Secretariat
Committee on Fiscal Affairs
Organisation for Economic Co-operation and Development

Keidanren hereby submits its comments on the Discussion Draft on Transfer Pricing Documentation and CbC Reporting published by the OECD on January 30, 2014.

A. Introduction

1. First of all, we outline the basic thinking of the Japanese business community regarding base erosion and profit shifting (BEPS).

2. As pointed out by the OECD, it is true that, with advancing globalization and digitalization, the current international taxation system has become unable to keep up with certain aspects of economic activities. Given this situation, we believe it is generally significant that the OECD is working to revise the Model Tax Convention and the Transfer Pricing Guidelines and harmonize the laws of the member countries. We hope that the effort to create a common framework will move forward, involving non-OECD member countries as well.

3. The issues of particular importance are taxation in a digital economy (Action 1 of the BEPS Action Plan) and the treatment of intangibles under transfer pricing taxation regimes (Action 8). It is hoped that clear rules on these issues will be promptly established, regardless of the existence of BEPS. With corporations facing international double taxation, another important issue is to make dispute resolution mechanisms more efficient (Action 14). We are also ready to support the development of a multilateral instrument (Action 15) if it contributes to swift resolution of disputes. Keidanren will continue to participate in the development of these rules in an active and constructive manner, cooperating with the Business and Industry Advisory Committee to the OECD (BIAC) and the business organizations of other countries and regions.

4. However, the BEPS Action plan contains multiple items that make us wonder if the ends justify the means. The most notable example is Action 13 "Re-examine transfer pricing documentation." It is our understanding that the purpose of the BEPS Action Plan is to counter tax avoidance practices of some multinational enterprises (MNEs), thereby ensuring a level playing field. If that is the case, it is unreasonable and counterproductive to impose excessive additional burdens on numerous corporations that have never been engaged in BEPS. While some appear to argue that addressing BEPS requires gathering information comprehensively, we believe it highly irresponsible to try to resolve a particular issue at the expense of corporations. We have similar concerns about the collection of data on BEPS (Action 11) and the disclosure of tax planning arrangements (Action 12), as both of them may place additional burdens on taxpayers.

5. Business activities will be hampered if overly strict rules are introduced to prevent tax avoidance. From that perspective, we are strongly interested in what direction the discussions are taking regarding such matters as strengthening controlled foreign company rules (Action 3) and limiting interest deductions (Action 4).

6. Although the BEPS Project focuses on the issue of double non-taxation, we must stress once again that, in the actual business world, many corporations suffer from double taxation. We need to avoid the situation where excessive focus on double non-taxation results in an increase of double taxation.

B. Overall Evaluation of the Discussion Draft

7. We regret to say that, from these perspectives, the contents of this Discussion Draft are a disappointment to us. Action 13 aims to "develop rules regarding transfer pricing documentation to enhance transparency for tax administration, taking into consideration the compliance costs for business". We understand that both improving transparency and reducing compliance burdens are at the core of this project. In reality, however, the proposed system would place additional and unnecessary burdens on taxpayers, taking little account of compliance costs. We also strongly fear that reliance on superficial numerical data, such as those contained in the country-by-country reports, might lead to incorrect risk assessments, thereby exposing the MNE to the additional risk of double taxation in a country where it operates. Furthermore, serious problems could arise from the perspective of protecting confidential information, depending on the methods of making the master files and country-by-country reports available to overseas tax administrations. For these reasons, we oppose the contents of the Discussion Draft.

8. However, we cannot let the discussions at the OECD move forward unilaterally without the Japanese business community's views being reflected. If this discussion draft were to be adopted as proposed, it would be unavoidable for the laws of all countries, including Japan, to be affected. Another matter we cannot overlook is the prevailing notion that placing unreasonable burdens on taxpayers is acceptable. If this misinformed notion were to continue to prevail, it would cause significant problems when specific rules are set based on other Action Plans. Therefore, while firmly opposing the Discussion Draft, Keidanren has decided to submit its comments as per the below, preparing for the possibility that the Transfer Pricing Guidelines will be revised as proposed.

C. Comments on the Discussion Draft

C1. General Comments

9. First of all, fundamental change is needed to the Discussion Draft's basic principle of imposing new documentation requirements on all MNEs, except for certain small and medium enterprises. Especially, instead of placing excessive burdens on all corporations, a "gateway test" should be introduced to limit the range of corporations obligated to submit additional information.

10. In recent years, great emphasis has been placed on cooperation between tax administrations and corporations in aiming to enhance tax compliance related to transfer pricing. In Japan, the National Tax Agency is taking measures to strengthen corporate governance of major companies on tax matters. For corporations, developing a relationship of dialogue and cooperation with tax administrations has the merits of reducing unnecessary compliance costs and undergoing proper risk assessment. Therefore, a reasonable approach should be to assess risk through such dialogue processes and, only when a significant problem is detected, to request the company that additional information be submitted. In other words, consideration should be given to creating an incentive whereby a company with no significant problem will be exempted from the submission of additional information. This approach is expected to further enhance tax compliance by encouraging tax administrations and corporations to work together.

11. Another possible approach to a gateway test is to determine whether a company's effective corporate tax rate on a consolidated basis is at or above a certain level by analyzing its financial statement data. The Transfer Pricing Guidelines should provide clear guidance on these points.

12. Even if a company is required to submit additional information as a result of the gateway test, a limit must be placed on who should prepare, to whom the company should submit, and which information the company should include in, its master file and country-by-country report, as explained in C2 below. In particular, how the documents are shared among tax administrations is a matter of grave concern to Japan's business community. We believe that the master file and country-by-country report should be submitted by the parent company of the MNE group to the tax administration of its country of domicile and should be made available to an overseas tax administration only through the exchange of information mechanism in accordance with the bilateral tax convention.

C2. Specific Issues (responses to the boxed questions, and other comments)

13. Below is our response to each of the questions raised in the 10 boxes given in the Discussion Draft. We also elaborate our view on how a new documentation system should be structured if creating it were to be unavoidable.

Response

14. We consider country-by-country reporting per se to be unnecessary in the first place; naturally, we also believe it unnecessary to develop additional standard forms and questionnaires beyond the country-by-country reporting template.

15. While sharing risk assessments is useful in general, we do not think that the country-by-country reports constitute useful information, at least for the purpose of assessing risk.

Response

16. With regard to information possessed by a foreign associated enterprise, a tax administration should be permitted to request its submission only when deemed necessary to audit specific cross-border transactions. Detailed and comprehensive documentation should not be required of all corporations across the board.

17. Accordingly, no change will be needed to the basic principles set out in paragraphs 5.6 and 5.15 of Chapter V of the current Transfer Pricing Guidelines, which require tax administrations to: (a) take great care to balance its need for the documents against the cost and administrative burden to the taxpayer of creating or obtaining them; (b) recognize that they can avail themselves of the exchange of information articles in bilateral double tax conventions to obtain such information, where it can be expected to be produced in a timely and efficient manner; and (c) limit the amount of information that is requested at the stage of filing the tax return.

18. We believe that information possessed by a foreign associated enterprise should, in principle, be obtained in accordance with the exchange of information articles of the bilateral tax convention; and that, even in that case, information exchange must be conducted upon request and only for the purpose of determining the facts related to the application of the bilateral tax convention to a particular case. For example, one country's tax administration should not be able to obtain the master file, the country-by-country report, and other comprehensive information prepared by a taxpayer of another country with which the bilateral tax convention has been concluded, for purposes other than determining the facts relevant to a particular case.

19. Furthermore, we find the last sentence of paragraph 15 of the Discussion Draft to be unacceptable, which states, "It is therefore important that the tax administration is able to obtain directly or through information sharing, such as exchange of information mechanisms, information that extends beyond the country's borders" (italics added). This sentence is highly inappropriate as it appears to envision a situation where a tax administration directly contacts a taxpayer of another country over whom it has no jurisdiction. We request that the word "directly" in the paragraph be deleted.

Response

20. If the submission of the master files becomes mandatory, it is an absolute prerequisite to clearly define the scope of members of an MNE group that needs to be covered by the master file.

21. Paragraph 18 of the Discussion Draft stipulates that the master file should contain common standardized information relevant for all MNE group members. At the same time, the Transfer Pricing Guidelines define, in its glossary, an MNE group as "a group of associated companies with business establishments in two or more countries." These provisions raise the problem of how to determine the scope of associated companies. However, as to the definition of associated companies (enterprises), the said glossary only states to the effect that two enterprises are associated enterprises if one of them meets the conditions of Article 9 of the OECD Model Tax Convention with respect to the other. As a result, the definition of associated companies seems to depend on the laws of individual countries after all. The problem here is that each country has its own definition of this term under the domestic laws. If countries continue to leave such differing definitions unchanged, it is highly likely that confusion will arise as an MNE group's master file may be deemed by an overseas tax administration to be insufficient in terms of the scope of its associated companies.

22. Therefore, it is essential for the revised Transfer Pricing Guidelines to stipulate a uniform criterion for associated companies/enterprises. For example, it is possible to uniformly define the term as an entity in which the MNE has more than 50 percent of the shares. Similarly, it is necessary to define the scope of members of an MNE group to be covered by the country-by-country report. In the event that these uniform criteria cannot be set, an MNE group should be allowed to prepare the master file and country-by-country report in accordance with the laws of the country of domicile of the parent company.

23. Whether to prepare the master file on a line of business basis or on an entity wide basis should be determined by each MNE. When a line of business basis is chosen, the MNE should be permitted to use, as a minimum unit, the business segments disclosed on its annual securities reports and other financial reports.

24. Regarding preparers, the Discussion Draft proposes that the master file be prepared by the ultimate parent entity of the MNE group, but fails to provide the definition of an ultimate parent entity. As the organizational structure varies from one MNE to another, a certain level of flexibility should be allowed in the determination of an ultimate parent entity. For example, each of the companies listed on one country's stock exchanges should be regarded as an ultimate parent entity in that country and be permitted to create the master file of its own. Similar treatment should be allowed for the country-by-country reports.

25. Another matter of importance is how the master file created should be made available to overseas tax administrations. Each MNE is required to include in the master file the information on its entire businesses, whether on a line of business basis or on an entity wide basis. As such, MNEs have a strong aversion to making every piece of that information available to overseas tax administrations.

26. Suppose that an MNE headquartered in Country X engages in Businesses A, B, and C, and has a subsidiary doing Business A in Country Y. In this case, when requested by Country Y's tax administration to provide the MNE's master file, should Country X's tax administration hand over to its counterpart in Country Y the master file containing information on all of Businesses A, B, and C? We do not believe so. For Country Y's tax administration, obtaining the MNE's information on Business A should suffice to assess and audit the specific cross border transactions from a viewpoint of transfer pricing. There is no reason that justifies its need to obtain information on Businesses B and C, which may not involve cross-border transactions or may handle matters of highly confidential nature, such as national defense and nuclear technologies.

27. If the information on an MNE's all lines of business contained in the master file were to be made available to overseas tax administrations, there would be no point in preparing the master file on a line of business basis. Preparing the master file on a group wide basis does not constitute a reason to uniformly provide all information contained therein to overseas tax administrations, either. A tax administration requested by its overseas counterpart to exchange information should retain the right to narrow down the information it provides to the extent needed. It goes without saying that under no circumstances should an MNE's master file be made available to an overseas tax administration through the MNE's subsidiary in that country. With regard to methods of making the master files and country-by-country reports available to relevant tax administrations, we elaborate in our response to Box 9 below.

28. In addition to information on advance pricing agreements (APAs), other rulings, and mutual agreement procedures (MAPs), which are discussed in our response to Box 10 below, the following should be deleted from the list of information to be included in the master file because these pieces of information are highly classified and disclosure of them may cause abuse of confidentiality, or cannot possibly be useful for the purpose:

    • Chart showing supply chain for material products and services;
    • A description of important business restructuring transactions, acquisitions and divestitures occurring during the fiscal year;
    • A list of important related party agreements related to intangibles, including cost contribution arrangements, principal research service agreements and license agreements;
    • A description of any material transfers of interests in intangibles among associated enterprises during the fiscal year concerned, including the entities, countries, and compensation involved;
    • A description of the group's transfer pricing policies related to R&D and intangibles;
    • A description of the MNE's general transfer pricing policies related to financing arrangements between associated enterprises
      (It is sufficient for such items to be described in the local file as needed); and
    • The title and country of the principal office of each of the 25 most highly compensated employees in the business line.

29. As to a general written functional analysis describing the MNE's business, a note should be added stating that, as a rule, it is sufficient for the description to be made to the extent of the information disclosed in the MNE's annual securities reports, annual reports, and other financial reports.

Response

30. The introduction of the country-by-country reports is being considered based on the 2013 Lough Erne G8 Leaders' Communiqué in order for tax administrations to widely recognize and assess the taxation risks of MNEs. It is our understanding that the introduction of the reports is not necessarily requested in the context of transfer pricing taxation regimes. As such, it does not seem right for the country-by-country report to be part of the master file. Furthermore, we are deeply concerned that the country-by-country reports, which contain superficial numerical data only, are viewed and treated independently as part of transfer pricing documents, thereby encouraging transfer pricing taxation to be enforced based on a formulary apportionment approach, not on arm's length prices. While we do not consider the country-by-country report necessary in the first place, it should at least be positioned as a completely separate document from the master file if its introduction were to be unavoidable.

31. The country-by-country reports should be deemed sufficient if they include, at least, important business activity codes, revenues, earnings before income tax, and income tax (corporate income taxes reported on the financial statements). MNEs should not be required to newly collect data that they do not gather at present.

Response

32. In the light of the current process of preparing consolidated financial statements, the bottom-up approach seems to be the more feasible choice for a majority of Japanese companies. However, as corporations do not have systems in place whereby information on all the foreign associated enterprises is automatically collected, even the bottom-up approach will impose significant additional burdens on them. Regarding the top-down approach, although we do not deny it being used by an MNE that opts to do so, the approach seems to require extremely complicated work unless, among others, allocation using highly simplified keys is permitted. As such, at the very least, the use of the top-down approach should not be mandatory for MNEs.

Response

33. Irrespective of whether to select the bottom-up approach or the top-down one, MNEs should be allowed to have some flexibility in the selection between an entity by entity basis and an individual country basis when preparing the country-by-country report. For instance, when an MNE consolidates financial results on an individual country basis in the course of compiling the consolidated financial statements of the group, the MNE should be permitted to use that consolidated results on an individual country basis for the country-by-country report, rather than the results of each entity in respective countries.

34. It would be a significant additional burden to manage cross border transaction between associated enterprises separately from transactions between group entities within the same country. The elimination of transactions between group entities would also be extremely burdensome. We oppose these requirements.

35. We also request that a permanent establishment be excluded from the definition of an entity. The exclusion is needed to alleviate administrative burdens.

Response

36. MNEs do not currently tabulate, on a per country basis, corporate income tax paid on a cash basis and withholding tax paid. Moreover, their systems are not capable of managing corporate income tax paid in the country of domicile separately from that paid in other countries. If the reporting of these items were to be required, significant additional burdens would be placed on MNEs.

37. If the reporting of corporate income tax were to be unavoidable, stating the amount of corporate income taxes as reported on the financial statements should be deemed sufficient. We oppose the requirement to report withholding tax paid.

Response

38. MNEs do not currently tally the aggregate cross-border payments between associated enterprises. Nor do they gather information on intra-group payments of royalties, interest, and service fees, other than those directly transacted between the parent company and foreign associated enterprises. If the reporting of these items were to be required, significant additional burdens would be imposed on MNEs. We oppose the requirement to report these items.

Response

39. For the country-by-country reports, stating important business activity codes should suffice. No other information should be required.

Response

40. We believe that the gateway test proposed in C1 above should constitute the first threshold for materiality.

41. There are several indices that could be the materiality thresholds applied thereafter. When deciding which thresholds to use, consideration should not be limited to the sizes and nature of the local economy and local operating entities as mentioned in the Discussion Draft. Attention should equally be paid to such factors as the volume of the transactions between associated enterprises and its share in the total transaction volume and so on. Numerical criteria should be stipulated in the Guideline. It is also conceivable to permit an MNE to exclude from the country-by-country report the information on entities not engaged in cross-border transactions.

42. In any case, if materiality thresholds were to differ from country to country, MNEs would have to prepare documentation to meet the lowest threshold in the world, rendering the materiality thresholds defined meaningless. Therefore, a set of uniform thresholds must be determined to be applied by all tax administrations. In the event that the uniform thresholds cannot be set, an MNE group should be permitted to comply with the laws of the country of domicile of the parent company.

Response

43. Giving consideration to taxpayers' documentation burdens is extremely important. As for the suggestion in paragraph 34, we request that it be revised to permit the searches in databases for comparables supporting part of the local file to be updated at intervals longer than three years in certain circumstances. Similarly, we believe that, depending on the level of materiality, financial data for the comparables does not necessarily need to be updated every year.

Response

44. It should be sufficient for the master file and country-by-country report to be submitted by the parent company of the MNE group to the tax administration of its country of domicile only. Therefore, the sentence "the master file should be prepared and submitted to all tax administrations" (italics added) in paragraph 35 is not appropriate.

45. It also should be considered sufficient if an MNE's master file and country-by-country report are submitted in English as well as in the language of the country of domicile of the parent company (e.g., in Japanese for companies domiciled in Japan). Then, if the master file and country-by-country report are made available to an overseas tax administration pursuant to the bilateral tax convention, the overseas tax administration should translate the master file on its own responsibility as needed. Under no circumstances should the tax administration request the parent company or other constituent entities of an MNE group to translate the master file. As far as the Transfer Pricing Guidelines require taxpayers to prepare documentation in English, it is a matter of course that every tax administration is also required to acquire proficiency in reading English.

Response

46. Tax administrations must be keenly aware that any nonpublic information of corporations constitutes classified information, and must pay compensation for the damage caused by the leak of such information.

47. The master file and country-by-country report of an MNE should be made available to an overseas tax administration only through the exchange of information mechanism in accordance with the bilateral tax convention, as described in our response to Box 9 below.

Response

48. Regarding a mechanism for making the master file and country-by-country report available to relevant tax administrations, the only option acceptable to us is the "filing of information in the parent company's jurisdiction and sharing it under treaty information exchange provisions." We cannot accept either "the direct local filing of the information by MNE group members subject to tax in the jurisdiction" or "some combination of the above."

49. In the master file and country-by-country report, the MNE is required to provide highly confidential information. Ordinarily, only the parent company is able to access such information in its entirety; each subsidiary of the MNE group can only access the information pertaining to itself and its own subsidiaries, except for the information obtainable through the annual securities reports and financial statements published by the parent company. If each of the foreign subsidiaries were to be obligated to submit the master file and country-by-country report to the tax administration of the country of its domicile, these subsidiaries would be able to know and obtain such highly confidential information, seriously undermining the MNE's corporate governance.

50. Specifically, the following example needs to be considered: Suppose that Multinational Company A of Country X and the Multinational Company B of Country Y have together established Joint Venture C in Country Z. Although being partners in Country Z, Companies A and B may fiercely compete against each other elsewhere. In this case, under the proposal of the Discussion Draft, Company A would be able to obtain Company B's master file and country-by-country report, and vice versa, through Joint Venture C. Moreover, if Company A sells its shares in Joint Venture C to Company D upon the dissolution of the partnership with Company B, Company D would then be able to obtain the master files and country-by-country reports of both Companies A and B. Considering these possible outcomes, MNEs would have no option but to avoid investing in an overseas joint venture. This would definitely discourage cross-border economic exchange, running counter to the OECD's mission of promoting policies that will improve the economic and social well-being of people around the world.

51. Furthermore, there are concerns that confidential information may be leaked from tax administrations. It is not uncommon that an MNE has hundreds or even thousands of subsidiaries and affiliates around the world. If each country's subsidiaries were to be obligated to submit classified information to the tax administration of that country, it would be highly doubtful whether the confidentiality of all the information submitted could be completely maintained. Once information leaks out, it is extremely difficult to trace the route.

52. The only solution to these problems is to exchange information in accordance with bilateral tax conventions. Even then, information exchange should be conducted upon request, not through automatic information exchange. A tax administration should be allowed to issue a request for information exchange only when the master file and country-by-country report of a foreign company is deemed absolutely essential to assessing and auditing specific cross-border transactions of a company in its jurisdiction. In no other circumstances should information exchange be permitted.

53. Some may argue that the solution we propose will make it difficult for one country's tax administration to exchange information with its counterparts in the nations and regions having no exchange of information provisions with that country. However, we believe that OECD's primary role is to recommend nations concluding tax conventions actively so as to avoid double taxation.

54. It goes without saying local files are not shared among tax authorities.

Response

55. The information on the APAs and MAPs with, and on the other rulings of, the tax administrations of particular countries is highly confidential. There is no justifiable reason for tax administrations not being parties thereto to have to obtain such information. Accordingly, APAs, other rulings, and MAP cases should all be deleted from the list of information to be included in the master file.

Other Comments

56. Paragraph 27 of the Discussion Draft states that the best practice is to prepare both the master file and the local file no later than the due date for the filing of the tax return for the fiscal year in question. However, due attention should be paid to the possibility that those files might not necessarily be complete by that time.

57. Especially, the master file should be maintained by taxpayers to be viewed by the tax administration of its country of domicile when needed for audit or assessment purposes. Taxpayers should not be obliged to routinely submit the master file with their returns.

58. If taxpayers prepare for the master file and local file without delay, they should not be penalized, unless there are intentional and gross negligence regarding the misstatement of these documents. Tax administrations should have the burden of proof as to the existence of intentional and gross negligence.

Sincerely,
Subcommittee on Taxation
KEIDANREN