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Comment and analysis


‘From my perspective’

Junko Yamato

I think that many issues and methodologies are common to both jurisdictions, such as issues relating to the application and implementation of the profit split method, other practical issues, and issues arising from the global financial crisis. The impact of the crisis on transfer pricing differs widely among clients, and depends not so much on the differences between jurisdictions but may be more on the differences between businesses and positions in the markets.

Another difference in risk management arises because of the documentation requirements in the US. As a result of these regulations, clients are generally more prepared for an audit, as they go through an annual “review” process (at least for their material transactions). In Japan however, there is no such documentation requirement, so as a result I think that type of “house cleaning” may not be done on a systematic basis.

However, I have found that the approaches to resolving issues are different. For example, APAs are very common in Japan, and we see APAs being used as a viable option to obtain certainty. On the other hand, the number of APAs for Financial Services cases in the US is still very small (at least based on the data provided in the IRS’s annual APA report). I also think the preference for bilateral (or trilateral) APAs in Japan is generally driven by the desire to obtain assurance of the treatment under OECD rules.

On the issue of documentation, it seems that the 2010 Japan Tax Reform might speak to documentation requirements in Japan. Do you think this will bring Japan closer to the US model of documentation?

We will have to wait for more details relating to the Tax Reform, as the preliminary statement released on December 22 contained little explanation as to transfer pricing changes; curiously, in comparison to the reform relating to other tax legislation, such as tax havens. There were two transfer pricing items identified in the proposed Reform: one of which was the role of documentation

Junko Yamato is a Financial Services Transfer Pricing Partner with PricewaterhouseCoopers New York, and is currently on a two year tour with the Transfer Pricing Consulting Group at PricewaterhouseCoopers Tokyo. Prior to her years in New York, Junko also worked with PricewaterhouseCoopers Toronto, and originally commenced her transfer pricing career in Tokyo in the late 1990s.

Since coming to Japan, do you see any differences in the issues being faced by Japanese Financial Services clients from those faced by US clients, or in the way clients are dealing with those issues?

and certain information to be considered at audits which is expected to include information relating to pricing negotiations, etc.

With respect to documentation, the proposal looks very different from the US documentation rules, and I believe there are two key aspects to this. One relates to the effect of documentation in relation to the “imputed” method , which can be used by the tax authorities to apply pressure to taxpayers. While we are not aware of many cases where the “imputed” method has actually been applied, during field audits we always have to remember that such method is available to the auditors as a last resort, which of course is extremely disadvantageous for the taxpayer. It is possible that, under the Reform, having documentation may neuter that possibility. So that might give taxpayers a little more bargaining power if documentation has been prepared.

Continued on next page...

PricewaterhouseCoopers • A publication for financial services industry tax and transfer pricing professionals • February 2010


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