Japan vs. Publisher Corp, April 2017, Tokyo District Court, Case No 第267号-56(順号13005)

« | »

A Japanese company entered into a transaction with a foreing group company to import English-language learning materials into Japan. The learning materials were then resold to Japanese customers.

The Japanese tax authority found that the resale price method should be used for setting the arm’s-length price for the transaction.

The arm’s-length price for the controlled transaction was the price at which the Japanese company resold the English-language learning materials to customers, minus a normal profit margin multiplied by the price. The “normal profit margin” in this case was found to be the weighted average ratio of gross margin to the total revenue for multiple transactions, where unrelated parties imported the same as the English-language learning materials, or goods of a similar sort, and then resold them to customers.

The tax authority held that unrelated parties importing and selling learning materials should be considered comparable transactions, and appropriate adjustments could be made to account for difference. However, an important difference between the tested transactions and the comparables found by the tax authorities, was that a famous cartoon character featured in the learning materials in the controlled transaction, while the characters used for the comparable materials were not known to the public.

The court held that, under the resale price method, the arm’s-length price was calculated based on the “normal profit margin” in similar transactions.

The method is based on the comparability of the functions performed by the seller, focusing on the fact that the profit margin relating to the resale transaction has a close relation to the functions performed and risks assumed by the seller, rather than the type of inventory assets relating to the transaction. Therefore, it is important to ensure that no significant differences exists between the comparable transactions and tested transaction, in terms of the functions performed or risks assumed by the seller.

When selecting comparable transaction, it is necessary to identify differences which may effect profit margins and if such differences is identified make appropriate adjustments. If the difference cannot be adjusted for the selected comparable transaction should be rejected.

It was determined that the functions performed by the respective sellers in each transaction were not substantially different because both transactions were door-to-door sales by sales representatives, learning materials were developed and produced by respective suppliers, and the seller did not perform the manufacturing function. However, as the method and content of advertising and the compensation of sales representatives differed between these transactions, the differences in functions performed by the sellers, affecting the calculation of the normal profit margin, were deemed objectively obvious.

Intangibles used in a transaction may impact various factors like sales price of inventory assets, gross revenue, advertisement expenses, sales expenses, negotiations with a seller and royalties. It is was difficult to measure the impact of these factors on the gross profit margins and therefore make an appropriate adjustment.

The comparable transactions selected by the tax authority were rejected by the court as inappropriate, and the court ruled in the taxpayer’s favour.

 

Click here for English Translation

DIS13005





Related Guidelines


Related Case Law