Saturday, October 21, 2017

Toyota forced to pay JPY 400 milion in back taxes due to failure to declare withholding tax on royalty to foreign companies

On October 13 2017, it was reported that Toyota was forced to pay JPY 400 million in back taxes by Tokyo Regional Taxation Bureau due to failure to declare withholding tax on intellectual property royalty to foreign companies. Toyota outsourced the development of rally cars to a subsidiary company in Germany and a Finnish company, and paid them JPY 2.6 billion for the development. The bureau recognized JPY 0.9 billion of the JPY 2.6 billion as IP royalty to be withheld. Toyota reportedly didn't get patent license from the foreign companies, but get some technologies and data for the development. And the bureau recognized such technology and data as 'knowledge with special technological value' for tax treatment.

When a company pays royalties to foreign companies for the use of their 'industrial property rights etc.' in Japan, it is required to withhold income tax payment for the foreign companies. The 'industrial property rights etc.' includes 'knowledge with special technological value' such as know-how and the like, according to the definition of 'industrial property rights etc.' in the circular notice for legal interpretation (161-34) [in Japanese].

Withholding Tax Guide 2017 [in English] page 34
6. Procedure for Withholding from Income Paid to Non-Residents or Foreign Corporations
(8) Any of the royalties or considerations listed below received from a person who performs operations in Japan pertaining to that operations
a. Royalties on or consideration for the transfer of rights concerning technology such as industrial property rights, production methods involving special technologies, or know-how

In case of a patent license agreement or a technology license agreement, it clearly identifies licensed rights and royalties. However, when some data is provided as part of development of something under a development agreement as here, it may not identify royalties on such data as distinguished from the development fee for other development activities. It would be desirable to list expense items carefully, so that you do not have to pay more taxes than necessary in response to findings by the bureau.

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