Tax reform 2018 responding to BEPS project
Tax reform 2018 will change the definition of a permanent establishment (PE) to clarify that a foreign enterprise should be treated as having a PE in Japan if there is a dependent agent who concludes the sales under commissionaire arrangements. The change of PE definition is part of effort to line with BEPS project, which had been discussing artificial avoidance of PE status and issued in Oct 2015 BEPS Final Report which proposed commissionaire arrangements should be included in PE definition.
No PE, No Taxation rule
It is a common standard of international taxation that profits of a foreign enterprise will be taxable only if the enterprise carries on business through a PE. Foreign branches are typically identified as PE. If you hire an agent instead of opening a physical office, you can carry on your business in the same way you have the office and avoid PE taxation. To prevent this kind of tax avoidance, there is Agent PE Rule, under which an agent who is acting for a foreign enterprise is deemed PE except for agents of an independent status who are acting in the ordinary course of their business.
What’s Commissionaire arrangement?
Normally, an agent concludes contracts in the name of the foreign enterprise, and receive agent fees. Under so-called commissionaire arrangements, an agent sells products in its own name but on behalf of a foreign enterprise that is the owner of these products. Commissionaire arrangement falls under Commission merchant’s transactions stipulated in the Japanese Commercial Code (Code 551).
Commissionaire arrangement used for tax avoidance