Introduction of the Authorised OECD Approach into Japanese Domestic Law

Abstract

In March 2014, Japan introduced into its domestic law the Authorised OECD Approach (AOA), which changed the way in which profits attributable to a permanent establishment (PE) are calculated. In so doing, the 2014 tax reform comprehensively modernized Japan’ s long-standing statutory provisions with regard to taxing the international income of multinational enterprises (MNEs). In fact, the AOA is only one of the important features of the 2014 tax reform.

This article presents the background to the 2014 tax reform, summarizes its core elements and discusses its implications. It is argued that Japan took advantage of the new article 7 of the 2010 OECD Model Tax Treaty to meet the old challenges which had existed for a long time. In 1962, the source rule and taxation method in respect of foreign corporations with a PE were established in Japan. These have remained unchanged for more than 50 years. Legislative changes were considered necessary long before the new article 7 of the 2010 OECD Model Tax Treaty. The significance of the 2014 reform is that it took the opportunity to respond to the change to the OECD Model and successfully resolved the impasse that had long prevailed. The net benefits of the novel features of the 2014 reform must, however, be carefully evaluated.

The scope of this article is intentionally limited in two respects. First, it focuses on the taxation of corporations, although the 2014 tax reform covers the international income taxation of both corporations and individuals. Second, this article discusses the taxation of foreign corporations, although the 2014 tax reform affects the taxation of non-resident entities doing business in Japan as well as the foreign tax credit for resident entities doing business abroad.

Keywords: international taxation, tax treaty, permanent establishment, AOA

JEL Classification: K34