JAPANESE TRANSFER PRICING POLICY - A NOTE

This paper examines the issue of transfer pricing with particular refe rence to Japanese multinational companies against the background of re cent press reports alleging the misuse of this pricing mechanism to lo cate 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/ purchase price which is artificially low/high for goods which, typical ly, are traded across one or more national boundaries. This is in prac tice difficult to prove, and tax authorities normally seek to make adj ustments based on attempts to establish a 'fair' or 'arm's length' pri ce for goods for which an independent market seldom exists. The assump tion generally made is that multinationals operate similarly in respec t of transfer pricing, namely to the disadvantage of host countries in which they operate. It is the contention of this paper that this blan ket assumption does not hold true, especially in the instance of Japan ese multinationals, and it is argued that this can be demonstrated cle arly if the pricing structures operated by a typical Japanese firm are examined in the light of the differing costing principles obtaining a nd the different business culture.