Movement away from traditional methods – lessons from recent transfer pricing cases involving intangibles

Japan Inbound Tax & Legal Newsletter June 2018, No. 29

The Tokyo District Court recently issued two judgments regarding transfer pricing cases, both in relation to dealing with intangibles when applying a method for calculating arm’s length price. Although one case has not been finalized as of the date of this newsletter, we believe both cases offer insight in this area and we introduce them and provide our views as follows.

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Deloitte’s View

These two cases are in line with recent trends regarding how to deal with intangibles in applying a method for calculating arm’s length price. Currently, the Court seems to emphasize the uniqueness of the intangibles and rigorously analyze whether there is a difference between a foreign related party transaction and comparable transaction. As a result, the Court may prefer not to uphold traditional transaction methods like the CUP or RP methods, but rather use the RPSM in terms of transactions involving intangibles.

The RPSM is applicable when two or more related parties contribute to the creation of important intangible assets or otherwise perform unique functions. Especially when a foreign related party transaction concerns the licensing of important intangible assets, application of the RPSM is often considered as it is difficult to find an appropriate comparable transaction.

If the taxpayer would like to apply the traditional transaction methods to a transaction involving intangibles, it may be recommendable to rigorously analyze the comparability of the transactions and prepare materials to explain in greater detail than previously required.

(75B, PDF)

* This Article is based on the relevant Japanese or specific country’s tax law and other authorities in effect on the date of this Article. This Article would not be guaranteed updating if there are any changes in Japanese tax law, any other law, or interpretations by the courts or tax authorities thereof after the date of this Article.

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