Japanese transfer pricing: a note

Abstract

This paper examines the issue of transfer pricing with particular reference to Japanese multinational companies against the background of recent press reports alleging the misuse of this pricing mechanism to locate artificially group profits in countries where a tax advantage may be obtained. The chief allegation seems to be that companies set out deliberately to engineer a pricing structure which results in a sales l purchase price which is artificially lowlhigh for goods which, typically, are traded across one or more national boundaries. This is in practice difficult to prove, and tax authorities normally seek to make adjustments based on attempts to establish a 'fair' or 'arm's length' price for goods for which an independent market seldom exists. The assumption generally made is that multinationals operate similarly in respect of transfer pricing, namely to the disadvantage of host countries in which they operate. It is the contention of this paper that this blanket assumption does not hold true, especially in the instance of Japanese multinationals, and it is argued that this can be demonstrated clearly if the pricing structures operated by a typical Japanese firm are examined in the light of the differing costing principles obtaining and the different business culture.