The Act on Special Measures Concerning Taxation is an important piece of legislation in Japan that provides special tax measures and regulations. Here are the key aspects of this act:

Purpose and Scope

The Act on Special Measures Concerning Taxation (Act No. 26 of 1957) is a Japanese law that establishes special provisions related to taxation, particularly concerning nonresidents and foreign corporations. It works in conjunction with other tax laws like the Income Tax Act and Corporation Tax Act to provide specific tax treatments in certain situations.

Key Provisions

The act covers various areas of taxation, including:

Interest Income and Dividend Income: It provides special provisions on the taxation of interest and dividend income.

Foreign Subsidiaries: The act includes special measures for taxing income from specified foreign subsidiaries of Japanese residents and domestic corporations.

Consolidated Corporations: There are provisions related to the taxation of consolidated corporations’ transactions with foreign affiliates.

Transfer Pricing: The act contains important transfer pricing legislation, which was enacted in 1986 under Article 66-4.

Application to Foreign Entities

The act has specific implications for foreign entities and transactions:

• It applies to international transactions between Japanese juridical persons and affiliated foreign juridical persons.
• The legislation focuses on foreign affiliated transactions to prevent potential loss of tax revenue.
• It provides guidance on the treatment of Cost Contribution Arrangements (CCAs) and transactions involving intangible property.

Tax Exemptions and Special Rates

The act includes provisions for certain tax exemptions and special tax rates:

• For example, it allows for a 15% tax rate on certain types of interest income, separate from other income taxation.
• There are exemptions for certain types of bond interest, such as book-entry transfer national government bonds.

Mutual Agreement Procedures

The act also addresses international tax issues through Mutual Agreement Procedures (MAP):

• It provides a framework for resolving disputes related to taxation not in accordance with tax treaties.
• This includes cases involving transfer pricing, permanent establishment issues, and withholding taxes in treaty partner countries.

The Act on Special Measures Concerning Taxation plays a crucial role in Japan’s tax system, particularly in addressing international taxation issues and providing specific tax treatments for various situations involving foreign entities and transactions.

Country by country (CbC)

The Act on Special Measures Concerning Taxation in Japan has a significant relationship with country-by-country (CbC) reporting requirements. Here are the key aspects of this relationship:

Implementation of CbC Reporting

The Act on Special Measures Concerning Taxation incorporates the OECD’s BEPS Action 13 recommendations on CbC reporting into Japanese law. Specifically:

1. It establishes the legal framework for CbC reporting requirements in Japan.
2. The act sets the threshold for CbC reporting at JPY 100 billion in consolidated group revenue, which aligns with the OECD’s recommended threshold of 750 million euros.

Reporting Requirements

Under the provisions of this act:

1. Specified Multinational Enterprise (MNE) Groups are required to prepare and submit a CbC report.
2. The first reporting fiscal year for CbC reports in Japan commenced on or after April 1, 2016.
3. Japanese corporations that are the Ultimate Parent Entity or Surrogate Parent Entity of a Specified MNE Group must submit the CbC report directly to Japanese tax authorities.

Filing Deadlines and Methods

The act specifies:

1. CbC reports must be submitted within 12 months following the end of the reporting fiscal year.
2. Submission is required to be done electronically via e-Tax.

Local Filing Requirements

The act also addresses local filing requirements:

1. In principle, if the Ultimate Parent Entity is located outside Japan, Japanese subsidiaries are not required to submit a CbC report.
2. However, local filing may be required if the automatic exchange of CbC reports is not implemented between the relevant tax authorities.

Penalties

The act includes enforcement measures:

1. A fine of up to 300,000 yen can be imposed if corporations fail to submit a CbC report to the District Director by the deadline without good reason.

International Exchange of Information

The Act on Special Measures Concerning Taxation aligns with international agreements for the exchange of CbC reports:

1. It enables the automatic exchange of CbC reports between Japan and other jurisdictions based on the Multilateral Competent Authority Agreement on the Exchange of CbC Reports (MCAA).
2. This facilitates the sharing of CbC reports submitted by foreign parent entities with Japanese tax authorities, reducing the burden on local subsidiaries.

By incorporating these CbC reporting requirements into the Act on Special Measures Concerning Taxation, Japan has effectively implemented the OECD’s recommendations on transfer pricing documentation and country-by-country reporting, enhancing transparency and supporting efforts to combat base erosion and profit shifting.