Order for Enforcement of the Income Tax Act

Of the amount of interest on liabilities (including discount charges on bills and other things whose economic nature is equivalent to interest; the same applies in the following paragraph) pertaining to business that a Resident carries on through a foreign office or similar establishment in each year, if the amount of net assets pertaining to that foreign office or similar establishment (meaning the remainder obtained by deducting the amount calculated by a reasonable method as the average balance of the book value of liabilities pertaining to that foreign office or similar establishment for that year from the amount calculated by a reasonable method as the average balance of the book value of assets pertaining to that foreign office or similar establishment for that year) falls short of the amount of net assets to be attributed to that foreign office or similar establishment, the amount of the portion corresponding to the amount of that shortfall is not to be included in necessary expenses in calculating the amount of income pertaining to income attributable to a foreign office or similar establishment of that Resident for that year.

The amount of interest on liabilities prescribed in the preceding paragraph is to be the sum of the following amounts:

the amount of interest on liabilities pertaining to business carried on through a foreign office or similar establishment (excluding the amounts listed in the following item and item (iii));

the amount that is to fall under interest paid, in an internal dealing, from the Resident's foreign office or similar establishment to the Resident's place of business or similar place;

of the amount of common expenses prescribed in paragraph (6) of the preceding Article, the amount of interest on liabilities included in the amount allocated pursuant to that paragraph as necessary expenses in calculating the amount of income pertaining to income attributable to a foreign office or similar establishment.

The amount of net assets to be attributed to a foreign office or similar establishment prescribed in paragraph (1) is to be the amount calculated by any of the following methods:

the capital allocation method (meaning a method of treating, as the net assets to be attributed to a foreign office or similar establishment, the amount calculated by multiplying the remainder for the Resident obtained by deducting the amount listed in (b) from the amount listed in (a), by the ratio of the amount listed in (c) to the amount listed in (d));

the amount calculated by a reasonable method as the average balance of the book value of that Resident's total assets for that year;

the amount calculated by a reasonable method as the average balance of the book value of that Resident's total liabilities for that year;

the amount calculated, with respect to the amount of assets to be attributed to that foreign office or similar establishment as of December 31 of that year of that Resident (or, if that person dies or has an Absence From Japan in the course of that year, at the time of that death or Absence From Japan; the same applies hereinafter in this paragraph, the following paragraph and paragraph (6)), by taking into account the risk that may arise (hereinafter in this paragraph and the following paragraph referred to as the "risk that may arise") for reasons specified by Ministry of Finance Order, such as nonperformance of a contract by the counterparty to a transaction;

the amount calculated by taking into account the risk that may arise with respect to the amount of total assets of that Resident as of December 31 of that year;

the comparable individual method (meaning a method of treating, as the net assets to be attributed to a foreign office or similar establishment, the amount calculated by multiplying the amount calculated by taking into account the risk that may arise with respect to the amount of assets to be attributed to the foreign office or similar establishment of the Resident as of December 31 of that year, by the ratio of the amount listed in (a) to the amount listed in (b)):

the amount of net assets of a comparable individual (meaning an individual who carries on, in the country or region where the foreign office is located (meaning the country or region where that foreign office or similar establishment is located; the same applies hereinafter in this item and paragraph (6), item (ii)), a business of the same kind as the principal business that the Resident carries on through the Resident's foreign office or similar establishment (limited, where that individual is an individual other than one who has a domicile or residence in the country or region where the foreign office is located, to one who carries on that same kind of business through a foreign office or similar establishment in the country or region where the foreign office is located), 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 that paragraph) that are recorded on the balance sheet as of December 31 of any one of the years within the three years up to and including 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 net assets to the total assets of that comparable individual is significantly higher than that ratio of an individual who carries on that same kind of business; hereinafter in this item and item (ii) of that paragraph referred to as a "comparison year") (or, where that comparable individual is an individual other than one who has a domicile or residence in the country or region where the foreign office is located, the amount of net assets pertaining to that individual's foreign office or similar establishment (limited to one located in the country or region where the foreign office is located));

the amount calculated by taking into account the risk that may arise with respect to the amount of total assets of the comparable individual as of December 31 of the comparison year (or, where that comparable individual is an individual other than one who has a domicile or residence in the country or region where the foreign office is located, the amount of assets pertaining to that individual's foreign office or similar establishment (limited to one located in the country or region where the foreign office is located)).

Where, with respect to the amount listed in item (i), (c) or (d) of the preceding paragraph, or the amount calculated by taking into account the risk that may arise with respect to the amount of assets to be attributed to the foreign office or similar establishment of the Resident as of December 31 of that year prescribed in item (ii) of that paragraph (hereinafter in this paragraph and the following paragraph referred to as "risk-weighted assets"), it is found that, due to the characteristics or scale of the business carried on by the Resident or other circumstances, the Resident is habitually in a situation where it is difficult to calculate those risk-weighted assets by the Filing Deadline for each of that year and subsequent years, the amount calculated by taking into account the risk that may arise with respect to the amount of assets to be attributed to the foreign office or similar establishment of the Resident prescribed in item (i), (c) of the preceding paragraph or item (ii) of that paragraph, or the amount of total assets of the Resident prescribed in item (i), (d) of that paragraph, as of a certain date 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, by March 15 of the year following the first year in which the Resident seeks to receive the application of that paragraph, the Resident has submitted to the competent district director with jurisdiction over the place for tax payment a written notice stating the reasons for which it is difficult to calculate risk-weighted assets by the Filing Deadline prescribed in that paragraph, the certain date prescribed in that paragraph and other matters specified by Ministry of Finance Order.

A Resident prescribed in the items of paragraph (3) may, notwithstanding that paragraph, make the method provided for in item (i) of that paragraph the method listed in item (i), and the method provided for in item (ii) of that paragraph the method listed in item (ii).

the simplified capital allocation method (meaning a method of calculating by multiplying the remainder obtained by deducting the amount listed in paragraph (3), item (i), (b) from the amount listed in item (i), (a) of that paragraph, by the ratio of the amount listed in (a) below to the amount listed in (b) below):

the book value of assets to be attributed to that foreign office or similar establishment of that Resident as of December 31 of that year;

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

the book value asset-to-capital ratio comparison method (meaning a method of calculating by multiplying the amount calculated by a reasonable method as the average balance of the book value of assets to be attributed to the Resident's foreign office or similar establishment for that year, by the ratio of the amount listed in (a) to the amount listed in (b)):

the amount of net assets of the comparable individual recorded on the balance sheet as of December 31 of the comparison year (or, where that comparable individual is an individual other than one who has a domicile or residence in the country or region where the foreign office is located, the amount of net assets pertaining to that individual's foreign office or similar establishment (limited to one located in the country or region where the foreign office is located));

the amount of total assets of the comparable individual recorded on the balance sheet as of December 31 of the comparison year (or, where that comparable individual is an individual other than one who has a domicile or residence in the country or region where the foreign office is located, the amount of assets pertaining to that individual's foreign office or similar establishment (limited to one located in the country or region where the foreign office is located)).

Where a Resident who calculated, by the capital allocation method, etc. (meaning the method listed in paragraph (3), item (i) or item (i) of the preceding paragraph; the same applies hereinafter in this paragraph), the amount of net assets to be attributed to a foreign office or similar establishment for the year preceding that year (meaning the amount of net assets to be attributed to a foreign office or similar establishment prescribed in paragraph (1); the same applies hereinafter in this paragraph) calculates the amount of net assets to be attributed to that foreign office or similar establishment for that year, the Resident may calculate it by the comparable individual method, etc. (meaning the method listed in paragraph (3), item (ii) or item (ii) of the preceding paragraph; the same applies hereinafter in this paragraph) only where there is a change in the type of business that the Resident carries on through that foreign office or similar establishment or any other similar circumstance, and where a Resident who calculated the amount of net assets to be attributed to a foreign office or similar establishment for the year preceding that year by the comparable individual method, etc. calculates the amount of net assets to be attributed to that foreign office or similar establishment for that year, the Resident may calculate it by the capital allocation method, etc. only where there is a change in the type of business that the Resident carries on through that foreign office or similar establishment or any other similar circumstance.

The amount of the portion corresponding to the shortfall prescribed in paragraph (1) is to be the amount calculated by multiplying the amount of interest on liabilities prescribed in that paragraph by the ratio of the remainder obtained by deducting the amount listed in item (i) from the amount of net assets to be attributed to the foreign office or similar establishment prescribed in that paragraph (or, if that remainder exceeds the amount listed in item (ii), the amount listed in item (ii)) to the amount listed in item (ii).

the amount of net assets prescribed in paragraph (1) pertaining to that foreign office or similar establishment of that Resident for that year;

the amount calculated by a reasonable method as the average balance of the book value of liabilities to be attributed to that foreign office or similar establishment of that Resident for that year (limited to those that are the cause of payment of the interest prescribed in paragraph (1) and others pertaining to the raising of funds).

The book value referred to in paragraph (1) and paragraph (3), item (i) is to be the amount of assets or liabilities that the Resident has entered in the Resident's accounting books.

The provisions of paragraph (1) apply only where a document stating the amount not included in necessary expenses pursuant to that paragraph and particulars of its calculation is attached to the Tax Return, Amended Return or written request for Reassessment, and where documents specified by Ministry of Finance Order, such as a document stating the matters forming the basis of the calculation of the amount of net assets to be attributed to a foreign office or similar establishment, are retained.

Even where the documents referred to in the preceding paragraph have not been retained for all or part of the amount not included in necessary expenses pursuant to paragraph (1), if the district director finds that there were unavoidable circumstances for the failure to retain those documents, the district director may apply the provisions of paragraph (1) only where those documents have been submitted.