Act on Special Measures Concerning Taxation

In each business year beginning on or after April 1, 2016 of a foreign corporation that has a permanent establishment, where, because the amount set as the amount of consideration for an internal dealing prescribed in Article 138, paragraph (1), item (i) of the Corporation Tax Act (hereinafter referred to in this Article as an "internal dealing") between the head office, etc. of the foreign corporation (meaning the head office, etc. prescribed in that item; the same applies in paragraph (3)) and the permanent establishment differs from the arm's length price, the amount to be included in gross profit is understated, or the amount to be included in deductible expenses is overstated, in calculating the amount of income pertaining to the domestic source income listed in Article 141, item (i), (a) of that Act of the foreign corporation for that business year, then, with regard to the application of the provisions of that Act and other laws and regulations concerning corporation tax with respect to the income pertaining to the domestic source income listed in item (i), (a) of that Article of the foreign corporation for that business year, that internal dealing is to be based on the arm's length price.

The arm's length price prescribed in the preceding paragraph means the amount calculated by the method that is most appropriate for calculating the amount that should be the amount of consideration for an internal dealing if that internal dealing were conducted between independent enterprises under normal transaction terms, taking into account the details of that internal dealing, the functions performed by the parties to that internal dealing, and other circumstances, from among the methods specified in the following items according to the category of transaction listed in each of those items into which that internal dealing falls:

sale or purchase of inventory assets: the following methods:

comparable uncontrolled price method (meaning the method which uses, as the amount that should be the amount of the consideration for an internal dealing, the amount equivalent to the amount of the consideration for a transaction wherein a seller and a buyer who are not in a special relationship (meaning the special relationship prescribed in Article 66-4, paragraph (1); the same applies in (b)) have sold or bought inventory assets of the same type as the inventory assets pertaining to the internal dealing, under circumstances where the transaction level, transaction volume and any other conditions are similar to those of the internal dealing (in the case where such inventory assets of the same type have been sold or bought under circumstances where the transaction level, transaction volume and any other conditions are different from those of the internal dealing, and any variance arising from such difference in the conditions can be adjusted, the amount of the consideration as adjusted is included));

resale price method (meaning the method which uses, as the amount that should be the amount of the consideration for an internal dealing, the amount calculated by deducting, from the amount of the consideration gained by the buyer of the inventory assets involved in the internal dealing for having sold the inventory assets to a person with no special relationship thereto (referred to in (b) as the "resale price"), the amount of normal profit (meaning the amount calculated by multiplying the resale price by the normal profit margin specified by Cabinet Order));

cost plus method (meaning the method which uses, as the amount that should be the amount of the consideration for an internal dealing, the amount calculated by adding, to the amount of the cost incurred by the seller of the inventory assets involved in the internal dealing for having acquired the inventory assets by purchase, manufacture or any other acts, the amount of normal profit (meaning the amount calculated by multiplying the amount of cost by the normal profit margin specified by Cabinet Order)); or

a method equivalent to the methods listed in (a) through (c) or any other method specified by Cabinet Order.

a transaction other than the transaction listed in the preceding item: a method equivalent to the methods listed in (a) through (d) of that item.

The amount of internal donations of a foreign corporation in each business year (meaning, of the amounts paid by the permanent establishment of the foreign corporation to the head office, etc. of the foreign corporation in the internal dealings of the foreign corporation in that business year, the amount equivalent to the amount of donations prescribed in Article 37, paragraph (7) of the Corporation Tax Act) is not included in deductible expenses in calculating the amount of income pertaining to the domestic source income listed in Article 141, item (i), (a) of that Act of the foreign corporation for each business year. In this case, where that amount of the foreign corporation is calculated in accordance with the provisions of Article 37 of that Act pursuant to the provisions of Article 142, paragraph (2) of that Act, the phrase "the following paragraph" in paragraph (1) of that Article is deemed to be replaced with "the following paragraph or Article 66-4-3, paragraph (3) of the Act on Special Measures Concerning Taxation (Special Provisions on Taxation on Internal Dealings of Foreign Corporations)".

A foreign corporation that has internal dealings in that business year must prepare or obtain, by the due date for filing the return under the provisions of Article 144-6, paragraph (1) of the Corporation Tax Act for that business year, the documents specified by Order of the Ministry of Finance as documents considered to be necessary for calculating the arm's length price prescribed in paragraph (1) pertaining to those internal dealings (including, where an electronic or magnetic record (meaning a record that is made in an electronic form, a magnetic form, or any other form that cannot be perceived by the human senses, and that is used in information processing by computers; hereinafter the same applies in this Article) has been prepared in lieu of preparing those documents, that electronic or magnetic record), and must preserve them pursuant to the provisions of Order of the Ministry of Finance.

With regard to the documents considered to be necessary for calculating the arm's length price prescribed in paragraph (1) pertaining to the internal dealings of a foreign corporation in that business year, the provisions of the preceding paragraph do not apply where the internal dealings of the foreign corporation in the business year preceding that business year (where the foreign corporation has come to have a permanent establishment in that business year, the internal dealings in that business year) fall under both of the following, or in the case specified by Cabinet Order as a case where there are no internal dealings in the business year preceding that business year:

the total of the amounts set as the amount of consideration for internal dealings is less than 5 billion yen;

the total of the amounts set as the amount of consideration for internal dealings (limited to those equivalent to the transfer or lending of an intangible asset (meaning an asset specified by Cabinet Order as an asset other than tangible assets and financial assets; hereinafter the same applies in this item) (including the creation of rights pertaining to an intangible asset and any other act of having another person use an intangible asset), or to transactions similar thereto) is less than 300 million yen.

Where the relevant official of the National Tax Agency or the relevant official of the tax office or Regional Taxation Bureau with jurisdiction over a foreign corporation's place for tax payment has requested the foreign corporation to present or submit the documents specified by Order of the Ministry of Finance prescribed in paragraph (4) pertaining to an internal transaction subject to contemporaneous documentation (meaning an internal dealing other than an internal dealing to which the provisions of the preceding paragraph apply; hereinafter the same applies in this paragraph) in each business year (including, in the case where an electronic or magnetic record has been prepared or preserved in lieu of preparing or preserving those documents, that electronic or magnetic record; hereinafter the same applies in this paragraph) or copies thereof, and these are not presented or submitted by the day designated by the official, taking into account the number of days normally required to prepare the presentation or submission of the documents or copies requested, within a period not exceeding 45 days from the day on which the presentation or submission was requested, or has requested the foreign corporation to present or submit the documents specified by Order of the Ministry of Finance as documents considered to be important for calculating the arm's length price prescribed in paragraph (1) (including an amount deemed to be that arm's length price pursuant to the provisions of the main clause of Article 66-4, paragraph (8) as applied mutatis mutandis pursuant to paragraph (14)) pertaining to an internal transaction subject to contemporaneous documentation in each business year (including, in the case where an electronic or magnetic record has been prepared or preserved in lieu of preparing or preserving those documents, that electronic or magnetic record; hereinafter the same applies in this paragraph) or copies thereof, and these are not presented or submitted by the day designated by the official, taking into account the number of days normally required to prepare the presentation or submission of the documents or copies requested, within a period not exceeding 60 days from the day on which the presentation or submission was requested, the official may, when it is necessary for the calculation of the arm's length price prescribed in paragraph (1) which pertains to the internal transaction subject to contemporaneous documentation of the foreign corporation in each business year, ask questions of a person who is engaged in a business that is the same type as the foreign corporation's business involving that internal transaction subject to contemporaneous documentation, inspect the books and documents concerning that business (including, in the case where an electronic or magnetic record has been prepared or preserved in lieu of preparing or preserving those books and documents, that electronic or magnetic record; hereinafter the same applies in this Article), or request the presentation or submission of those books and documents (including copies thereof), to the extent considered necessary for such calculation.

Where the relevant official of the National Tax Agency or the relevant official of the tax office or Regional Taxation Bureau with jurisdiction over a foreign corporation's place for tax payment has requested the foreign corporation to present or submit the documents specified by Order of the Ministry of Finance as documents considered to be important for calculating the arm's length price prescribed in paragraph (1) (including an amount deemed to be that arm's length price pursuant to the provisions of the main clause of Article 66-4, paragraph (8) as applied mutatis mutandis pursuant to paragraph (14)) pertaining to an internal transaction exempt from contemporaneous documentation (meaning an internal dealing to which the provisions of paragraph (5) apply; hereinafter the same applies in this paragraph) in each business year (including, in the case where an electronic or magnetic record has been prepared or preserved in lieu of preparing or preserving those documents, that electronic or magnetic record; hereinafter the same applies in this paragraph) or copies thereof, and these have not been presented or submitted by the day designated by the official, taking into account the number of days normally required to prepare the presentation or submission of the documents or copies requested, within a period not exceeding 60 days from the day on which the presentation or submission was requested, the official may, when it is necessary for the calculation of the arm's length price prescribed in paragraph (1) which pertains to the internal transaction exempt from contemporaneous documentation of the foreign corporation in each business year, ask questions of a person who is engaged in a business that is the same type as the foreign corporation's business involving that internal transaction exempt from contemporaneous documentation, inspect the books and documents concerning that business, or request the presentation or submission of those books and documents (including copies thereof), to the extent considered necessary for such calculation.

The relevant official of the National Tax Agency or the relevant official of the tax office or Regional Taxation Bureau with jurisdiction over a foreign corporation's place for tax payment may, when it is necessary for the calculation of the arm's length price prescribed in paragraph (1) which pertains to an internal dealing of a foreign corporation, retain the books and documents (including copies thereof) submitted pursuant to the provisions of the preceding two paragraphs.

The authority of the relevant official pursuant to the provisions of the preceding three paragraphs is not construed as being granted for criminal investigation.

The relevant official of the National Tax Agency, a Regional Taxation Bureau, or a tax office, when asking questions, conducting an inspection, or making a request for presentation or submission pursuant to the provisions of paragraph (6) or (7), must carry an identification card and present it to the person concerned when requested.

In any of the following cases, the person who has committed the violation is punished by a fine of 300,000 yen or less:

where a person has failed to answer or has given a false answer to the questions given by the relevant official pursuant to the provisions of paragraph (6) or (7), or has refused, obstructed or avoided the inspection pursuant to those provisions; or

where a person has, without justifiable grounds, failed to comply with a request for the presentation or submission of books and documents pursuant to the provisions of paragraph (6) or (7), or has presented or submitted books and documents (including copies thereof) containing false statements or records.

Where the representative of a corporation (including the administrator of an association or foundation without juridical personality) or an agent, employee or other worker of a corporation or an individual has committed any of the violations set forth in the preceding paragraph with regard to the operations of the corporation or individual, not only the offender is punished but also the corporation or individual is punished by the fine prescribed in the paragraph.

If the provisions of the preceding paragraph apply to an association or foundation without juridical personality, its representative or administrator represents the association or foundation without juridical personality with regard to its procedural acts, and the provisions of the laws concerning criminal proceedings in which a corporation is the defendant or the suspect apply mutatis mutandis.

Procedures for the retention of the books and documents (including copies thereof) set forth in paragraphs (6) and (7) and other necessary matters concerning the application of the provisions of paragraphs (1) through (5), paragraph (8) and the preceding paragraph are specified by Cabinet Order.