Asia-Pacific Transfer Pricing Handbook

Chapter Eighteen

Japanese Profit Split Transfer Pricing Methods

The Japanese taxing provisions provide a strong preference to the traditional transfer pricing transaction methods. Nevertheless, despite that strong preference, the Japanese transfer pricing provisions in fact favor the profit split method when the enterprise is unable to apply the traditional transfer pricing transaction methods. We consider seven profit split transfer pricing examples, a significant percentage of the 26 examples overall:

1. Case 16: Applying the Profit Split Method to a Series of Foreign-Related Transactions

2. Case 17: Excluding Transactions from the Profit Split Method

3. Case 18: Calculation of the Profit to Be Split

4. Case 19: Differences in Labor Costs Impact the Residual Profit Split Method

5. Case 20: Treatment of Market Fluctuations

6. Case 21: Calculation of Basic Profit

7. Case 22: Factors for Splitting the Residual Profit

CASE 16: APPLYING THE PROFIT SPLIT METHOD TO A SERIES OF FOREIGN-RELATED TRANSACTIONS

In the case at hand, the business undertakes a series of foreign-related transaction situations. The taxpayer determines that it is appropriate to aggregate multiple foreign-related persons when it applies the profit split method.

Schematic of the Business Relationships

Here is the fact pattern that explains the business relationships:

• Japanese Corporation P purchases raw materials.
• Japanese Corporation P manufactures Product A and Product B.
• Japanese Corporation P sells Product ...