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Application of a Range to Determine Whether Transfer Pricing is Arm's Length

31 August 2006
By Nobuo Mori, Makoto Ikeya, and Yaye Nakano

Although the US Transfer Pricing Regulations and the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations recognize the application of a range of prices or other profit level indicators to test the arm's length character of transfer prices, no such regulations currently exist in Japan. As a consequence, Japanese taxpayers are faced with a considerable amount of taxation risk. This article from International Taxation examines how a range should be determined and conclude that the span of an arm's length range depends on the quality of the data relevant to the uncontrolled comparables from a statistical viewpoint. The authors provide an example of the application of an arm's length range using the Residual Profit Split Method (RPSM).

This article is available in Japanese only.