TP and Pillar 2 Requirements for Japanese Entities of MNEs

In recent years, international efforts to prevent tax avoidance by multinational enterprises (MNEs) have been strengthened.

In this context, there are broadly two main types of documentation filing obligations that the Japanese entities (Japanese subsidiaries, branches, etc.) of MNEs must comply with under Japanese tax law:

• Transfer Pricing (TP) related documentation requirements (BEPS Action 13)
• Global Minimum Tax (Pillar 2) related documentation requirements

The TP-related documentation system was introduced in the 2016 tax reform, while the Pillar 2-related documentation system was phased in through the 2023-2025 tax reforms.

Both target “huge corporate groups operating globally,” but they differ in the size of companies the requirement is applicable to and the administrative burden placed on Japanese bases.

This article provides an overview of how to determine the filing obligations for both systems and the documents to be submitted.

1. Overview and Background of the Systems

TP-related obligations (BEPS Action 13)

This rule requires submitting a “Country-by-Country Report (CbCR)” and a “Master File.”

The purpose is to enable tax authorities in each country to understand and analyze the global income allocation, tax payment status, and outline of economic activities of MNE groups.

Global Minimum Tax obligations (Pillar 2)

Under Japanese tax law, this obligation requires providing a “Report on Group Global Minimum Tax Amount, etc.” and a “Report on Group Domestic Minimum Tax Amount, etc.”

This corresponds to the Global Minimum Tax (Pillar 2) agreed upon by the OECD, and was introduced for the purpose of imposing a top-up tax in the jurisdiction of the parent company, etc., when the effective tax rate in the jurisdiction where the subsidiary, etc., is located is less than the minimum rate (15%).

In general, under the Global Minimum Tax information reporting system (the GloBE Information Return, or GIR), if the OECD-prescribed format is completed, it is possible to handle both reports simultaneously, which Japanese tax law divides due to differences in their introduction timing.

2. Application Criteria (Target Group Size)

These two requirements do not apply to all MNEs. Whether a group is subject to them depends on the MNE group’s global consolidated revenue as follows:

• TP-related (CbCR / Master File):
  Applies when the total revenue in the consolidated fiscal year “immediately preceding” the target consolidated fiscal year is JPY 100 billion or more.
• Pillar 2-related (GloBE Information Return):
  Applies to large MNE groups whose total revenue is 750 million EUR or more (in Japanese Yen equivalent) in at least two of the four target fiscal years immediately preceding the target fiscal year.

3. Required Actions and Obligations for Japanese Entities of MNEs

As explained below, even if the Ultimate Parent Entity (UPE) of the MNE group is not located in Japan, the reporting obligations may be imposed on its Japanese entities. For both systems, the reporting documents cover comprehensive financial data and organizational structures of the entire group operating worldwide.

Therefore, it is practically impossible for the Japanese entities to prepare them on their own, and it is a practical premise that the group’s UPE centralizes and prepares the information.

Whether the Japanese entities are directly obligated to submit the documents to the Japanese tax authority depends on the status of information exchange agreements between Japan and the country where the UPE is located.

(1) TP-related

• Country-by-Country Report (CbCR)
  If an “information exchange provision under a tax treaty” exists between Japan and the country of residence of the MNE’s UPE, the UPE will generally submit it to the local tax authority in its jurisdiction, so the Japanese entities do not need to submit the CbCR directly. However, even in this case, Japanese entities need to submit a document called the “Notification of Ultimate Parent Entity” to the Japanese tax authority by the end of the target consolidated fiscal year.
  On the other hand, if no information exchange provision exists, etc., Japanese entities must obtain the CbCR and submit it to the Japanese tax authority within 1 year of the end of the target consolidated fiscal year.
• Master File
  Unlike the CbCR, the submission method does not change depending on whether an information exchange provision exists under the tax treaty. As a general rule, Japanese entities must submit the Master File directly to the Japanese tax authority within 1 year from the day following the end of each ultimate parent fiscal year.

(2) Pillar 2-related

If an automatic exchange agreement (“Qualifying Competent Authority Agreement” (QCAA)) exists between the tax authority of the jurisdiction of the MNE’s UPE and the Japanese authority, the Japanese entities are exempt from the direct obligation to submit the GloBE Information Return directly to the Japanese tax authority. However, in this case, the “Notification of Ultimate Parent Entity” must be submitted instead within 1 year and 3 months (within 1 year and 6 months for the first submission) from the day following the end of the target fiscal year.

On the other hand, if a QCAA does not exist, as a general rule, the Japanese entities will be required to provide the information to the Japanese tax authority by the above deadlines.

(3) Key Considerations

It should be noted that the “information exchange provision under a tax treaty” referred to in the TP-related reporting obligation and the “Qualifying Competent Authority Agreement (QCAA)” in the Pillar 2-related reporting obligation are considered to be different. Therefore, even if an information-exchange provision exists under a tax treaty, the Japanese entities are not immediately exempt from the obligation to directly submit Pillar 2-related information to the Japanese tax authorities.

You can check the list of countries or regions with which Japan has concluded the QCAA on the National Tax Agency website below.

National Tax Agency website:
Countries and Regions Subject to the Automatic Exchange of GIR Information with Japan

Also, although a notification called the “Notification of Ultimate Parent Entity” exists in both the TP-related and Pillar 2-related systems, the names are the same, but the forms to be submitted are different.

4. Summary

Based on the above, the actions that Japanese entities should take under Japanese tax law are summarized in the tables below.

【TP-related Filing Requirements】

Criteria: Total revenue in the consolidated fiscal year immediately preceding the target consolidated fiscal year is JPY 100 billion or more.

【Pillar 2-related Filing Requirements】

Criteria: Total revenue is EUR 750 million or more (in JPY equivalent) in at least two of the four target fiscal years immediately preceding the target fiscal year.

* Please note that the “information exchange provision under a tax treaty” and the “Qualifying Competent Authority Agreement (QCAA)” are considered not to be the same.