Intercompany transactions by financial services companies tend to be complex
Unlike tangible asset transactions, many of the intercompany transactions entered into by financial services companies, such as global trading, loans, guarantees, securities research, investment advisory services and reinsurance tend to be complex and require specialised treatment for transfer pricing calculation purposes. For example, transfer pricing analyses in this area often require consideration of business models unique to the industry or a particular focus on individual business circumstances. Furthermore, recent changes to the global economic environment have triggered a number of business restructurings and consolidations, which often impact existing transfer pricing arrangements.
Tax audits focusing on transfer pricing issues
Consequently, the number of regular tax audits focusing on transfer pricing issues has been on the rise. If taxpayers are not ready to explain their transfer prices reasonably, their risk of being subject to an adjustment will increase. Moreover, the regular corporate tax auditors also have the power to transfer a taxpayer’s file to the specialist transfer pricing examiners, if they believe that this step is warranted from their initial review. As a transfer pricing tax audit is a daunting process, normally taking from 1-2 years and requiring substantial resources and costs, this is a most undesirable result. And, if an assessment is made, pursing an appeal of the entire assessment or a reduction in the assessment amount through domestic recourse procedures, or obtaining relief from double taxation through mutual agreement procedures (competent authority negotiations) requires significant effort on the part of multinational corporations and, in some cases, may not even result in a satisfactory resolution.
To cope with this challenging environment, we strongly advise taxpayers not only to undertake an analysis of their transfer pricing tax risk for transactions in the past, but also to develop sound transfer pricing policies for transactions in the future. This may include filing for an advance pricing arrangement as a means of controlling future transfer pricing tax risk.
PwC professionals specialized in transfer pricing issues related to financial services
Zeirishi-Hojin PricewaterhouseCoopers (“PwC”) Transfer Pricing Consulting Group in Tokyo has a committed team of professionals specialized in transfer pricing issues related to the financial services industry.
With extensive experience in the application of the Japan transfer pricing legislation with respect to financial services, as well as through our global network of financial services transfer pricing professionals in more than 30 countries, we provide solution services which we can tailor to meet the specific needs of clients, while also taking into account the risks of both Japan and the countries of the foreign parties involved. For more information on our transfer pricing consulting services, please contact us.