Last year saw the imposition of an additional USD265 million Japanese corporate tax on Yahoo Japan with the tax authorities applying the anti-avoidance provision within the Japanese TPCR legislation in order to disallow the carry over of tax losses in a merger (the background is explained in greater detail this is post).
The specialist press has reported that the approach used by the tax authorities to challenge such transactions seems frequently to be the application of the general anti-avoidance section in the Japanese TPCR regulations. The anti-avoidance article can be applied to deny tax preferred treatment even when the transaction meets the formal qualifications for tax preferment.
Articles in the specialist press have reported the experience of the tax practitioners when facing audits of Japanese TCPR transactions. Although they had dealt with transactions which met the formal qualifications for tax preferment and the treatment of either carried over tax losses or assets with embedded unrealized tax losses was correct, the focus of the audits would often appear not to be on these items but Article 132-2 of the Japanese Corporate Tax Law which focuses on whether the transaction was used to gain an unfair tax advantage.
The Yahoo Japan case was the first to have involved the above anti-avoidance regulation and is reported to be going to appeal in August. This maybe the first of many such cases.
Recent tax audit trends seem to suggest audit activity around this area will increase. Companies that have been involved in Japanese TPCRs have regularly been asked to present related documentation for scrutiny at recent tax audits. The Tokyo Regional Tax Office is known to have established a new team to respond to the audit of Japanese TPCRs and international tax avoidance transactions within their 4th Audit Unit.
The Japanese TPCR system was introduced in 2001 and since then has not seen a great deal of focused audit activity. The reason for this past lack of audit interest reflects the background to the introduction of the measures, which were intended to encourage mergers and other corporate reorganizations within Japan in order to help revive the depressed economy of that period. However, since that time transactions have been identified by the tax authorities which clearly have included a tax avoidance motivation.
Given the above trend it is important to pay attention both to the formal criteria required in order for a transaction to be tax preferred but also to consider the overall commercial context of the transaction and ensure that any tax benefit received does not fall foul of the anti-avoidance rules.