Friday, December 23, 2016

Japan to Strengthen Oversight of Overseas Transfer of Patents

The fiscal 2017 tax reform outline unveiled on December 8 includes strengthening measures concerning cross-boarder tax cheats. 

The scope of the foreign subsidiaries unitary tax system that imposes a tax for a parent company and their foreign subsidiaries in a lump will be expanded in order to prevent activities to elude taxation in Japan by transferring income to a subsidiary established in a country or region with lower tax rate. After April 2018, a foreign shell company, independent of its location (currently applied only to a company established in a country or region with tax burden ratio of less than 20%), will get taxed combined with its parent Japanese company. Further, when it is recognized as a subsidiary with the intent of tax cheats, such a subsidiary will get taxed under the unitary tax system, even if it is not a shell company. 

The tax reform outline provides an addendum on "Basic Idea for Ideal Form of International Taxation" and mentions overseas transfer of intellectual properties.  It states that:
     The overseas investment and technologies transfer should be made for pure business reasons, but not for reduction of tax burden. For example, transferring intellectual properties, which are created through research and development using Japanese infrastructure and labor power, to a foreign shell company not only causes loss-of-taxation but also potentially hampers conservation of Japanese intellectual properties.

    The government will review necessary practice according to a basic idea of matching “the location of activities” and “the location of taxation” which is recommended in the BEPS (Base Erosion and Profit Shifting) project. Regarding “the location of activities” for intellectual properties, two locations should be considered, i.e. the location of creation of intellectual properties through research and development and the location of profit through the use of intellectual properties. 

International coalition is a must for prevention of tax cheats by multinational companies. At the same time, governments are supposed to consider the interest of their own domestic companies. I hope that the Japanese government carefully examines the measures including the conditions and the timing to be applied, so as not to cause harm to competitiveness of Japanese companies.

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