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We thank you for the opportunity to comment on the Public Consultation Document "Revisions to Chapter VII of the OECD Transfer Pricing Guidelines: Special considerations for intra-group services".

This document is submitted by Keidanren's Business Infrastructure Bureau and is based on the discussions held by the Subcommittee of the Keidanren Committee on Taxation^#1 and the International Tax Research Project of the Keidanren Public Policy Institute.^#2

This public consultation document seeks to expand additional guidance and specific examples on issues that are difficult to judge in practice (such as drawing the boundary between shareholder activities and duplicative activities, and the required evidence). We welcome the direction of this document from the perspective of improving predictability in practice. We understand that it aligns the provisions of Chapter VII of the Transfer Pricing Guidelines with the foundational principles of Chapters I through III, and supplements and clarifies the existing rules.

On the other hand, we propose that consideration be given so that the detailed provisions do not lead to an excessive increase in the administrative burden or aggressive tax enforcement that excessively demands evidentiary backing. In addition, it is desirable that the provisions and their enforcement take care not to create a double standard with the provisions of domestic laws in each jurisdiction, such as the recognition of donations in Japan.

From this perspective, we submit the following comments on each issue.

1. Benefit test

(1) Application of the benefit test

Although explanations and examples regarding the benefit test have been expanded in the Public Consultation Document, if individual benefit tests and the retention of evidence are required for each beneficiary entity, there is a concern that the practical burden will become excessive from the perspective of information asymmetry and cost-benefit, given the decentralization of head office functions in multinational enterprises. In applying the benefit test, the standard would ideally be at a level that can be reasonably explained utilizing normal business documents possessed by companies and existing management information, without excessively relying on external advisors or large-scale analyses. Furthermore, the uniform clarification of test criteria risks impairing the flexibility of reasonable explanations by taxpayers, conversely leading to an increased practical burden; thus, the guidance is expected to contribute to the simplification of practice in a direction that allows for flexible explanations in line with business realities.

In addition, when a global company comprehensively provides various management services to its subsidiaries, it is difficult in practice to perform individual allocation calculations for each service and each recipient. Therefore, if the total costs of all services are comprehensively allocated using reasonable allocation keys, and it can be reasonably explained that this roughly corresponds to the benefits received, such comprehensive allocation could be permitted.

It is desirable to deter aggressive tax enforcement, such as deeming the benefit test unmet simply because an entity is in a loss-making position. From this perspective, we suggest that the OECD promote awareness of the concepts in these Guidelines not only among OECD member countries but also among countries negotiating membership and non-member jurisdictions.

(2) Treatment when expected benefits do not materialize

We appreciate the clarification that, when a benefit reasonably expected at the time the activity was performed does not materialize ex post, this fact alone does not necessarily lead to the conclusion that the benefit test is not met.

On the other hand, even in cases where a project, such as the rollout of an ERP system (e.g., paragraph 7.17), is ultimately unimplemented or unachieved, the "prior expectations" formed at the time the activity is performed would inherently incorporate contractual rights and obligations (such as the developer's obligation to provide deliverables or agreements on cost bearing) and risk allocations. In addition, in cases where the failure to realize the expected benefit is exclusively due to reasons attributable to the service provider, such as unilateral negligence, an independent recipient would not necessarily pay the consideration, leaving room to interpret that a charge is not always required. Therefore, we respectfully suggest that the guidelines be supplemented and clarified in the examples to indicate that the existence of a benefit can be judged based on whether an independent enterprise would have had the intention to pay the consideration, in light of not only the existence of prior expectations but also specific factual circumstances such as contractual relations (payment terms and risk allocation) to be incorporated into prior expectations and the causes of non-realization.

(3) Further clarification between direct benefit and incidental benefits

Regarding the distinction between direct benefits and incidental benefits, the proposed standard of whether an independent third party would bear the costs itself or perform the activity itself seems subjective; thus, it is desirable to establish more objective criteria. In addition, we propose the addition of specific examples where cost sharing is permitted even for indirect benefits.

2. Boundary between shareholder activities and intra-group services (related to Box 1)

(1) Clarification of boundary examples between shareholder activities and IGS (intra-group services)

What is debated in practice is not typical IGS, but cases where the boundary between typical group management activities by a parent company—such as the formulation of group strategy, management monitoring, and information sharing—and IGS is unclear. Therefore, we suggest further enhancement of guidance on boundary examples, particularly regarding activities such as "support," "advice," "control," and "coordination," clarifying what activities do not fall under IGS and stating that the mere existence of involvement as part of the parent company's normal corporate activities would not immediately be evaluated as taxable IGS. At the same time, drawing these boundaries is highly case-specific, and if uniform categorization or identification/allocation rules are introduced, there are concerns that this might unnecessarily restrict the practical operation of group services and impair the flexibility of reasonable explanations. To prevent additional guidance from being formally used by some tax authorities as a basis for aggressively asserting IGS applicability, thereby increasing transfer pricing disputes and double taxation risks, it is also suggested to clearly state that taxpayers' reasonable explanations based on factual circumstances will be respected.

Also, parent company activities related to M&A via paper companies (decision-making, due diligence, PMI, etc.) involve a mix of aspects as shareholder activities and aspects as subsidiary support services, so we propose the addition of specific examples that can serve as a reference for judgment. Furthermore, regarding shareholder activity costs that are not recognized as having compensatory value in the affiliate's country and do not meet the requirements for tax deductibility, the guidelines would ideally include a statement allowing for their deductibility on the shareholder's side, to prevent situations where they cannot be deducted in either country. In addition, activities for which an independent enterprise would not voluntarily request and pay consideration—such as when a shareholder unilaterally imposes a strategy or rule against the subsidiary's intentions—are suggested to be explicitly excluded from the recovery of service fees in the guidelines, even if the subsidiary ultimately derives a benefit.

To further clarify the distinction between shareholder activities and stewardship activities, we suggest additions regarding the approach to cost sharing for activities that may benefit both the shareholder and the operating subsidiary (strategy support, performance monitoring, business reorganization, M&A support, etc.), the approach to bearing costs related to global tax reporting such as Pillar Two, QDMTT, and Country-by-Country Reports (CbCR), and the approach to cost bearing for governance and subsidiary management expenses incurred by regional headquarters or intermediate holding companies (i.e., whether the holding company, ultimate parent, or operating company should bear them).

(2) Clarification of specific activities relating to corporate governance of the MNE as a whole

It is desirable to clarify that paragraph 7.26(e) "Ancillary activities to the corporate governance of the MNE as a whole" may include the following activities:

• Formulation of strategies, policies, and rules for the entire group
• Policy formulation and data collection on a global basis triggered by regulatory compliance in specific regions like the EU at financial institutions, etc. (cases where it is difficult to judge the benefit received by entities other than those directly subject to the regulation)
• Formulation of group-wide sustainability (ESG) strategies, promotion of disclosure, and monitoring activities
• Evaluation of benefits and cost-sharing criteria when sharing costs between the parent and group companies in global cybersecurity monitoring activities
• Activities to unify the corporate image, such as unifying the design of group companies' websites
• Internal audits aimed at strengthening group governance
• "AI governance activities" such as the formulation of AI usage policies and AI risk management accompanying the expanded use of generative AI

Additionally, regarding the centralized services provided under head office leadership relating to the governance of the entire group mentioned above, it would be useful to clarify the criteria for whether a benefit is recognized even if subsidiaries, etc. do not individually request them. In particular, for head office-perspective services for the entire group, it would be useful to clarify what degree of benefit is required at the local level receiving the charge, whether a request from the subsidiary using the service is necessary, or how services designated or mandated by the head office as a group policy should be evaluated in the benefit test.

3. Determining the arm's length charge and other conditions of intra-group services

(1) Selection of allocation keys for specific intra-group services (Questions on p.18)

Regarding the selection of allocation keys, practical rationality and operability would ideally be considered, and there are cases where single indicators such as headcount or number of users do not necessarily properly reflect the benefits or input man-hours (such as ERP implementation or regulatory compliance). Therefore, rather than recommending a single allocation key for a specific service, it is desirable to ensure the flexibility for taxpayers to choose from multiple reasonable allocation methods in light of business realities, including those taking into account usage fees and frequency of use (number of hours used, man-hours, etc.). Excessively expanding examples of allocation keys in guidance, etc., is highly likely to invite operations by tax authorities that demand their formal application, thereby impairing practical flexibility. Therefore, sufficient care is expected to be taken to prevent such formalistic operations. Furthermore, if individualization and accurate grasping of allocation keys are excessively demanded, it will result in a significant increase in the burden from the perspective of constructing and operating related internal controls and responding to audits.

In addition, in the case of providing comprehensive management services, taking into account corporate practicality and operability, companies could be allowed to apply allocation keys already utilized in practice. For example, in practice, sales are generally used as an allocation key in many cases, and headcount is used for IT and human resource services.

Regarding allocation keys during organizational restructuring, retroactive adjustments are basically difficult in practice. Also, in cases where head office-led common system expenses are proportionally billed to each company using an indirect-charge approach, clarification is useful regarding the treatment when companies or businesses subject to billing leave the group due to organizational restructuring, resulting in a decrease in users. Regarding the incremental costs (unallocated costs) that arise in situations where functions remain the same and the total cost of the system does not decrease, in practice there are cases where the head office bears them and cases where increased charges are billed to the remaining companies; we suggest that the guidelines indicate the approach to the benefit test and transfer pricing (burden amount) for each case.

(2) Treatment of stock or share-based compensation (Questions on p.20)

Regarding whether to include share-based compensation in the cost base when calculating the cost of service provision for transfer pricing purposes, the treatment currently varies by country, raising concerns that the cost base could change depending on the timing of the grantee's exercise of rights. We also understand that this issue was discussed at the OECD in 2004 without reaching a single conclusion to date.

For this reason, for the time being, it is desirable for the OECD to take the lead in conducting a survey on the treatment status by tax authorities in each country and clarify the situation by publishing the results. In the future, to avoid practical complexity, it might be beneficial to develop additional guidance, such as allowing calculations using accounting expenses incurred in each year.

(3) Other considerations regarding the charge for group services

Regarding the charge for group services, many companies operate by agreeing with tax authorities on arm's length mark-ups to be applied to each activity category through existing APAs (Advance Pricing Arrangements) or advance rulings. Consideration would ideally be given so that the contents of this draft remain consistent with the mark-up levels within the arm's length range agreed upon in existing APAs and rulings.

Also, we propose the addition of real-world examples (examples of Pass-through Costs and proxy payment schemes) that contribute to judging whether a mark-up is necessary, such as when a regional centralized service center advances third-party expenses or conducts centralized purchasing on behalf of group companies.

Regarding the indirect-charge approach (paragraph 7.49), since it is assumed that double taxation risks will increase, tax authorities are expected to give sufficient consideration in enforcement so as not to cause double taxation.

4. Documentation

To ensure that the detailing of documentation provisions does not lead to an excessive increase in administrative burdens, we propose consideration such as allowing simplified treatment or explanations via internal approval documents for "an explanation of the expected benefit resulting from the activities performed." In addition, when the target transactions cover a wide range, preparing and providing documents related to contemporaneous evidence becomes an excessive administrative burden, so the target of contemporaneous evidence is suggested to be limited to transactions exceeding the same materiality thresholds for contemporaneous documentation under each country's tax laws. Additionally, to avoid incurring excessive compliance burdens compared to tax risks, we propose that simplified documentation be permitted without demanding excessive benefit tests for low-risk, small-amount transactions, such as when IGS is less than a certain percentage of the service recipient's total SGA.

In Japan, the 2026 tax reform expanded the scope of documentation by establishing "special provisions for the preservation of documents relating to transactions between corporate groups," but combined with the introduction of global minimum taxation, etc., the practical burden of documentation that must be handled by the company as a whole has become extremely heavy. Under the coordination of each country, considerations would ideally proceed in the direction of streamlining overlapping documents and reducing the practical burden. In addition, for companies with fiscal years ending in March, which is mainstream for Japanese companies, it is necessary to finalize financial statements and calculate taxes within just a few months after the end of the fiscal year. Because detailed calculations and true-up practices within a tight closing schedule are extremely difficult, sufficient preparation periods could be ensured, such as transitional measures during the transition period or phased application.

Regarding the relationship with documentation requirements, we respectfully suggest the provision of specific examples of materials necessary to prove Reasonably Expected Benefits at the time of receiving the service (business plans, budgets, project proposals, etc.) and the clarification of the respective accountability of the service provider and the beneficiary.

5. Low value-adding intra-group services

When applying the simplified approach in the benefit test, despite the guidance that tax administrations should generally refrain from reviewing or challenging the benefit test, there remains a concern that local tax authorities may deny deductibility on the grounds of "no identification of individual acts." When applying the updated guidelines resulting from this revision, we respectfully suggest that countries ensure their enforcement practices appropriately reflect the underlying intent of the revision.

Also, regarding the examples of low value-adding services (paragraph 7.80), in recent years there has been an increase in responses to situations that could have a material impact on the core business, such as the provision of large-scale and sophisticated DX infrastructure to group companies, the increase in complex global transactions, and active business reorganizations. While the examples in the current draft are almost identical to the current guidelines, we suggest adding a statement to the introductory text clarifying that "Among the following services, those exceeding general and routine practices will require individual calculation of the charge."

In addition, we highly welcome the statement in paragraph 7.96 of the public consultation document that "tax administrations levying withholding tax are encouraged to apply it only to the amount of that profit element or mark-up."

6. Other issues

Regarding "on call services" (paragraph 7.37, etc.), ambiguity remains in the scope of the term; for example, in relation to "availability of such services," does a parent company's guarantee for a subsidiary's borrowing also fall under on-call services?

Also, in the current guidelines, on-call services are placed under "B.1 Determining whether intra-group services have been rendered," but in this draft, the provisions are placed in the same section alongside items such as shareholder activities, duplication, and incidental benefits that do not meet the benefit test. We suggest that the placement of "on call services" be reorganized.