Transfer Pricing Regulations in Japan

The first elements of transfer pricing rules in Japan were introduced in January 1986, when the Ministry of Finance at the time presented the annual tax reform bill, which was later that year approved. Since then, further statutory provisions on transfer pricing rules have been added.

As of 2025, transfer pricing regulations are stipulated in the Special Taxation Measures Law (STML) (Article 66-4), also known as the Act on Special Measures concerning Taxation (“ASMT”). In addition, articles 39-12 stipulated in the Special Taxation Measures Law Enforcement Order (STML Enforcement Order) by the Cabinet provide specific guidance on how the transfer pricing rules are applied.

In addition, the National Tax Agency (NTA) issues Circulars to provide interpretations and directives regarding the application in practice of the transfer pricing provisions.

Arm’s Length Principle

The arm’s length principle also known in Japanese as “dokuritsu kigyokan torihiki kakaku”, is based on Article 9 of the OECD Model Treaty, and stipulated in article 66- of the ASMT. The article stipulates that transfer pricing rules apply to cross-border transactions between juridical persons and their foreign-related parties, ensuring compliance with the arm’s length principle.

However, these rules do not cover domestic transactions, except in specific cases where profits might be shifted outside Japan’s tax jurisdiction. Additionally, transactions between a Japanese taxpayer and a foreign corporation’s Japanese branch are generally excluded, as they already fall under domestic taxation rules. However, since 2016, Japan has applied the separate entity approach for profit allocation between a head office and its branch, aligning with the OECD’s Authorized Approach to taxable income attribution.

Related Party Definition

In Japan, transfer pricing rules apply only to transactions made by foreign related persons, hence for the Japanese legislator it was important to make a clear definition on the matter. Hence, an entity or individual is considered to be a “foreign person” if they meet one of the three qualifying criteria:

1. A foreign-related person must be a corporation or a juridical person under Japanese law.
2. The entity must be defined as a corporation not established under Japanese law and without its head office in Japan. This distinction ensures that only cross-border transactions fall under transfer pricing rules, aligning with Japan’s policy focus on preventing profit shifting outside its tax jurisdiction.
3. A foreign-related person must have a special relationship with the Japanese taxpayer, which can be established through:

• A direct or indirect ownership of 50% or more of shares or capital.
• Considerable influence in business decisions, even without a majority shareholding.
• If the entity or the individual holds 50% or more of shares in both the Japanese taxpayer and the foreign corporation.

Transfer Pricing Methods

The methods that can be used to determine the arm’s length price in Japan are:

• Comparable Uncontrolled Price Method
• Resale Price Method
• Cost Plus Method
• Transactional Net Margin Method
• Profit Split Method

Japan does not have a preferred method, and since 2010 the choice has been dependent on the method that is most appropriate to the case, and by the arm’s length principle.

Comparability Analysis

An important part of the transfer pricing compliance is the comparability analysis. Below is a summary of the main points regarding comparability analysis in Japan:

Japan’s comparability rules are based on the OECD Transfer Pricing Guidelines and provide a set of factors that determine the similarity between controlled (related-party) transactions and uncontrolled (third-party) transactions. According to the law, the key factors include:

1. The business type, functions, and risks of the entities involved;
2. The intangible assets used;
3. The nature of goods or services exchanged;
4. Market factors, including the level of transactions (retail, wholesale), government policies, and economic conditions; and
5. External influences likewise consumer trends, seasonality, or regulatory pricing constraints.

Japan’s transfer pricing rules do not indicate a preference for internal or external comparables. Important, in this regard, is to make sure that there is compatibility with the factors listed above. However, in practice, internal comparables may be preferred when they are available, while external comparables are used if internal data is lacking or unreliable.

Documentation Requirements

In Japan, the transfer pricing documentation requirements are based on the three-tiered approach set forth by the OECD. This requires multinational groups to submit the following documentation to the Japanese tax authorities:

• Master file;
• Local file; and
• Country-by-Country (CbC) report.

Master File

The submission of a Master File, known as “business circumstances reporting items”, is considered an essential requirement for companies that are part of a specified multinational enterprise (MNE) group. This obligation is applied to both domestic corporations and foreign corporations that have a permanent establishment in Japan that belong to an MNE.

Regarding the procedure, the filing process is done electronically and the report must include essential information such as the organizational structure, financial data, key business activities, intangible assets, and intercompany financial arrangements within the MNE group. However, for the groups with multiple entities, Japanese law has provided a simplified filing process for groups with multiple entities allowing for a single entity to file on behalf of the group. The report can be submitted in either Japanese or English.

Local File

The submission of a Local File was introduced in 2016 as part of Japan’s adoption of the OECD BEPS framework, and it applies to domestic corporations and foreign corporations that have a permanent establishment in Japan and that make transactions with foreign related parties. The local files are considered contemporaneous documentation, meaning they must be ready before submission of the tax return. Also, the law provides exemption policies for companies when their total transactions with a single foreign-related party in the previous year were below JPY 5 billion, or their intangible asset transactions were below JPY 300 million.

The local file documentation must provide information regarding (i) the nature of the company’s transactions, including assets and services exchanged, functions performed, risks borne, and the use of intangible assets.; (ii) the way transfer prices were determined, meaning the companies need to submit benchmarking data, financial analysis, and comparability studies to justify the pricing method used.

Country-by-Country Reporting

• The CbC report should be filed by domestic corporations that are either the parent company or a surrogate parent company of an MNE group.
• In the CbC submission, companies must provide detailed financial and operational data for each jurisdiction in which they operate. The report must include revenue numbers, pre-tax profits, taxes paid and accrued, capital investment, retained earnings, number of employees, and fixed assets (excluding cash). In addition to financial data, companies must also disclose the names and locations of all entities part of the MNE.
• Submissions of reports are done electronically to the district taxation office responsible for their headquarters, within one year after the end of the fiscal year.

 Advance Pricing Agreements (APA) and Mutual Agreement Program (MAP)

Japan uses both APA and MAP to manage and resolve international tax disputes, in compliance with OECD guidelines.

APAs are agreements made between the taxpayer and the tax authorities, in advance, to avoid tax disputes regarding transfer pricing methodology. It was first introduced in 1987, but the APA procedures have been developed through the years via the Circulars. The authority regulating the agreements is the National Tax Agency (NTA), which determines how Japan’s tax law will be applied to a specific situation or transaction that has not yet occurred from a tax perspective.

Under the Japanese law, there are three types of APAs:

• Unilateral APA – An agreement between the taxpayer and the NTA only, and in this case the transfer pricing methodology needs to be confirmed in advance.
• Bilateral APA – An agreement between the NTA and a foreign tax authority under a bilateral income tax treaty, making sure that both jurisdictions accept the transfer pricing method.

Regarding the Mutual Agreement Procedure (MAP) helps resolve tax disputes, including transfer pricing issues and tax treaty conflicts. Taxpayers can request MAP even if they have taken legal action domestically. Japan allows both bilateral and multilateral MAPs, ensuring fair and treaty-based tax resolutions.

Approach to Transfer Pricing Audits

In Japan, transfer pricing audits have increased over the years, especially for multinational corporations’ subsidiaries. Though the legislation provides the transfer pricing documentation exemption policies as discussed above, the companies still have to produce a Local File upon request during an audit.

Penalties

If a company fails to submit its Master File or CbC report without a valid reason, the responsible individual—such as a representative, agent, or employee—may face a fine of up to JPY 300,000.

For the local file, while there is no fine provided, the failure to present the required information can lead to the usage of “non-disclosed” comparables by tax authorities, which can lead to significant assessments.

Taxation at a Glance

The official name of Japan’s tax authority is the National Tax Agency (NTA). The table below provides a summary of the main taxation rates related to businesses:

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