Incentives to transfer profits: a Japanese perspective

This paper forms one of a series examining aspects of transfer pricing from a Japanese perspective. In earlier work the authors examined prevalent all egations that global companies, especially Japanese multinationals, operate d transfer pricing policies to the deliberate disadvantage of host countrie s by artificially locating profits in jurisdictions where a tax advantage c ould be obtained. There would appear to be considerable evidence to suggest that obtaining a tax advantage is not the primary reason for adopting any particular transfer pricing policy. This is especially true in the case of certain Japanese companies, the transfer pricing policies of which result i n effective transfers of profits back to their home base in Japan, where ta x rates are relatively high. In earlier work it was initially suggested tha t this homeward transfer of profits was a consequence of following differen t costing principles and operating within a different business culture. Thi s paper will explore further these reasons and attempt to analyse why such companies actively seek to undertake foreign direct investment, yet do not exploit transfer pricing opportunities in ways which have been open to them .