1. Plenary 1 Taxation of Intra-group Services Japan May 12, 2016 TMI Associates (Japan) Partner Attorney-at-law, Certified Public Tax Accountant Nobuaki Iwashina 2 nd Draft

2. 2 1 IGS in Japan Foreign Subsidiary Services JPN Parent Payment for services Foreign Parent Services JPN Subsidiary Payment for services Outbound Services Rendered by JPN Parent Inbound Services Rendered to JPN Subsidiary Planning, coordination, budgetary control, financial advice, accounting, etc.

3. 3 2 Taxation of IGS in Japan Taxation Issues  Transfer Pricing - Outbound Services, rendered by a parent in Japan to foreign subsidiaries - Inbound Services, rendered by a parent in foreign countries to a subsidiary in Japan  Service PE  Withholding Tax on Service Fees

4. 4 3 Transfer Pricing (1) Rules on TP in Japan Same rules applies to outbound services and inbound services  Act on Special Measures concerning Taxation  Order for Enforcement of the Act on Special Measures concerning Taxation  Circular Notice on Act on Special Measures concerning Taxation  Transfer Pricing Administrative Guideline - Referring to IGS (2-8 to 2-10) - Including IGS Practical Case (No. 23)

5. 5 3 Transfer Pricing Outbound Services rendered by a parent in Japan to foreign subsidiaries Foreign Subsidiary Services JPN Parent Issue 1 Whether intra-group services have been rendered? Payment for services Issue 2 Whether the amount of payment for services is ALP? Services by JPN Parent Planning, coordination, budgetary control, financial advice, accounting, etc.

6. 6 3 Transfer Pricing Issue 1 Whether intra-group services have been rendered? [Judgmental standard] Value Test - Economic or commercial value or not [Excluded activities from IGS] - Duplicated activities - Shareholder activities, such as general shareholders meeting, issuing shares, drafting securities reports, etc. Same as OECD TP Guideline

7. 7 3 Transfer Pricing Issue 2 Whether the amount of payment for services is ALP? Are activities incidental to original business? Yes ALP: Total cost No markup No -Are all requirements below satisfied? -- Designated activities (see next slides) -- Not related to core business -- Cost for the services / total costs is moderate -- Not using IP -- Rational cost calculation ALP: Total cost No markup CUP, Cost Plus or other Method Yes No

8. 8 3 Transfer Pricing Issue 2 [Typical classification] - Similar to BEPS final report 7.47 and 7.49 Cost Plus Method - Budgetary control - Accounting, auditing and legal support - Computer services - Supervision of cash flows and solvency - Process of capital increases - Recruitment, staffing and training - Remuneration services - Advertising - General services of an administrative or clerical nature If other requirements are satisfied Other TP Method - Planning, coordination - Manufacturing, purchasing, distributing and marketing services - Management of interest and exchange rate risks

9. 9 3 Transfer Pricing (2) Practices in Japan  Incidental services to original business Cost Plus method: Cost + 5-10 % markup  Non incidental services to original business CUP, Cost Plus and other TP method

10. 10 3 Transfer Pricing (3) Judicial Cases  Decision on March 31th, 1999 - The parent in Japan purchased products manufactured by the local subsidiary - The tax court decision - The parent should owe costs for checking on status of manufacturing and quality control by the parent, and - The parent should claim personnel dispatch cost for establishing administrative system for the local subsidiary  Adobe Japan case - Not a typical IGS case - Payment for support services, one of core services, rendered by Adobe Japan to Adobe Netherlands - Adobe Japan won at the appeal court on October 30th, 2012

11. 11 3 Transfer Pricing Adobe Japan case Adobe Japan Adobe US Adobe Netherlands Customer Payment for services Cost + 5% of sales in JPN Sales support for Adobe Netherlands License Service agreement Whether the amount of payment for services is ALP? Sublicense Royalty payment Comparable (Distributor) Service provider Comparability? Tax authority: Resale Price method

12. 12 4 Service PE (1) Japan’s PE Rules – Inbound Services  Japan’s domestic rules on PE do not treat service-based PEs as a separate category  Currently there is no indication of the introduction of such rules  Consulting service constitutes PE due to tax treaties between China, Indonesia, Thailand, etc. (2) PE in Other Jurisdictions – Outbound Services  Many Japanese MNE suffering service PE in China and India  Example - When an employee of the parent in Japan was seconded to a foreign subsidiary a service PE for the parent was recognized

13. 13 5 Withholding Tax on Service Fees (1) Rules for Payment of Service fees to Foreign companies – Inbound Services  Income on personnel service - domestic source income - 20% withholding tax under income tax law in Japan  Income on other services - domestic source income - No withholding tax except for income attributable to PE in Japan