Japan’s Directive on Transfer Pricing Operations
Japan’s National Tax Agency (NTA) has issued transfer pricing regulations in two parts:
- The regulations - the Commissioner’s Directive on the Operation of Transfer Pricing
- The examples - the Reference Case Studies on the Application of Transfer Pricing Taxation.
- Japanese transfer pricing regulations are complex compared with transfer pricing regulations in most other countries.
Japan’s National Tax Agency amended its Commissioner’s Directive on the Operation of Transfer Pricing on June 25, 2007 that are related to Article 66-4 of the Act on Special Measures Concerning Taxation, i.e., the “Special Taxation Measures of Transactions between Corporations and Foreign-related persons.” The Guidelines and examples cover different facets of transfer pricing. For example:
- APA procedural issues see Guidelines
- Cost contribution agreements See Guidelines
- Residual profit split see Examples
The Japanese National Tax Agency organizes the Japanese Administrative Transfer Pricing Guidelines in the following manner:
- Chapter 1. Definitions and Basic Policies
- Chapter 2. Examination Process
- Chapter 3. Arm’s Length Prices
- Chapter 4. Treatment of Foreign Transferred Income
- Chapter 5. Advance Pricing Arrangements (APA)
An enterprise should be aware that transfer pricing selection in Japan is formalistic, putting initial credence on the traditional transfer pricing methods and the credibility of the data. The net effect is often for the enterprise or the NTA to apply a profit split transfer pricing method. The enterprise should be aware that the Japanese transfer pricing provisions would apply the profit split method in situations in which the government counter-party would not apply the profit split method.