The Australia-Japan tax treaty signed by Australian Foreign Minister, Stephen Smith, in Japan yesterday is a long overdue overhaul that will be a boon for businesses on both sides, according to KPMG Australia Tax partner, Rick Asquini.

“As Japan is a major source of foreign investment in Australia, the improvements in this new agreement around withholding taxes on dividends, interest and royalties will be a very positive step towards maintaining and attracting further investment. We will see more Japanese yen flow into Australia.

“Until now we’ve been operating under an agreement established nearly 40 years ago, business has changed dramatically over this time and this new treaty reflects the strength of the trading relationship.

“I would strongly encourage all Australian companies operating in Japan and Japanese companies here to review how they are financing their operations and assess their dividend and royalty arrangements immediately in light of these changes,” he said.

Mr Asquini said the energy and natural resources sector may face a shake up in light of the short timeframe in which Japanese companies may engage in the exploration of natural resources tax-free.

KPMG’s Transfer Pricing Partner, Anthony Seve said that Japanese companies in Australia would be relieved by the newly established time limit on transfer pricing reviews.

“In the past, there was no time limit on these reviews and that meant there was a high degree of uncertainty and administrative burden for many companies. Now that uncertainty has been removed, it will help Japanese companies to better manage their transfer pricing risk in a more practical and efficient manner,” said Mr Seve.

In addition, through the interpretative notes of the treaty, a clear intention is stated as to the application of OECD principles and methods to resolve Australia/Japan transfer pricing cases.

“It is hoped that this affirmation of approach between Australia and Japan will assist in resolving some difficult transfer pricing cases that are currently under examination,” said Mr Seve.

This report from Ernst & Young covers 850 MNEs in 24 countries, and summarizes their transfer pricing practices, perceptions, and audit experiences, and provides insight into how they are dealing with the economic, regulatory, and fiscal changes taking place around the world.Since 1995, Ernst & Young has surveyed MNEs on international tax matters. The scope of our biennial transfer pricing research reflects the growing number of countries that devote attention to transfer pricing through increased enforcement and regulatory activities, as well as the diversity of transfer pricing issues facing MNEs.

Download the “2007-2008 Global Transfer Pricing Survey: Global Transfer Pricing Trends, Practices and Analyses” (pdf, 1.2mb) for findings from each country, compared with regional and global results. Also read analysis of issues including documentation and controversy risk management practices, convergence of customs and transfer pricing, the impact of financial reporting requirements, and audit experiences, as well as insight into industry sectors.

Key findings from the report include:

• Forty percent of all respondents identified transfer pricing as their most important tax issue
• Over half (52%) of all respondents have undergone a transfer pricing examination since 2003, with 27% resulting in adjustments by tax authorities
• Eighty-seven percent of all respondents consider transfer pricing a risk issue in relation to managing financial statement risk
• Sixty-five percent of respondents from parent MNEs believe transfer pricing documentation is more important today than two years ago. But only one-third of MNEs prepare transfer pricing documentation on a concurrent, globally coordinated basis.