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Outline of Tax Convention

A tax convention contributes to promoting investment and economic exchanges between two countries through providing legal stability in taxation, eliminating international double taxation, and preventing tax evasion and avoidance.

As the international standards for a tax convention, there is the OECD Model Tax Convention. This is used as a model when countries, mainly member countries of the OECD, conclude a tax convention with other countries. Japan, a member country of the OECD, adopts provisions in line with this model in general.

【Major contents of the OECD Model Tax Convention】

  •  Providing legal stability in taxation and eliminating international double taxation

    • Clarification of the scope of taxation in the source country (where the income arises)

      --  With respect to business profits, the profits of an enterprise may be taxed but only so much of them as is resulting from the business activities of branches, etc.(permanent establishments) situated in the source country.

      --  With respect to investment income (dividends, interest and royalties), the maximum rate of withholding tax (including exemption) in the source country is provided.

    • Methods to eliminate international double taxation in the residence country

      --  Foreign income exemption method or foreign tax credit method

    • Resolution of taxation not in accordance with the Convention by mutual agreement procedure between tax authorities (including arbitration proceedings)

  •  Measures for preventing tax evasion and avoidance

    • Exchange of information on taxpayers (including bank accounts information) between tax authorities

    • Mutual assistance in the collection of unpaid taxes

    (Reference) Major flow up to concluding a tax convention (under the jurisdiction of the Ministry of Foreign Affairs)

    Initiation of negotiations → Agreement in principle → Signing → Diet approval (discussed at the Committee on Foreign Affairs of the House of Representatives and at the Committee on Foreign Affairs and Defense of the House of Councillors) → Exchange of diplomatic notes → Promulgation → Effectuation

    (Note) Prior to signing, submission to the Diet, exchange of diplomatic notes and promulgation, decisions shall be made at a Cabinet meeting upon a request from the Ministry of Foreign Affairs.