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 multinational firm concerned is operating a system in which group-wide economic functions dominate decision making. Its key contention is that the economic functions of any entity should be examined in order to determine whether transactions analysis can be used to produce an acceptable value. This is done in the particular context of Japanese multinational enterprises and uses two hypothetical situations to demonstrate the inadequacy of transactions based analysis as a panacea for transfer pricing problems, especially for transfers of value involving intangibles and services, which it redefines into two categories, perceptible and imperceptible.