TRANSFER PRICING AND ECONOMIC FUNCTIONS ANALYSIS - THE JAPANESE PARADIGM

This paper examines the difficulties facing tax authorities in valuing cross-border flows from a transactions based analysis, in conditions where intangibles and services are important and where the multination al firm concerned is operating a system in which group-wide economic f unctions dominate decision making. Its key contention is that the econ omic functions of any entity should be examined in order to determine whether transactions analysis can be used to produce an acceptable val ue. This is done in the particular context of Japanese multinational e nterprises and uses two hypothetical situations to demonstrate the ina dequacy of transactions based analysis as a panacea for transfer prici ng problems, especially for transfers of value involving intangibles a nd services, which it redefines into two categories, perceptible and i mperceptible.