2007 Reports

A Practical Analysis of Transfer Pricing Methodologies for Bilateral Advance Pricing Arrangements

Yamakawa, Hiroki

I was previously Director of Mutual Agreement Procedures, National Tax Agency ('NTA'), in Japan. This paper was written during my stay at Columbia University as senior visiting research scholar. I hope that this paper will lead to further discussion of practical aspects of Transfer Pricing Methodologies for Bilateral Advance Pricing Arrangements. The opinions expressed herein are my personal views and do not necessarily reflect organizational or state positions. It is desirable for multinational enterprises to minimize the risk of economic double taxation arising as a result of transfer pricing adjustments. Such economic double taxation should be, if at all possible, addressed under the condition of rational income allocation between countries. For this purpose we need practicable transfer pricing methodologies. Furthermore, it is better if we have an efficient bilateral framework in which to settle transfer pricing disputes. There is some possibility that Bilateral Advance Pricing Arrangements ('BAPA'), where Transfer Pricing Methodologies ('TPMs') are mainly based on profit methods, can be a reliable way of resolving these disputes. Looking to the past, actual results of BAPA between Japan and the United States may be viewed as a successful model whereby tax authorities have reached agreement in a considerable number of cases of various types related to both inbound and outbound transactions. In this paper, which is intended to be highly supportive of the BAPA, I enumerate the practical points at issue, after taking note of world currents in transfer pricing taxation. I also express some important items for development of the BAPA.