Net Margin Method,

introduced in March 2004) is increasing sharply.

Chart 4 The number of Disposed BAPA-by Transfer Pricing Method
Number30

2001 Business Year2006 Business Year

25

25
25

22

20

16
13

15

8

10

7

5
5
0
CUP

RP

CP

1

PS

TNMM

Some cases include more than one transaction, and thus one case is counted more than once in accordance withthe different types of transactions involved. “Others” refers to global trading-related transactions and etc.
2 In some cases, more than one transfer pricing method is applied, as they contain more than one transaction, which
requires different transfer pricing treatment.

3

Provisional Translationd. The Number of disposed BAPA cases – by Region
The number of disposed BAPA cases is categorized by region as indicated in chart 5 below.
Although the number of BAPA cases with USA, Australia, and Canada has made up a large share ofentire BAPA cases, the number of BAPA cases with Asian countries with little experience in BAPA
is increasing 3 .

In light of the changes of their policy on BAPA in such countries, the number of

BAPA cases with such countries will be expected to increase.
The number of countries with which the NTA was under negotiation for BAPA had been eleven in
the business year 1996 (ten years before), and it increased to twenty-five in the business year 2006.
The number of countries with which the NTA was negotiating (a) BAPA case(s) at the end of thebusiness year 2006 is shown in the attachment “Partner Countries of Mutual Agreement
Procedure”.
Number
45
40
35
30
25
20
15
10
5
0

Business Year 2001

Chart 5 The Number of Disposed BAPA-by Region

Business Year 2006

39
34

18
11
5

Americas2

Asia/Oceania

Other

e. Time Required per BAPA Case
The average time spent on a BAPA case is around two years, though it varies in accordance with thenature of each case, e.g. whether the case is a new case or a renewal of an existing one, whether thecase is for compensating adjustment, and etc.
(3) Recent Discussions and Developments in various fora
a. Discussion at the OECD
Dispute Resolution with regard to international double taxation including mutual agreement
procedures had been discussed at the OECD since 2002. Through public comments and public
consultation, the report entitled “Improving the Resolution of Tax Treaty Disputes” was released in
February 2007.
In the report, it is proposed to add a provision about arbitration in Article 25 of the OECD MotelTax Convention and its commentaries.

In the “Manual on Effective Mutual Agreement Procedures(MEMAP)” also released by the OECD during the same period, 25 best practices of MAP areproposed so as to improve the effectiveness of MAP

3 The treaty partners with which the NTA accepted the biggest number of BAPA cases in the business year 2006 are
as follows in descending order : ①U.S. ②Australia ③China

4

Provisional Translation
b. Revision of Tax System in Japan
In the tax reform in 2007, grace of tax payment during the MAP concerning transfer pricing
taxation cases, i.e. suspension of collection during the MAP on transfer pricing adjustment cases,
was introduced and has become effective since the beginning of Fiscal Year 2007, i.e. April 1, 2007.
Under this system, a taxpayer may request the postponement of the payment of tax on transfer
pricing adjustment until the termination of MAP.
This new system has been introduced to mitigate taxpayers’ burden caused by international double
taxation, and the NTA is making efforts to administrate the system properly and smoothly.
c. Improvement of Pre-filing Consultation of APA and Staff Increase engaged in APA Examination
In response to the report of the Tax Commission regarding the tax reform in Fiscal Year 2007, the
NTA improved the APA system by facilitating the process of Pre-filing Consultation and expanded
its APA examination capacity by increasing the number of staff engaged in the examination of APA
requests.
Concerning the compliance activities on transfer pricing regulation, the NTA amended theCommissioner’s Directive on Transfer Pricing in June 2007 through public consultation process inorder to enhance the taxpayer’s predictability and to further clarify the administration of transfer
pricing regulation.

At the same time, the NTA also established and released a series of casestudies that show the examples of transfer pricing treatments under certain conditions.

5

Provisional Translation

2. Introduction
In Japan, transfer pricing taxation was introduced in 1986.

In 1987, advance pricing arrangement(APA) started, making Japan the first country in the world to implement such a procedure.
Basic mechanism of the transfer pricing taxation is to compute taxable income of a corporation as if
its transactions with its foreign-related entity/entities were conducted at arms’ length price, in casethat taxable income of the corporation was decreased as a result of the fact that its transactions
with its foreign related entity/entities had not been based on the arms’ length principle.
An APA is a framework for the tax administration and a taxpayer to agree that while the taxpayer
files its tax return in accordance with the agreed APA conditions for the APA covered years, the tax
administration refrains from transfer pricing taxation on the taxpayer(s).
An APA may involve one country only (unilateral APA), or two or more countries (bilateral APA,
hereinafter referred to as “BAPA” or multilateral APA). The latter APA is accompanied by the
Mutual Agreement Procedures (MAP).
The National Tax Agency (NTA) is promoting BAPA to facilitate the enforcement of transfer pricing
regulation, to mitigate the administrative burden on corporations, and to ensure the tax
predictability for corporate management. The number of BAPA cases is increasing in recent years
as the globalization of Japanese economy is progressing, and also the system of APA has become
more widely recognized among taxpayers.
APA cases make up the majority of MAP cases today. This indicates that the need to prevent double
taxation before it actually occurs by using APA is increasing.
The usefulness of APA is largely known among taxpayers, and the number of cases of second or
third APA (i.e. APA subsequent to the initial APA of the same taxpayer) has been increasing recently.
Moreover, the cases with countries without substantial experience in BAPA have occurred, and the
NTA’s BAPA partner has been expanding geographically.
This report outlines APA and the data concerning APA and MAP from 1 July 2006 to 30 June 2007.
Although there are APA cases which involve only one country only, i.e. Japan only, this reportmainly focuses on BAPA which make up the majority of APA cases in Japan. We hope that thisreport will deepen taxpayers’ understanding of APA administration and further promote APA.

6

Provisional Translation

3. What is Advance Pricing Arrangement (APA)?
As noted above, an APA is a framework for the tax administration and (a) taxpayer(s) to agree thatwhile (a) taxpayer(s) file its tax return in accordance with the agreed APA conditions for the APA
covered years, the tax administration refrains from transfer pricing taxation on the taxpayer(s).
The objective of APA is to ensure the predictability of transfer pricing taxation for the taxpayer byconfirming in advance the method of calculating arm’s length prices between the tax administrationand the taxpayer. This ensures the proper and smooth enforcement of transfer pricing taxation.
Transfer pricing taxation may often result in a large amount of additional taxes, and theexaminations often require a great deal of time and MAP to resolve the double taxation. Thus, therisks involved in transfer pricing taxation for the taxpayer are generally quite high. APAs help
taxpayers conducting foreign-related transactions to prevent the risk of such transfer pricing
taxation in advance.
APAs may involve either one country only (unilateral APA), or two or more countries (BAPA).
A unilateral APA confirms the method to be used to calculate arm’s length prices by the NTA for the
taxpayer in Japan. A unilateral APA does not ensure that associated taxpayers in the othercountries will avoid the risk of taxation by foreign tax administrations.
A BAPA, on the other hand, includes consultations regarding the method of calculation of arm’s
length prices between the two or more tax administrations that have jurisdiction over the related
taxpayers. Its objective is to ensure the predictability of transfer pricing taxation and to prevent therisks related to double taxation. With a BAPA, the taxpayer is ensured the legal stability of both tax
administrations (all tax administrations in multilateral cases). This is the reason that many
countries including Japan conduct BAPA.

Diagram of the BAPA Process

NTA

Mutual Agreement Procedures

Foreign Tax
Administration（Regional Taxation Bureaus）

APA review

APA review
APA request and MAP

APA request and MAPt
Japanese Taxpayer

Related Parties

7

Foreign Taxpayer

Provisional Translation

4. History of APAs in Japan and the WorldIn the nineteen eighties, because of the development of globalization of business activities, the needto address income shifting through transactions between a corporation and its foreign related
entity/entities increased.
income shifting.

Some foreign countries had already been prepared to address such

Therefore, Japan introduced transfer pricing taxation in March 1986 to realize

proper international taxation in common framework with foreign countries.
The system of APA was first introduced in Japan in 1987. It was developed to ensure the properand smooth enforcement of transfer pricing regulation by giving administrative confirmation as tothe most rational method of calculating arm’s length prices for corporations.
The United States Internal Revenue Service (IRS) also formally adopted APAs (known as “Advance
Pricing Agreements” in the U.S.) in 1991 with Procedure 91-22. Subsequently, Canada (1994), New
Zealand (1994), Australia (1995), and Mexico (1995) introduced APA. After the 1995 OECD reporton transfer pricing further promoted APAs, Korea (1996), China (1998), the U.K. (1999), France(1999), the Netherlands (1999), and Germany (2000) created the system, and it truly became a focusof global interest 4 .
With this increase in global recognition, the number of APA requests has risen, and since 1994,
BAPA requests in Japan have also increased. Due to this increase in the number of BAPA requests,
the 1987 Directive was revised in 1999, and the Commissioner’s Directive on Methods ofCalculation of Arm’s Length Prices (Administrative Guidelines), encouraging BAPA, was released.
The content is retained in the successive Commissioner’s Directive on the Operation of Transfer

Pricing (Administrative Guidelines) 5 (hereafter referred to as “Transfer Pricing Administrative
Guidelines”) issued on 1 June 2001, and is still in effect.
Comprehensive guidelines for MAP on which BAPA cases are based were released as theCommissioner’s Directive on Mutual Agreement Procedures(Administrative Guidelines)(hereafterreferred to as “MAP Administrative Guidelines”）on 25 June 2001 6 . The MAP Administrative
Guidelines (provisional English translation) are available on the NTA website (www.nta.go.jp) 7 .
Countries such as the United States, Canada and Australia also publicize their APA reports every
year in their websites.

4

The OECD issued the OECD/APA Guidelines in 1999, thereby committing to promoting BAPA.
Document ID: Examination Division 7-1 etc. dated 1 June 2001
6 Document ID: Office of Mutual Agreement Procedures 1-39 etc. dated 25 June 2001
MAP related to APA is regulated in the MAP Administrative Guidelines.
7 The translation is provisional, and is in the process of being updated, as the introduction of “Grace of tax payment(suspension of collection during the MAP on transfer pricing taxation cases) is to be included in the Directive.
5

8

Provisional Translation

5. Efforts in Pacific Association of Tax Administrators (PATA 8 )The Pacific Association of Tax Administrators (PATA) is comprised of representatives from the tax
administrations of Japan, Australia, Canada, and the United States. Meetings organized under theframework of PATA and based on the Exchange of Information articles of the applicable Convention
provide a forum for the administrations to exchange opinions and experiences about fiscal mattersof common interest. PATA has committed itself to executing MAP and BAPA. In June 2004, PATA
released an amendment to both guidance documents to handle the dramatically increased use of
MAP and BAPA, and subsequently to respond to the growing demand from taxpayers forinternational guidance. Both guidance documents concern the execution of MAP and BAPA, but are
not binding on PATA members.
Each guidance document establishes a deadline of two years for settling MAP and BAPA cases. This
two-year timeframe does not apply to certain cases, such as cases in which a taxpayer does notcooperate. Although MAP negotiation is a government-level process, the taxpayer which filed the
APA request is permitted to participate at some sessions to provide factual information.
The guidance for MAP also applies to all mutual agreement procedures, including transfer pricing
adjustments.
The guidance for BAPA encourages and facilitates the use of BAPA among PATA members which isconsidered more desirable than a unilateral APA.
Both guidance documents are available on the NTA website (www.nta.go.jp).

8 In January 2006 at the commissioners’ meeting including Japan, the United States, Canada, Australia, the United

Kingdom, France, China, and India held at Leeds Castle in the suburb of London, it was agreed to set up thecommissioners’ meeting (named “Leeds Castle Group”) including above eight countries and Germany and Korea, andconsequently PATA was dissolved.

9

Provisional Translation

6. Overview of APA in Japan(1) Definition of APA 9
APA is defined as the confirmation made by District Director of Local Tax Office or Regional
Commissioner of Regional Taxation Bureau (RTB) with regard to the method of calculation of arm’s
length prices and the specific details thereof deemed to be the most reasonable to be adopted by the
corporate taxpayer.
(2) Relationship between APA and MAP
a. Elimination of double taxation
BAPA is a means to eliminate double taxation before transactions are actually taken place.

BAPA

is established by the agreement reached by Competent Authorities (CA) of the countries concerned
regarding suitable transfer pricing methods.
b. Recommendation of MAP requests when an APA request is filed 10
To prevent double taxation and to ensure predictability of taxation, the division in charge at the
RTBs shall provide the taxpayer who wishes to file an APA request with the necessary information,
so that the taxpayer is able to consider what it should request in its APA application. The division in
charge shall also recommend the APA applicant to file a MAP request in the case that it turns out tohave an intention to file a BAPA request.
c. Collaboration between RTB’s APA review teams and the MAP section 11
The APA review teams (divisions in charge at the RTBs) and the MAP section (Office of Mutual
Agreement Procedures at the NTA) shall collaborate and exchange ideas from the pre-filingconsultation stage until the conclusion of the MAP, in order to resolve the APA case as quickly as
possible.
(3) Relationship between APA and Transfer Pricing Examinationa. Confirmation of future years’ transfer pricing
APA is concerned with the appropriateness of the methods applied to calculate arm’s length prices
and of the profit level based on past financial data. Whereas an APA is to grant a confirmation for
future transactions, transfer pricing examination deals with past years’ transactions.
b. Use of range
In transfer pricing examinations, arm’s length prices are calculated as a particular level or point. In
contrast, APA often sets a range which indicates that there is no income transfer when the financial
9Transfer Pricing Administrative Guidelines 1–1. Transfer Pricing Administrative Guidelines on Consolidated
Corporate Groups (Document ID: Examination Division 7-4 etc. dated 28 April 2005) 1–1
10 Transfer Pricing Administrative Guidelines 5–12
Transfer Pricing Administrative Guidelines on Consolidated Corporate Groups 5–12
11 Transfer Pricing Administrative Guidelines 5–13
Transfer Pricing Administrative Guidelines on Consolidated Corporate Groups 5-13

10

Provisional Translation
results of the transactions covered by the APA actually fell in the range.
c. Comparable transactions
APA is a system to confirm the appropriateness of the calculation methods proposed by the taxpayer
itself, and therefore the selection of comparable transactions is based only on the information
available to the taxpayer (e.g. public data, taxpayer’s internal data, etc.).
d. Relationship between APA request and tax examination 12z

Filing an APA request does not put into abeyance any examination of the same taxpayer
and its transactions.

z

In order to ensure confidence in the system, the information obtained from the taxpayer inthe APA review process is not used for examination, except for factual information, such as
financial statements, capital relationship diagrams, and summary statements of business.

(4) Request and Review Procedures
a. Deadline for filing an APA request 13
A Special Application Form (“Request for APA of the Transfer Pricing Methodology”) must be filedwith the necessary documents no later than the deadline 14 for filing the taxpayer’s final tax returnfor the first business year to be covered by the APA. When MAP is requested, a MAP Request Formmust also be submitted separately. Although there is no deadline for requesting MAP regarding
APA cases, the MAP Request Form is usually submitted together with the APA request.
b. Documents to be attached with APA request 15z

Outline of organization conducting the foreign-related transactions and overall descriptionof the transactions subject to the APA requestz

Transfer pricing method to be confirmed and the explanation of the reason that the
proposed method is the most rational onez

Material business and economic conditions essential to the APAz

Details of the transactions subject to the APA, e.g. cash flow, currency type and etc. of thetransactionsz

Capitalrelationships

andsubstantial

controlrelationships

withforeign-related

party/partiesz

Functions performed by each transaction partyz

Operational and accounting information for the prior three taxable years

12

Transfer Pricing Administrative Guidelines 2–21
Transfer Pricing Administrative Guidelines on Consolidated Corporate Groups 2-21
13 Transfer Pricing Administrative Guidelines 5–2
Transfer Pricing Administrative Guidelines on Consolidated Corporate Groups 5–2
14 The deadline for filing a request for APA renewal is the day before the first day of the business year to be coveredby the APA. (Transfer Pricing Administrative Guidelines 5–22. Transfer Pricing Administrative Guidelines on
Consolidated Corporate Groups 5–22.)
15 Transfer Pricing Administrative Guidelines 5–3, 5–4
Transfer Pricing Administrative Guidelines on Consolidated Corporate Groups 5–3, 5–4

11

Provisional Translationz

Outline of transfer pricing examinations, appeals, lawsuits, and similar procedures
pertaining to applicable foreign-related party/parties, and details of past taxation in theircountry/countriesz

Results determined by applying the proposed transfer pricing methods to the prior threetaxable yearsz

Miscellaneous documents that are considered necessary for the APA

c. Terms to be confirmed 16
Under the Transfer Pricing Administrative Guidelines, an APA is applicable to three to five taxable
years in principle.
(5) Review of APA Request
The review is carried out based on the following items:a. Information about the actual business conditions of the APA-requesting taxpayer and its
foreign-related party/parties, the particulars of the foreign-related transactions
b. Analysis of the probability of income transfer in the past years, which constitute the basic datafor review
c. Analysis of the adequacy of the methods used to calculate the arm’s length prices
d. Analysis of the comparability of the comparable transactions (e.g. comparability of the listed
items as below)zTypes of inventories, content of services rendered, etc.

zStage of transactionzVolume of transactionsz

Terms and conditions of the transactionsz

Functions performed and risks assumed by the party/parties concernedzIntangible assetszBusiness strategyzTiming of entry into the marketzMarket conditions(6) Effects of APA 17
When a taxpayer files its tax returns prepared in accordance with the APA, the confirmed
transaction is treated as having been conducted based on arm’s length prices.

If, after the APA isconcluded, the taxpayer’s income of the past APA periods turned out to be less than the appropriate
figures calculated by applying the APA, the taxpayer must file amended tax returns for the past
years.

However penalties will not be imposed under the circumstances.

16

Transfer Pricing Administrative Guidelines 5–7
Transfer Pricing Administrative Guidelines on Consolidated Corporate Groups 5–7
17 Transfer Pricing Administrative Guidelines5–16
Transfer Pricing Administrative Guidelines on Consolidated Corporate Groups 5–16

12

Provisional Translation(7) Examination of Compliance Conditions 18
A taxpayer who has received the APA confirmation (hereinafter referred to as “confirmed
corporation”) must submit reports (hereinafter referred to as “annual compliance reports”)
explaining that the reported income is compliant with the APA, by the deadline of the taxpayer’s
final tax return for each year covered by the APA or the deadline otherwise predetermined by theDistrict Director of the Local Tax Office. The division in charge at the RTB will examine the content
of those reports.
(8) Compensating Adjustments 19
In case the income (actual figures) derived from the confirmed transactions during the APA-covered
years does not comply with the conditions of the APA, the taxpayer must make necessary
adjustments (hereinafter referred to as “Compensating Adjustments”).

If the confirmed

corporation makes any adjustments in its financial statements so as to comply with the APA, theadjustments are treated as legitimate transactions for the purpose of transfer pricing.
If it is found that the income of the confirmed corporation is less than the appropriate levelcalculated by applying the APA, one of the two following procedures must be followed:
a. Adjustment of figures on the final tax return
The confirmed corporation must correct the taxable income on its final return if it turns out
that, after the closing date of the financial statements and before the deadline of the final tax
return, the income was understated in the financial statements pertaining to the confirmed
taxable years due to the inconsistency between the actual transaction and the results ofapplying the confirmed transfer pricing method.
b. Amended return
The confirmed corporation must promptly file an amended tax return if it turns out that, after
filing the tax return, the income was understated in the tax return pertaining to the confirmed
taxable years due to the inconsistency between the actual transaction and the results ofapplying the confirmed transfer pricing method.
If it is found that the income of the confirmed corporation is more than the appropriate figures,
when BAPA is applied, the confirmed corporation may adjust its income by one of the following twoways:
a. Adjustment of figures on the final return
The confirmed corporation may correct the taxable income in the final return based on the
18

Transfer Pricing Administrative Guidelines 5–18
Transfer Pricing Administrative Guidelines on Consolidated Corporate Groups 5–18
19 Transfer Pricing Administrative Guidelines 5–19
Transfer Pricing Administrative Guidelines on Consolidated Corporate Groups 5–19

13

Provisional Translation
mutual agreement for compensating adjustments, if it turns out that, after the closing date of
the financial statements and before the deadline for final tax return, the income in the financial
statements pertaining to the confirmed taxable years was overstated due to the difference
between the actual transaction and the results of applying the confirmed transfer pricing
method.
b. Request for correction
The confirmed corporation may file a request for correction based on the mutual agreement forcompensating adjustments if it turns out that the income was overstated due to the difference
between the actual transaction and the results of applying the confirmed transfer pricing
method in the tax returns after filing its final tax returns pertaining to the confirmed taxable
years.
(9) Revision, Cancellation, and Renewal of APA
a. Revision 20
In the event where there is a situation that causes material differences to business and economic
conditions essential to the continuation of the APA and critical assumptions compared to thesituation when the APA was confirmed, the taxpayer must file a request for the APA revision.
b. Cancellation 21
An APA shall be cancelled under any of the following circumstances:z

The confirmed corporation did not submit the request for revision even when material
differences to critical assumptions necessary to continue the APA arose.

z

The confirmed corporation failed to comply with the contents of the APA in its tax
return.

z

The confirmed corporation failed to submit the annual compliance report.

z

Any of the facts based on the APA request are revealed to be false.

c. Renewal 22
A Request for APA renewal for business years following the confirmed years shall be processed inaccordance with the procedures for a new APA request.
(10) Rollbacks 23
When a taxpayer requests “rollback” treatment (i.e. retrospective application) of the transfer

20

Transfer Pricing Administrative Guidelines 5–20
Transfer Pricing Administrative Guidelines on Consolidated Corporate Groups 5–20
21 Transfer Pricing Administrative Guidelines 5–21
Transfer Pricing Administrative Guidelines on Consolidated Corporate Groups 5–21
22 Transfer Pricing Administrative Guidelines 5–22
Transfer Pricing Administrative Guidelines on Consolidated Corporate Groups 5–22
23 Transfer Pricing Administrative Guidelines 5–23
Transfer Pricing Administrative Guidelines on Consolidated Corporate Groups 5–23

14

Provisional Translation
pricing method to the years prior to the APA period and the confirmed transfer pricing method in
BAPA is regarded as the most appropriate one also for the years prior to the APA period, therollback may be permitted.
(11) Procedures for Consolidated Corporations
The NTA established the Commissioner’s Directive on the Operation of Transfer Pricing Related toConsolidated Corporate Groups in April 2005. 24

The parent corporation shall file the request for

APA concerning its own transactions with foreign related entities in the name of the parent
corporation to the District Director of the Local Tax Office with the jurisdiction over the place of its
tax payment.

The parent corporation, instead of its subsidiary, shall also file a request for APA on

the foreign related transactions of the consolidated subsidiary to the District Director of the Local
Tax Office with jurisdiction over the place of its tax payment 25 .
The Commissioner’s Directive on Mutual Agreement Procedures (Administrative Guidelines) was
also revised to make the consolidated parent corporation the entity to request a MAP on behalf of its
subsidiaries. 26(12) Pre-filing Consultation 27
A Pre-filing Consultation is defined as a consultation between a taxpayer which is considering
requesting an APA and relevant divisions of the Regional Taxation Bureau (APA teams) with regard
to the method of calculation of arm’s length prices. The NTA Head Office in charge of the APA
program and/or the NTA’s Office of Mutual Agreement Procedures may participate in the
consultations if necessary.

Agents may also hold an anonymous consultation on behalf of the client

taxpayer.
Through the Pre-filing Consultation, both of the taxpayer and the APA team can establish acommon basic understanding on the APA request.

By doing so, it is expected that such effects as

the reduction of the taxpayer’s burden to prepare necessary documents and the facilitation of thereview conducted by the APA team of the RTB will be brought about, because of which the APA
teams offer counsel at pre-filing consultation in consideration of the following points:
・ Explaining necessary matters for APA procedures, e.g. how to prepare the APA
Application Form and its attachments, the deadline of filing, etc.
・ Understanding the details of foreign-related transactions for the APA and providing the
taxpayer with the necessary information to make an appropriate decision as to whether
or not to apply for the APA and how to do it.

24

See footnote 5.
Transfer Pricing Administrative Guidelines on Consolidated Corporate Groups 5–1
26 Document ID: Office of Mutual Agreement Procedures 1-18 etc. dated 8 June 2005 (amended)
27 Transfer Pricing Administrative Guidelines 1–1, 5–10
Transfer Pricing Administrative Guidelines on Consolidated Corporate Groups 1–1, 5–10
25

15

Provisional Translation

7. Flow of APA Process
In Japan, APA commences at the request of the taxpayer. The NTA does not charge any fee for
APA proceedings.

BAPA procedures, as a rule, can be divided into the following four steps: (1)submission of APA request, (2) review of the request by the Regional Taxation Bureau (RTB) APA
review group, (3) MAP negotiations and agreement, and (4) review of annual compliance reports,
etc.
(1) Submission of APA Request
The taxpayer may have a pre-filing consultation with the tax authority before deciding whether toapply for an APA. 28 Where MAP proceedings are likely to be requested at a later date, the MAP
Office of the NTA Head Quarter may participate in the consultation in addition to the relevant
divisions of the Regional Taxation Bureau (RTB) and of the NTA Head Office in charge of the APA
program. Further, there may be a case where the taxpayer applies for an APA, after a transfer
pricing examination which resulted in transfer pricing adjustment, in order to avoid future risk oftaxation and to ensure tax predictability for its business. In such a case, if a MAP is underway
regarding the former transfer pricing adjustment case, the taxpayer can submit a request for APA
to the MAP Office and then can arrange for a pre-filing consultation.
The NTA encourages taxpayers, who submit an APA request, to file a request for MAP in the casewhere the taxpayer has turned out to have an intention to initiate a BATA and has not filed it yet 29 .
APA requests are submitted to the Local Tax Office or the RTB (depending on which jurisdiction theapplicant corporation belongs to). The taxpayer is required to attach the necessary documents
which sufficiently illustrate the transactions (see 5(4)b) to the request form for the purpose of
facilitating the review of APA requests by the RTB review team.
(2) Review by the Regional Taxation Bureau (RTB) APA Review Team
When the APA request is submitted, the relevant division of the RTB designates a tax examiner tobe responsible for the request and commences the review immediately. The APA review staff
designated requests documents necessary for the review in addition to the documents attached to
the APA request. The APA review group of the RTB then reports the results of its review to thedivision in charge at the NTA Head Office. That NTA division reviews the report internally andsends it to the NTA’s Office of Mutual Agreement Procedures.
The RTB’s APA review team conducts its review in accordance with the Transfer Pricing
Administrative Guidelines 5-11 (Review of APA Requests).
28

Transfer Pricing Administrative Guidelines 5–10
Transfer Pricing Administrative Guidelines on Consolidated Corporate Groups 5–10
29 Transfer Pricing Administrative Guidelines 5–12
Transfer Pricing Administrative Guidelines on Consolidated Corporate Groups 5–12

16

Provisional Translation(3) MAP Negotiations and Agreement 30
In the case of BAPA, a CA analyst drafts a position paper based on the conclusion reached by the
APA review team of the RTB. Face-to-face negotiations between the CA staff of the countries
concerned are generally held several times a year. In addition, communication between CAs by
telephone, fax, and other means is conducted, to exchange opinions more frequently. The CA staff
and APA review staff keep their regular contact and exchange views to confirm material facts.
When the APA agreement is reached, the content of which is the same as that of the original APA
request, the APA review group within the RTB sends the notice of APA confirmation to the taxpayer.
When the APA agreement is reached, the content of which is different from that of the original APA
request, the taxpayer is required to submit a modified APA request in accordance with theagreement. The RTB’s APA review team then sends the notice of APA confirmation to thetaxpayer. 31(4) Review of Annual Compliance Report, etc. 32
After the APA confirmation notice is received, the taxpayer is required to submit, by the deadline
for its final tax return or by an otherwise designated date, the annual compliance report which
explains whether or not the business results reported in the year’s tax return meet with theagreement. The division of the RTB in change may request further explanation from the taxpayer ifnecessary, and it may also visit the taxpayer’s premises for review in case of need. In the case that
income figures are under-reported compared with the figures agreed, they must be adjusted upwardin the modified tax return. Review of Annual Compliance Reports by the division of the RTB in
charge corresponds to tax examination for corporate tax.

Conversely, in the case that income

figures are over-reported, MAP negotiations must be held. The taxpayer must submit a MAP
request and conduct a compensating adjustment (request for correction of tax return for downward
adjustment) based on the new MAP agreement.
When the conditions provided in critical assumptions are changed, the taxpayer must submit arequest for new MAP consultation.

30

Transfer Pricing Administrative Guidelines 5–13
Transfer Pricing Administrative Guidelines on Consolidated Corporate Groups 5–13
31 In the case of a unilateral APA, a modified APA request may be requested when the RTB APA review groupjudges the original APA request to be unreasonable. If the taxpayer does not accept the request for
modification from the APA review group, the APA review group sends a notice of non-confirmation. When thecontent of the APA request is approved, or when the taxpayer accepts the required modification, the RTB APA
review group sends a notice of confirmation to the taxpayer.
32 Transfer Pricing Administrative Guidelines 5–17, 5–18
Transfer Pricing Administrative Guidelines on Consolidated Corporate Groups 5–17, 5–18

17

Provisional Translation

Flowchart of BAPA Procedure
3 MAP Request
MAP Office
NTA

Foreign Tax Authority
5 Negotiation

8 Agreement

6 Tentative Agreement

9 Notice of Agreement

7 Confirmation
2 APA
Application
9 Notice of
2 MAP Request

Agreement
4 Review of APA

1 APA
Application
Regional Taxation Bureau
Relevant Division in the NTA

10 Notice ofConfirmation

1 MAP Request
District Office

18

TaxpayerProvisional Translation

8. Staff in Charge of BAPA Cases(1) Staff in MAP Office
A section in charge of MAP was created in June 1982 and initially placed under the Councilor of the
Minister’s Secretariat (Deputy Commissioner [International Affairs]) and the Director (Head of the
Office for the Deputy Commissioner [International Affairs]), who dealt with international
conferences and mutual agreement procedures. The Office of International Operations wasestablished in 1986.
in 1995.

Subsequently, the position of the Director overseeing MAP cases was created

The Office of Mutual Agreement Procedures was established in July 1999.

The staff of the Office of Mutual Agreement Procedures is responsible for all MAP cases, so theyhandle the Mutual Agreement Procedures related to double taxation cases including not only BAPA
cases, but also transfer pricing taxation cases, withholding cases, permanent establishment casesand etc. However, APA cases have made up approximately 70% of all the cases handled by the Officeof Mutual Agreement Procedures in recent years. The table below describes the current structure of
the Office of Mutual Agreement Procedures.
Group

Jurisdiction

1–aDeputyDirector, Office of Mutual

1–bCommissioner

Agreement Procedures

1–c(International

3–aAffairs)

3–b

Director

Mainly North America
and Oceania(Mutual2–aMainly Western Europe

Agreement Procedures)

2–b

and Asia(2) APA Review Groups
The Large Enterprise Examination Division of the Large Enterprise Examination and Criminal
Investigation Department in the NTA established the Director (International Examination) andTransfer Pricing Section No. 1-3 in 1987. They supervise and guide the RTBs in transfer pricing
taxation and implementation of the APA program.
National Tax Agency
Deputy Commissioner(Large Enterprise
Examination andCriminal Investigation)

Director,
Large Enterprise
Examination Division

Director(International Examination)

Transfer Pricing
SectionNo. 1-3

The divisions in charge of APA within the Examination Department in the RTBs are as follows. In
2005, Advance Pricing Arrangement Division was established in Tokyo RTB to handle reviews of
APA requests.

19

Provisional Translation
Regional Taxation Bureau (Office)Tokyo RTB
Osaka RTB
Nagoya RTB

Kantoshinetsu RTB

Other RTBs

First Large Enterprise
Examination
Department
First Large Enterprise
Examination
Department
Large Enterprise
Examination
Department
Large Enterprise
Examination andCriminal Investigation
Department
Large Enterprise
Examination andCriminal Investigation
Department

Deputy Assistant Regional
Commissioner (International)

Advance Pricing
Arrangement Division
Transfer Pricing
DivisionInternational
Examination of Large
Enterprise DivisionInternational
Examination of Large
Enterprise Division
Management Division(Large Enterprise
Examination)
Large Enterprise
Examination Division

Okinawa Regional Taxation Office20

Provisional Translation

9. Taxpayer Cooperation in APA
The APA system is based on taxpayer’s initiative. The cooperation of the taxpayer to the review ofthe filed APA request is therefore indispensable for the smooth proceeding. In particular, timely
submission of the relevant documents and other information significantly contribute to efficient
case reviews and CA discussions. Prompt submission is thus essential.
Further, when an APA request is submitted also to a foreign tax administration, the application
should be submitted simultaneously to the NTA in order to enable more effective case review and
CA discussions to be conducted.
Even after the commencement of MAP process, the CA analysts often request additional
information for the purpose of, for example, verifying facts. On such occasions, the taxpayer’s
prompt response is highly appreciated.
If it is found that the main purpose of the APA request is to decrease the tax burden in an
inappropriate way, the APA/MAP procedures may stop or end in non-confirmation.

21

Partner Countries of Mutual Agreement Procedure
Europe（15 countries）
Austria(61)
Denmark(68)APA
Switzerland (71)APA
Ireland(74)
Spain(74)APA
United Kingdom(06)APA
Italy
(80)
Germany(83)APA

Belgium
FinlandNetherlands
NorwayLuxembourg
FranceSweden(88)APA(91)(92)APA(92)(92)(07)APA(99)APA

East Europe（17 countries）
Romania(76)
Poland(80)
Slovakia２(77)
Armenia１ (86)Czech２(77)
Ukraine１ (86)
Hungary(80)
Uzbekistan１(86)１Azerbaijan (05)

Kyrgyz１(86)
Georgia１(86)
Tajikistan１ (86)
Turkmenistan１ (86)（Attachment 1）

Belarus１
Moldova１
Russia１
Bulgaria

(86)
(86)
(86)
(91)

North America(2 countries)
Canada(99)APAUSA(03)APACentralandSouth
America (2 countries)
Brazil (76)
Mexico (96)Middle East
(3 countries)
Egypt
(69)
Israel(93)
Turkey(93)

Africa（2 countries）
Zambia(70)
South Africa (97)

East・South East Asia（8 countries）
Philippines (06)Singapore
Indonesia(82)
Viet Nam
China３(83)APA
Korea
Thailand(90)APA
Malaysia

South・Central Asia
(4 countries）
Pakistan(60)
Sri Lanka
(67)
India
(06)
Bangladesh(91)

NOTICE-１．Convention with former Soviet Union is inherited.
２．Convention with former Czech Slovakia is inherited.
３．Convention is not applicable to Hong Kong and Macau.
４ .Former Japan-U.K. bilateral tax convention isinherited by Fiji.

(94)APA(95)(98)APA(99)

Oceania (3 countries)
Fiji４
(62)
New Zealand (67)Australia (69)APA【Explanatory note】
１． Countries with shaded text
indicate the partner countries
that
we
have
mutualagreement procedure cases asof the end of business year
2005. (25 Countries)“APA” indicates countries withwhich we have BAPA cases
accompanied by the mutual
agreement procedure as of theend of business year 2005. (16Countries)
２． The numbers with parentheses
indicate
final
revision
autograph as last two digits of
the year.

(Attachment 2)

Summary of MAP Statistics

BAPA

Transfer
Pricing
Taxation

Others

Total

Cases Received

63

8

19

90

Cases Disposed

49

27

16

92

Cases Carried Over

143

29

29

201

Cases Received

92

27

10

129

Cases Disposed

65

16

12

93

Cases Carried Over

170

40

27

237

Cases Received

105

35

14

154

Cases Disposed

84

16

15

115

Cases Carried Over

191

59

26

276

Business Year

2004

2005

2006

(Note)
1

Business year is from July through the end of June.

2 The number of MAP cases received is the cases either which we received
request for mutual agreement procedures from the taxpayers, or which we
received request for mutual agreement procedures from foreign taxpayer
authorities.
3

MAP cases with regard to compensating adjustment and revision of theagreement are counted as the number of MAP received as of there-negotiation year.

Japan’s Tax Convention Network
Europe（15 countries）
Austria(61)
Denmark(68)
Switzerland (71)
Ireland
(74)
Spain
(74)
United Kingdom(06)CA
Italy
(80)
Germany(83)

Belgium
FinlandNetherlands
NorwayLuxembourg
FranceSweden

(88)
(91)
(92)
(92)CA(92)CA(07)CA(99)CA

East Europe（17 countries）
Romania(76)
Poland(80)
Slovakia２ (77)Armenia１ (86)Czech２(77)
Ukraine１ (86)
Hungary(80)
Uzbekistan１(86)１Azerbaijan (05)（Reference）

Kyrgyz１(86)
Georgia１(86)
Tajikistan１ (86)
Turkmenistan１ (86)

Belarus１
Moldova１
Russia１
Bulgaria

(86)
(86)
(86)
(91)CA

North America(2 countries)
Canada(99)CA
USA(03)CA
CentralandSouth
America (2 countries)
Brazil (76)
Mexico (96)CA

Middle East
(3 countries)
Egypt
(69)
Israel(93)CA
Turkey(93)CA

Africa（2 countries）
Zambia(70)
South Africa (97)CAEast・South East Asia（8 countries）
Philippines (06)CASingapore
Indonesia(82)
Viet Nam
China３(83)
Korea
Thailand(90)CA
Malaysia

South・Central Asia
(4 countries）
Pakistan(60)
Sri Lanka
(67)
India
(06)CA
Bangladesh(91)CANOTICE-１．Convention with former Soviet Union is inherited.
２．Convention with former Czech Slovakia is inherited.
３．Convention is not applicable to Hong Kong and Macau.
４ .Former Japan-U.K. bilateral tax agreement isinherited by Fiji.

(94)CA(95)CA(98)CA(99)CA

Oceania (3 countries)
Fiji４
(62)
New Zealand (67)Australia (69)【Explanatory note】
１． Countries with bold indicate
OECD member countries. (26Countries)
２． “CA” indicates countries withwhich we have correlative
adjustment provision in the tax
treaty. (20 Countries)
３． The numbers with parentheses
indicate
final
revision
autograph as last two digits of
the year.