One Point Advice on Transfer Pricing Taxation
Transfer pricing is a taxation to set appropriate prices for cross-border transactions with foreign related parties based on the “arm’s-length principle” and to require appropriate tax payment in each country. For example, a transaction in which a U.S. subsidiary purchases a product developed and manufactured by a Japanese parent company and sells it in the U.S. market occurs between related parties. Because of this, the price for this transaction can be arbitrarily determined. In this case, if the sales price from the Japanese parent company to the U.S. subsidiary is too low, the income attributable to this transaction will be transferred from the Japanese parent company to the U.S. subsidiary, resulting in an understatement of taxable income reported in Japan and, conversely, an overstatement of taxable income reported in the United States. Since the income reported in Japan will be understated, if this problem is pointed out during a tax audit, the Japanese Tax Authority will reassess the income based on the correct price and impose additional tax payments, resulting in a double taxation.
