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Comment and analysis


‘From my perspective’

Junko Yamato

Another interesting aspect is whether the financial information of foreign related parties will be included in the list of required documentation, despite the fact that it is not needed for transfer pricing analysis from a taxpayer’s perspective unless the profit split method is applied.

Secondly, once more details of the Reform become known, we will have to carefully monitor how this change could or could not impact the auditors’ authority to use secret comparables in making assessments. Under the current legislation, there is a direct reference in the clause relating to the use of secret comparables to the information that is required under the provisions relating to application of the ‘imputed’ method: as such, a change to the provisions relating to the ‘imputed’ method could impact the clause relating to secret comparables. I think this second point is very interesting. The use of secret comparables has been a problematic issue in Japan. So if the use of such data is going to be at least somewhat controlled, I think that is a very desirable change for taxpayers, and

I think obviously a real benefit to having documentation ready.

Based on the current proposals it seems unlikely that penalty protection will be provided by having documentation on hand in the event of an audit in Japan, as it is in the US.

What other insights can you give us about the differences between transfer pricing practice in Japan and the US?

First, there is a large amount of guidance provided by the government in the US to enable taxpayers to have more certainty in their position. The s482 regulations are very, very detailed, with a lot of specific guidelines that we need to follow. Some of the specifics are unique, but at the same time it may give us certainty – which is useful for clients. In contrast, the Japanese regulations are still relatively thin, and therefore we need to rely on the OECD Guidelines, at least where we have treaties.


“APAs are very common in Japan, and we see APAs being used as a viable option to obtain certainty”


“There were two transfer pricing items identified in the proposed Reform: one of which was the role of documentation”

Another interesting difference is about penalties. In Japan, penalties are automatic at assessments, and, unlike the US, cannot be avoided by, for example, a documentation report. Consequently, the notion of ‘penalties’ could be perceived negatively by persons outside of tax within a multinational organization, and could be problematic: perhaps this is more of a soft issue.

A final point is that in Japan we naturally see a lot of interaction with Asian countries. And transfer pricing in the Asian region is very different from dealing with transfer pricing in the Western world or among other developed countries. The issue of dealing with non-OECD countries is very much more at the forefront in Japan, and there is far less uniformity of approach in Asia than perhaps in Europe or North America. Moreover, Asian transfer pricing rules and practices vary so much that it makes the process of transfer pricing more complicated. Also, there could be issues where domestic law is quite different from an OECD-type model or where there are non-transfer

pricing matters to consider – such as foreign exchange controls, etc. All of this means that there are far more things to think about when implementing a transfer pricing policy in Asia than in Europe or the US.

For more information please contact: Junko Yamato - junko.yamato@us.pwc.com

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


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