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The transfer price tax system is applied when a resident, etc. pays a higher price than the normal price in an international transaction with a related party, or transfer taxable income abroad at a lower price. The tax authorities protect their taxation rights and prevent international tax avoidance by denying transfer prices and taxing them at arm’s length prices, whether or not there is an intention to avoid tax in international transactions.
Arm’s Length Price
Arm’s length price refers to a price that is applied or is considered to be applied to general transactions between a resident, domestic corporation, or domestic place of business, and a person other than an overseas special related party. The most reasonable method among the following shall apply for calculating arm’s length price.
Method of Arm’s Length Price Calculation
Comparable third party pricing method
Resale price method
Cost addition method
Profit sharing method
Net profit margin method
Other methods considered to be reasonable
※ For details on how to calculate the arm’s length price, please refer to Article 8 of the Law for the Coordination of International Tax Affairs on the website of the Ministry of Government Legislation.
Tax Imposition Based on Arm’s Length Price
When an enterprise reduces its taxable income by applying a higher or lower price than its arm’s length price in a transaction with a related party, the taxing authorities recalculate the taxable amount based on the arm’s length price and imposes a tax on the transaction.