The Shift in Burden of Proof in Transfer Pricing Litigations

This text is a part of the outcome of research performed under a Waseda Univeristy Grant for Special Research Project 2015K-297.  The outcome of the research has been partly presented at International Conference on Innovation in and Management in January 2016.

This article focused on analysis of transfer pricing litigations in Japan in relation to the criteria of the burden of proof in arm’s length pricing methods. Transfer pricing cases are used as primary data and the study analyzed the process of how hypothetical or secret comparables affect the final court decisions.  Transfer pricing cannot be “an exact science” within the Japanese litigation system because burden of proof is primarily on the tax authority. Since the burden of production is based on the judge’s psychological conviction, the taxpayer’s comparables for the arm’s length price can be rejected. This article attempted to prove that an arm’s length price in transfer pricing encompasses a mechanism that involves estimation or hypothetical comparables.