This post collates information that is often required when making a claim for the reduction or exemption of Japanese tax on Japanese source income further to the Japan/US Tax Treaty (i.e. when claiming ‘Treaty Benefits’). It includes links to information relating to the Japan/US Tax Treaty and to forms (‘Treaty Forms’) issued by the Japanese tax authorities which must be completed in order to claim Treaty Benefits in respect of common items of Japan source income. The Treaty Forms themselves include helpful and detailed notes which should be read closely. You should always take professional advice around the circumstances when a Treaty Form is required, the information required to support a claim and on the completion and submission of the Treaty Form itself.
Resources relating to the Japan/US Tax Treaty
Scattered around the internet are a number of different documents relevant to the Japan/US treaty. These are collated below:
Treaty, explanatory notes, entry into force
If you check the following – http://www.mofa.go.jp/announce/announce/2004/3/0330.html – you”ll come to the Japanese Ministry of Foreign Affairs site where it shows the New Treaty came into force on 30 March 2004. Refer to Article 30 of the New Treaty to work out when its different provisions apply to different types of source income. Also see this link for guidance on how these provisions were intepreted by the US IRS.
This US Treasury Department Press Release includes discussion of the differences between the New Treaty and the treaty it replaced.
Protocol, Exchange of Notes
The US Treasury Department also has a useful page with links to the various treaties and protocols the US has entered into, although please note their “Caution” that the text on their site may be the text prior to ratification.
The page includes a link to the exchange of notes made at the time the treaty was entered into which mentions, among other things, that both countries will endeavour to resolve transfer pricing disputes within the framework of the OECD’s transfer pricing guidelines and that “..domestic transfer pricing rules…may be applied in resolving transfer pricing disputes under the Convention only to the extent that they are consistent with OECD Transfer Pricing Guidelines…”.
The exchange of notes also discusses the use of weighted risk assets as an allocation basis for equity for non-insurance financial institution transfer pricing, the definition of a “bond” in the treaty and other matters.
This page also includes a link to the Protocol to the New Treatywhich includes various special terms relating to, among other matters, US exercise tax on insurance premiums, taxation of post cessation income of a branch, application of the arm’s length principal, REIT taxation, stock option taxation, definition of regular trading on an exchange, activities of a partnership and tokumei kumiai and other treaty related tax issues.
This record of discussions of 19 May 2004 notes that the consolidated financial statements of a group are examined when considering the application of article 11(3)(c)(iv), which allows qualifying entities more than 50 per cent of whose liabilities are raised from debt issued on capital markets to claim a reduced rate of withholding tax.
The website of the US Congress Joint Committee on Taxation (‘JCT’) also includes a PDF of the explanation of the JCT to the Committee on Foreign Relations of the US Senate in February 2004 proposing the adoption of the New Treaty. This is an interesting document in that, while it covers some of the same ground as the Technical Explanation above, it includes in its review of the terms of the New Treaty more context around the US domestic tax law and the treaty along with other matters. For example, on page 55 the document notes that while US domestic law does not recognise transactions between branch and head office, the New Treaty can give them effect under certain circumstances.
New Treaty claim forms
The Japanese National Tax Authority web site includes a page with links to PDFs of the Treaty Forms (those numbered in the table on the left between 250 and 274). With the exception of the limitations of benefits forms these are also used for claiming benefits under tax treaties other than the US/Japan treaty.
Limitation of benefits, fiscal transparency
Different Treaty Forms are used for different sources of income, but regardless of the source of income it is often necessary to complete a “Limitation of Benefits” or “LOB” form confirming that the US recipient of the income is entitled to Treat Benefits. Also where income is received through entities, such as US LLCs, that may be treated as corporations for Japanese tax purposes but as fiscally transparent entities for US tax purposes it is generally necessary to prove that the entities concerned are fiscally transparent as well as evidencing their ownership through to the non fiscally transparent US entities that are ultimately entitled to Treaty Benefits. Corresponding proof of tax status is also required for entities that are fiscally transparent for Japanese tax purposes but which are not fiscally transparent for US tax purposes.
The US Limitation of Benefits form is here. Note that there is a limitation of benefits form specific to different countries whose treaties with Japan have limitation of benefits article. Besides the US LOB Treaty Form there are Treaty Forms for England, France and Australia. If a person does not qualify for Treaty Benefits when looking at the criteria specified in the limitation of benefits article it is still possible for that person to apply for a Japanese tax office determination allowing such qualification if the person claiming can show that “…the conduct of [their] operations, do not have as their principal purpose the obtaining of benefits under the convention…”. The form required for such a claim is here.
Members of foreign entity, – this form is used to show the members or partners etc of entities that are fiscally transparent for Japanese tax purposes.
Different sources of income
- Dividends- note that for this and other sources of income the recipient of the income completes and signs the form but that if this recipient is fiscally transparent for Japanese tax purposes then the entity member form (link above) must be completed by the fiscally transparent entity and the limitation of benefits form by the entity on whom the income is ultimately taxed (and who is normally also required to file a residence certificate).
- Income subject to taxation on filing of a tax return (this can include certain Japan source income even for a company that does not have a permanent establishment in Japan. It would, for example, be filed by a US company selling shares in a Japanese company in which it held a 25% or greater interest under some circumstances).
- Partnership income