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Economy

US pushes Japan Inc. to pay taxes on IP profit from America

Policy targets gains from data and brand value generated locally for multinationals

The IRS has indicated to such foreign companies as Toyota that they will eventually need to rework their tax obligations for U.S. subsidiaries to reflect the contribution of intangible assets in America.   © Reuters

TOKYO -- U.S. authorities are pressing foreign companies such as Toyota Motor to pay taxes on profit from data and brand value gained in America, aiming to bring in tax revenue that would otherwise go abroad.

The Internal Revenue Service in February 2019 announced a new policy stating that multinationals should calculate the value of their intangible assets in the U.S., such as intellectual property, and book profits earned from them in America. It set out a method for calculating these earnings.

The agency began indicating to companies like Toyota around mid-2019 that they will eventually need to rework their tax obligations for U.S. subsidiaries.

At Japanese businesses, matters related to intellectual property, such as research and development and customer data analysis, often are entirely handled by the head office rather than subsidiaries. Profits from these assets -- even those generated abroad -- are booked there, and taxes on them are paid in Japan.

But this practice may need to change under the new U.S. tax policy.

The view of the IRS is that multinationals need to recognize American taxpayers' contributions to these profits, such as supplying personal data or adding to a brand's name recognition. Japanese businesses are being asked to put an appropriate dollar figure on these contributions.

"We don't know whether there will be an immediate impact on the tax burdens of Japanese companies, so for the time being, we'll keep an eye on how the IRS applies the rule," said a source familiar with the situation at Japan's National Tax Agency.

The U.S. policy shares some similarities with a digital taxation proposal under discussion by the Organization for Economic Cooperation and Development. Both are based on the idea that companies gain added value not only from R&D in their home countries, but also from markets that generate large troves of customer data, and that this should be taxed accordingly.

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