Japan’s Amount B Stance Aims to Meet Bare Minimum Requirements

While international debate surrounds a proposed simplification to transfer pricing, Japan has declared its intention not to adopt it anytime soon—and underscored that strategy by publishing FAQs earlier this month.

As part of the Two-Pillar Solution agreed by the OECD/G20 Inclusive Framework on BEPS, Amount B of Pillar One introduces a simplified and streamlined approach to applying the arm’s-length principle to baseline marketing and distribution activities—using a formulaic pricing matrix that eliminates the need for a traditional comparability analysis.

While Japan has chosen not to implement Amount B for the time being, a ruling coalition announcement indicated that Japan will monitor international discussions and trends before considering its ultimate response.

The announcement suggests Japan is pursuing a wait-and-see strategy. With the US moving toward implementing Amount B, but most other major economies hesitating, Japan appears to lack immediate motivation for adoption.

Integrated into the Organization for Economic Cooperation and Development’s transfer pricing guidelines, Amount B aims to enhance certainty and reduce compliance burdens. But its elective adoption, confirmed in a 2024 report, has created an ironic twist: a framework designed for simplification now risks amplifying double taxation.

The introductory section of the report states that an outcome determined under Amount B by an implementing jurisdiction is “non-binding on the counterparty jurisdiction.” This immediately sets the stage for transfer pricing rule mismatches.

The report offers only limited remedies. A non-adopting jurisdiction should “commit to respect the outcome” determined by an Amount B jurisdiction, but only if it’s a “covered jurisdiction.” The commitment is also subject to the non-adopting jurisdiction’s “domestic legislations and administrative practices.”

Even for treaty partners, the commitment is to “take all reasonable steps to relieve potential double taxation.”

Japan’s commitment to respecting Amount B outcomes in covered jurisdictions is minimal. Some non-implementing European countries are pursuing legislative changes to elevate their commitment from de facto to de jure, and the US has signaled it will respect outcomes regardless of the counterparty’s covered jurisdiction status.

However, Japan has chosen to limit its commitment to a purely factual basis, deeming no domestic legal amendments necessary. While maintaining an internationally cooperative posture, Japan so far has demonstrated an intention to comply only with the bare minimum requirements agreed within the Inclusive Framework.

Five Questions

Japan’s National Tax Agency, through its FAQs, clarified its position for Japanese multinational enterprises with related parties in Amount B-adopting jurisdictions.

Core principle—Questions 1 and 2: Since Japan hasn’t implemented Amount B, Japanese taxpayers must rely on existing transfer pricing methodologies to determine arm’s-length prices. This applies universally, regardless of whether the related party’s jurisdiction has adopted Amount B approach or is a covered jurisdiction.

Procedural implications—Questions 3 and 4: Any advance pricing agreement request in Japan must be based on existing methods. Similarly, mutual agreement procedure negotiations will be conducted based on existing methods, not the Amount B approach.

However, the National Tax Agency affirmed that in a mutual agreement procedure with a covered jurisdiction, Japan will respect an Amount B outcome to the extent permitted under Japanese domestic law and administrative practices. This demonstrates full but minimal consistency with the Inclusive Framework agreement.

Documentation requirements—Question 5: Transfer pricing documentation prepared solely under Amount B won’t satisfy Japan’s requirements. However, the National Tax Agency hinted at a practical solution: If such documentation includes a parallel analysis using existing methods that supports an Amount B outcome, it may be deemed compliant in Japan.

Question 5 is critical for Japanese multinational enterprises accustomed to using their foreign marketing and distribution subsidiary’s local file (often the tested party under the transactional net margin method) for their own documentation. If the foreign subsidiary applies Amount B, a separate traditional benchmarking analysis will now be necessary for Japanese compliance.

Potential Flexibility

The FAQs leave key questions unanswered. Paragraph 79 of the report suggests a jurisdiction could accept an Amount B outcome on a case-by-case basis in a mutual agreement procedure or enter into specific competent authority agreements to provide corresponding adjustments.

The five questions remain silent on Japan’s willingness to pursue these more accommodating paths. This ambiguity is particularly relevant for instance, for transactions with the US, as it’s not a covered jurisdiction, meaning Japan has no formal commitment to respect its Amount B application.

While a bilateral advance pricing agreement and a mutual agreement procedure based on Amount B is likely off the table, Japanese tax practitioners speculate that an Amount B-based analysis could be permissible as supplementary information.

Moreover, the final outcomes of competent authority negotiations often appear to stem more from pragmatic and sometimes political considerations than from pure transfer pricing theory.

One perspective is that Amount B outcomes could sway these discussions, even if unacknowledged, giving rise to tentative hopes that Japan’s stance might prove more flexible than currently presented.

Practical Implications in Asia

One primary concern for Japanese multinational enterprises is whether key outbound jurisdictions in China, Thailand, Singapore, Vietnam, Indonesia, Hong Kong, and Malaysia will implement Amount B.

These jurisdictions are major trading partners of Japan, and it is common for Japanese multinational enterprises to have affiliated entities operating there, which are subject to transfer pricing rules.

If these jurisdictions opt against implementation, their hesitation likely would be rooted in a perception that the prescribed Amount B profit margins are too low, potentially reducing tax revenue for them.

That would imply another potential risk. Japanese tax practitioners are concerned that the Amount B pricing matrix could become an unofficial, de facto floor for profit levels in these non-adopting jurisdictions.

A Japanese multinational’s marketing and distribution subsidiary in one of these jurisdictions reporting profits below the Amount B matrix could face heightened scrutiny and challenge from the local tax authority, which might implicitly use Amount B as a benchmark.

Therefore, Japanese multinationals must now closely monitor the trends regarding not only Amount B adoption but also its non-adoption in key markets.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Takato Masuda is an associate with Nishimura & Asahi in Tokyo.

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