Asia-Pacific Transfer Pricing Handbook

Chapter Sixteen

Selecting the Arm’s Length Price in Japan

In Japan, the taxpayer’s selection of the arm’s length price is an important facet of its transfer pricing regime. The arm’s length price selection in Japan is particularly onerous because the transfer pricing provisions contain two specific factors:

1. The complexity of Japan’s transfer pricing regime itself, the most complex across Organisation for Economic Co-operation and Development (OECD) and non-OECD members, except for the United States, as Japan places a high priority on method selection

2. The Japanese transfer pricing method selection criteria, which delineate three broad transaction categories:

a. The traditional transaction methods themselves

b. Methods that are “equivalent to” the traditional transaction methods

c. Methods that are “equivalent to” the methods that are “consistent with” the traditional transaction methods

BACKGROUND

The National Tax Agency (NTA) of Japan issued its Transfer Pricing Administrative Guidelines in 2001 and amended these Administrative Guidelines to reflect 2007 litigation. The NTA, to supplement these Administrative Transfer Pricing Guidelines, issued its Reference Case Studies on the Application of Transfer Pricing Taxation (hereafter Reference Case Studies). These “cases,” or, more technically “examples,” provide an analysis of many transfer pricing issues a multinational taxpayer might face, 26 examples in all:

1. Section 1—Selection of the method of calculation of arm’s length ...