Order for Enforcement of the Income Tax Act

The amount calculated as specified by Cabinet Order as the amount of net assets pertaining to a permanent establishment prescribed in Article 165-3, paragraph (1) (Exclusion of Interest on Liabilities Corresponding to Net Assets Attributable to a Permanent Establishment from Necessary Expenses) of the Act is the remainder after deducting the amount set out in item (ii) from the amount set out in item (i).

the amount calculated by a reasonable method as the average balance of the book value of the assets pertaining to the permanent establishment of the Nonresident for the year;

the amount calculated by a reasonable method as the average balance of the book value of the liabilities pertaining to the permanent establishment of the Nonresident for the year.

The amount calculated as specified by Cabinet Order as the amount to be attributed to a permanent establishment prescribed in Article 165-3, paragraph (1) of the Act (hereinafter referred to as the "capital attributable to a permanent establishment" in this Article) is the amount calculated by any of the following methods:

the capital allocation method (meaning the method by which the amount calculated by multiplying the remainder after deducting the amount set out in (b) from the amount set out in (a) of the Nonresident by the ratio of the amount set out in (c) to the amount set out in (d) is taken as the capital attributable to a permanent establishment);

the amount calculated by a reasonable method as the average balance of the book value of the total assets of the Nonresident for the year;

the amount calculated by a reasonable method as the average balance of the book value of the total liabilities of the Nonresident for the year;

the amount calculated, for the amount of assets attributable to a permanent establishment of the Nonresident as of December 31 of the year (or, if the person dies during the year, at the time of death; the same applies hereinafter through paragraph (4)), by taking into account the risk that may arise due to the counterparty's breach of contract or other reasons specified by Ministry of Finance Order (hereinafter referred to as the "risk that may arise" in this paragraph and paragraph (4));

the amount calculated, for the amount of total assets of the Nonresident as of December 31 of the year, by taking into account the risk that may arise;

the peer-individual comparison method (meaning the method by which the amount calculated by multiplying the amount calculated, for the amount of assets attributable to a permanent establishment of the Nonresident as of December 31 of the year, by taking into account the risk that may arise, by the ratio of the amount set out in (a) to the amount set out in (b) is taken as the capital attributable to a permanent establishment).

the amount of net assets of a comparable individual (meaning an individual who conducts in Japan a business of the same kind as the principal business that the Nonresident conducts through a permanent establishment (limited, where that individual is a Nonresident, to one who conducts that same kind of business through a permanent establishment) and whose business scale and other circumstances relating to that same kind of business are similar; the same applies hereinafter in this item and item (ii) of the following paragraph) that is recorded on the balance sheet as of December 31 of any one of the years within the three years on or before the year preceding that year (excluding a year that falls under a case specified by Ministry of Finance Order as one in which the ratio of the amount of net assets of that comparable individual to the amount of total assets is significantly lower than that ratio of individuals conducting that same kind of business; hereinafter referred to as the "comparison year" in this item and item (ii) of that paragraph) (or, where that comparable individual is a Nonresident, the amount of net assets pertaining to the permanent establishment of that Nonresident who is the comparable individual);

the amount calculated, for the amount of total assets of the comparable individual as of December 31 of the comparison year (or, where that comparable individual is a Nonresident, the amount of assets pertaining to the permanent establishment of that Nonresident who is the comparable individual), by taking into account the risk that may arise.

A Nonresident prescribed in the items of the preceding paragraph may, notwithstanding that paragraph, adopt the method listed in item (i) of this paragraph as the method specified in item (i) of that paragraph and the method listed in item (ii) of this paragraph as the method specified in item (ii) of that paragraph.

the simplified capital allocation method (meaning the method of calculating by multiplying the remainder obtained by deducting the amount listed in item (i), (b) of the preceding paragraph from the amount listed in item (i), (a) of that paragraph by the ratio of the amount listed in (a) of this item to the amount listed in (b) of this item);

the book value of the assets attributable to the permanent establishment of that Nonresident as of December 31 of that year;

the book value of the total assets recorded on the balance sheet of that Nonresident as of December 31 of that year;

the book value asset-to-capital ratio comparison method (meaning the method of calculating by multiplying the amount calculated by a reasonable method as the average balance of the book value of the assets attributable to the permanent establishment of that Nonresident for that year by the ratio of the amount listed in (a) of this item to the amount listed in (b) of this item).

the amount of net assets recorded on the balance sheet of the comparable individual as of December 31 of the comparison year of the comparable individual (where that comparable individual is a Nonresident, the amount of net assets pertaining to the permanent establishment of that Nonresident who is the comparable individual);

the amount of total assets recorded on the balance sheet of the comparable individual as of December 31 of the comparison year of the comparable individual (where that comparable individual is a Nonresident, the amount of assets pertaining to the permanent establishment of that Nonresident who is the comparable individual).

In the case where, with respect to the amount calculated in consideration of the risk that may arise (hereinafter referred to as "risk-weighted assets" in this paragraph and the following paragraph) on the amount listed in paragraph (2), item (i), (c) or (d) or on the amount of the assets attributable to the permanent establishment as of December 31 of that year of the Nonresident prescribed in paragraph (2), item (ii), it is found that, due to the characteristics and scale of the business conducted by the Nonresident or other circumstances, the Nonresident is ordinarily in a situation in which it is difficult to calculate those risk-weighted assets by the Filing Deadline for each year on or after that year, the amount calculated in consideration of the risk that may arise on the amount of the assets attributable to a permanent establishment prescribed in paragraph (2), item (i), (c) or paragraph (2), item (ii), or on the amount of total assets prescribed in paragraph (2), item (i), (d), as of a certain day between July 1 and December 31 of that year may be treated as those risk-weighted assets.

The provisions of the preceding paragraph apply only where a written notice stating the reason why it is difficult to calculate the risk-weighted assets by the Filing Deadline prescribed in that paragraph, the certain day prescribed in that paragraph, and any other matters specified by Ministry of Finance Order has been submitted to the competent district director with jurisdiction over the place for tax payment by March 15 of the year following the first year for which application of the provisions of that paragraph is sought.

In the case where a Nonresident who calculated the capital attributable to a permanent establishment for the year preceding that year by the capital allocation method, etc. (meaning the method listed in paragraph (2), item (i) or paragraph (3), item (i); the same applies hereinafter in this paragraph) calculates the capital attributable to a permanent establishment for that year, the Nonresident may calculate it by the comparable individual method, etc. (meaning the method listed in paragraph (2), item (ii) or paragraph (3), item (ii); the same applies hereinafter in this paragraph) only where it cannot be calculated by the capital allocation method, etc. by reason of falling under any of the following cases or where there are circumstances such as a change in the type of business conducted through the permanent establishment of that Nonresident or other similar circumstances, and in the case where a Nonresident who calculated the capital attributable to a permanent establishment for the year preceding that year by the comparable individual method, etc. calculates the capital attributable to a permanent establishment for that year, the Nonresident may calculate it by the capital allocation method, etc. only where there are circumstances such as a change in the type of business conducted through the permanent establishment of that Nonresident or other similar circumstances.

the case where, for a Nonresident prescribed in paragraph (2), item (i), there is an amount that cannot be fully deducted when the amount listed in (b) of that item is deducted from the amount listed in (a) of that item;

a case specified by Ministry of Finance Order as one in which the ratio of the amount of net assets to the amount of total assets of that Nonresident is significantly lower than that ratio of an individual who conducts a business of the same kind as the main business conducted through the permanent establishment of that Nonresident.

The items specified by Cabinet Order as equivalent to interest prescribed in Article 165-3, paragraph (1) of the Act are to be discount charges on bills and other items equivalent to interest in their economic nature.

The amount specified by Cabinet Order prescribed in Article 165-3, paragraph (1) of the Act is to be the sum of the following amounts:

the amount of interest on liabilities pertaining to the business conducted through a permanent establishment (meaning interest prescribed in Article 165-3, paragraph (1) of the Act; the same applies hereinafter in this paragraph and the following paragraph) (excluding the amounts listed in the following item and item (iii));

the amount of what would fall under interest paid, in an internal dealing prescribed in Article 161, paragraph (1), item (i) (Domestic Source Income) of the Act, by the permanent establishment of the Nonresident to a place of business or similar place of that Nonresident prescribed in that item;

the amount of interest on liabilities included in the amount allocated, as provided by Cabinet Order, as pertaining to the business conducted through a permanent establishment, as prescribed in Article 165, paragraph (2), item (ii) (Calculation of the Tax Base and Amount of Income Taxes Imposed on Aggregate Income) of the Act.

The amount of the portion corresponding to the shortfall prescribed in Article 165-3, paragraph (1) of the Act, calculated as provided by Cabinet Order, is to be the amount calculated by multiplying the amount specified by Cabinet Order prescribed in that paragraph of that Nonresident for that year by the ratio to the amount listed in item (ii) of the remainder obtained by deducting the amount listed in item (i) from the capital attributable to a permanent establishment of that Nonresident for that year (or, where that remainder exceeds the amount listed in item (ii), the amount listed in item (ii)).

the amount calculated, as provided by Cabinet Order, as the amount of net assets prescribed in Article 165-3, paragraph (1) of the Act pertaining to the permanent establishment of that Nonresident for that year;

the amount calculated by a reasonable method as the average balance of the book value of the liabilities attributable to the permanent establishment of that Nonresident for that year (limited to those that give rise to the payment of interest and others pertaining to the procurement of funds).

The book values in paragraph (1) and paragraph (2), item (i) are to be the amounts of the assets or liabilities that the Nonresident has recorded in the account books.