Recent Developments in Japan’s Anti-avoidance Regulations (AAR) on Cross-border Taxation

Abstract

This report examines recent developments in Japan’s Anti-avoidance Regulation (AAR) on cross-border taxation. This topic has attracted practitioners’ substantial attention, mainly because the PPT (principal purpose test) doctrine was included in the Multilateral Instrument (MLI) signed by the Japanese government (2016). Looking at the legislative history of Japanese domestic tax law, it is clear that Japan has focused on special anti-avoidance regulations (SAARs) in addition to several targeted anti-avoidance regulations (TAARs) applicable in some business segments. So far, Japan has not introduced a domestic general anti-avoidance regulation (GAAR) like that in the German AO, section 42. Judges in international tax planning cases have sometimes delivered interpretations of treaty or domestic law without depending on the PPTstyle theory. This report examines some important court cases to identify the framework for interpretation of treaties and related domestic rules. After briefly exploring those issues, this report recommends (1) referring to foreign case law on PPT interpretation and (2) introducing a variety of administrative guidance to provide predictability to taxpayers.