DEPARTMENT OF STATE 

WASHI NGTON 

November 6,2003 

Excellency: 

I have the honor to acknowledgereceipt of Your Excellency’snote of today’s date 

which reads as follows: 

“Excellency: 

I have the honor to refer to the Convention between the Government of Japan and the 

Government of the United States of America for the Avoidance of Double Taxation and the 

Prevention of Fiscal Evasion with respect to Taxes on Income which was signed today 

(hereinafter referred to as “the Convention”) and to the Protocol also signed today which 

forms an integral part of the Convention, and to confirm, on behalf of the Governmentof 

Japan, the following understanding reached between the Government of Japan and the 

Governmentof the United States of America: 

His Excellency 

Ryozo Kato, 

Ambassador of Japan. 

DIPLOMATIC NOTE 
 
1. In order to avoid application of the local inhabitant taxes or the enterprise tax as 

provided for in paragraph 3 of Article 8 of the Convention, if a political subdivision or local 

authority of the United States seeks to levy a tax similar to the local inhabitant taxes or the 

enterprise tax in Japan on the profits of any enterprise of Japan from the operation of ships or 

aircraft in international traffic in circumstances where the Convention would preclude the 

imposition of a Federal income tax on those profits, the Government of the United States will 

use its best endeavors to persuade that political subdivision or local authority to refrain from 

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imposing such tax. 

2. It is understood that the principle as set out in paragraph 1 of Article 9 of the 

Convention may apply for the purposes of determining the profits to be attributed to a 

permanent establishment. It is understood that the provisions of Article 7 of the Convention 

shall not prevent the Contracting States from treating the permanent establishmentas having 

the same amount of capital that it would need to support its activities if it were a distinct and 

separate enterprise engaged in the same or similar activities. With respect to financial 

institutions other than insurance companies, a Contracting State may determine the amount of 

capital to be attributed to a permanent establishment by allocatingthe institution’s total equity 

between its various ofices on the basis of the proportion of the financial institution’s riskweighted assets attributable to each of them. 

3. With reference to Article 9 of the Convention, it is understood that double taxation 

can be avoided only if tax authorities share a common understanding of the principles to be 

applied in resolving transfer pricing cases. Therefore, the Contracting States shall undertake 

to conduct transfer pricing examinations of enterprisesand evaluate applications for advance 

pricing arrangementsin accordance with the Transfer Pricing Guidelines for Multinational 

Enterprises and Tax Administrations of the Organisation for Economic Cooperation and 

Development (hereinafter referred to as “the OECD Transfer Pricing Guidelines”), which 
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reflect the international consensus with respect to these issues. The domestic transfer pricing 

rules, including the transfer pricing methods, of each Contracting State may be applied in 

resolving transfer pricing cases under the Convention only to the extent that they are 

consistent with the OECD Transfer Pricing Guidelines. 

4. With reference to paragraphs 2 and 3 of Article 10 of the Convention, it is understood 

that, in the case of Japan, the date on which entitlementto the dividends is determined is the 

end of the accountingperiod for which the distribution of profits takes place. 

5. With reference to subparagraph (c) of paragraph 3 of Article 11 of the Convention: 

(a) it is understood that the term “bonds” includes bonds, commercial paper, and 

medium-term notes, whether collateralized or not; and 

(b) it is understood that bonds that are subject to transfer restrictions applicable to 

private placements shall not be considered to have been issued in the financial 
 

markets. The preceding sentence shall not apply to offerings qualifylng for exemption 
 

fiom securities registration requirements pursuant to Rule 144Apromulgated under 
 

the SecuritiesAct of 1933 of the United States or any similar provisions under the 
 

domestic law of Japan. 
 

6. It is understood that the term “authorities (including courts and administrative bodies)
 

involved in the administrationof the taxes” as referred to in paragraph 2 of Article 26 of the 

Convention includes such authorities as provide legal advice to those governmental entities 

that are directly involved in the assessment or collection, the enforcement or prosecution in 

respect of, or the determination of appeals in relation to, the taxes, but are not themselves a 

part of such entities, and includes, in the case of the United States, the Office of Chief 

Counsel for the Internal Revenue Service. 
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7. It is understood that the term “supervisory bodies” as referred to in paragraph 2 of 

Article 26 of the Convention includes authorities that supervise the general administrationof 

the government of a Contracting State. 

8. It is understood that the powers of the competent authority of each Contracting State 

to obtain information include powers to obtain information held by financial institutions, 

nominees, or persons acting in an agency or fiduciary capacity (not including information 

relating to communicationsbetween a legal representative in its role as such and its client to 

the extent that the communications are protected under domestic law), and information 

relating to the ownership of legal persons, and that the competent authority of each 

Contracting State is able to exchange such idormation in accordance with Article 26 of the 

Convention. 

If the foregoingunderstanding is acceptable to the Government of the United States of 

America, I have the honor to suggest that the present note and Your Excellency’sreply to that 

effect should be regarded as constituting an agreement between the two Governments in this 

matter, which shall enter into force at the same time as the Convention. 

I avail myself of this opportunity to extend to Your Excellency the assurance of my 

highest consideration.” 

I have further the honor to confirm on behalf of the Government of the United States 

of America that the foregoing understanding is acceptable and to agree that Your 

Excellency’s note and this note shall be regarded as constituting an agreement between the 

two Governments which shall enter into force at the same time as the Convention. 
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I avail myself of this opportunity to renew to Your Excellency the assurance of my 

highest consideration. 

For the Secretary of State: 

ci”