Necessary documentation for transfer pricing

Friday, May 27, 2011. 10:48

Whether the setting of transfer price falls within the arms’ length range or not is often turning into disputes among taxpayers and tax authority. Enterprises may face risk of being requested by the tax authority to pay extra tax especially of large amount once the price charged made between related parties are tested to be outside the arms’ length standard. On the other hand, tax authority may find it difficult to gain cooperation from the enterprise to furnish documentation for examination regarding the price setting. In order to resolve the tax disputes, tax authority has made it clearer what documentation an enterprise should prepare and present to the tax authorities upon examination.

A.  Documentation described clearly the content of the transaction made between related parties for goods, services, or use of property (including intangible property).
A1: documentation providing thorough information of goods or service.
A2: Agreements made between the related parties.

B.   Documentation described clearly that the price charged to the related parties is determined based on the price that would be charged by independent parties dealing at arms’ length (arms’ length standard).
B1: documentation describing the method of determining the price and the reason of arm’s length standard chosen; documentation described the method according to which the independent parties determined the price.
B2: documentation providing information of the transaction made by unrelated parties for sufficiently comparison and the reason that such transaction is chosen.

This is the requirement of documentation effective after the reform of corporate taxation law as of 31 Mar 2010.

Source:
Article 66 – paragraph 4 of “Act on Special Measures concerning Taxation” and
Article – paragraph 10.1 of “Ordinance for Enforcement of Act on Special Measures concerning Taxation” http://www.nta.go.jp/shiraberu/zeiho-kaishaku/joho-zeikaishaku/hojin/041220/05.htm