Incentives to transfer profits: a Japanese perspective

Abstract

This paper forms one of a series examining aspects of transfer pricing from a Japanese perspective. In earlier work the authors examined prevalent allegations that global companies, especially Japanese multinationals, operated transfer pricing policies to the deliberate disadvantage of host countries by artificially locating profits in jurisdictions where a tax advantage could be obtained. There would appear to be considerable evidence to suggest that obtaining a tax advantage is not the primary reason for adopting any particular transfer pricing policy. This is especially true in the case of certain Japanese companies, the transfer pricing policies of which result in effective transfers of profits back to their home base in Japan, where tax rates are relatively high. In earlier work it was initially suggested that this homeward transfer of profits was a consequence of following different costing principles and operating within a different business culture. This paper will explore further these reasons and attempt to analyse why such companies actively seek to undertake foreign direct investment, yet do not exploit transfer pricing opportunities in ways which have been open to them.