Taxation in Japan

• I.... Corporate income taxes
  
  • Corporate status
  • Normal corporate income taxes
  • Privileges under the blueform return system
  • Taxable income of Domestic Corporations
  • Filing of returns and payment of taxes

• II... Individual income taxes
  
  • Individual income taxes of Japan
  • Classification of individual taxpayers
  • Taxable income
  • Ordinary taxable income ,allowable deductions and computation of income tax amount
  • Inhabitant taxes

• III.. Income taxes on expatriates' compensation
  
  • Expatriates in Japan
  • Income taxes due by expatriates
  • Taxable compensation to expatriates

• IV... Consumption tax

• Yokoyama CPA Office

• International positioning of Japanese accounting

  Accounting and disclosure system in Japan ; Differences between US GAAP and Japanese GAAP

• Currency Conversion

  The World Clock - Time Zones

  Major World Indices

Japanese Tax System (1998 edition prepared by Tax Bureau, Ministry of Finance JAPAN)
Overall aspects of the tax system, individual income tax , corporate tax , consumption tax , property-based tax and other

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I.Corporate income taxes

I-1 Corporate status

For the purpose of Japanese corporate taxes, foreign enterprises operating in Japan are classified as domestic corporation and foreign corporation.

• Domestic corporation
  Subsidiaries,joint ventures,etc. established under the Japanese law have this status,and are liable for the taxes on their entire income.

• Foreign corporation
  Branches in Japan of corporations established and registered outside Japan fall under this status. The scope of taxable income for corporate income tax purposes differs depending on the manner of their operation in Japan,however, it is limited to income from sources within Japan.

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I-2 Normal corporate income taxes

Japanese corporate income taxes consist of corporation tax (national tax) under the Corporation Tax Law, and local taxes under the Local Tax Law, which are business tax (prefecture tax), prefectural inhabitant tax and municipal inhabitant tax. The rates of such taxes for each accounting period are as shown below.


Corporation tax:(currency:Yen:\)

Business tax:

In case of "Paid in capital of \100million or less":

In case of "Paid-in capital in excess of \100million ":

(*1)Added value component: Lobour costs+Net interest payment+Net rent payment+Income/loss for current year
(*2)Capital component : Capital plus capital surplus for tax purposes

Note: Business tax is deductible from income in the accounting period in which it has become due.

Prefectural and municipal inhabitant taxes based on corporation tax:

Prefectural and municipal inhabitant per capita tax:

Prefectural inhabitant per capita tax:
The tax amount varies based on the total of paid-in-capital and capital surplus of the corporation.

Currency:Yen:\

Municipal inhabitant per capita tax:
The tax amount varies based on the total of paid-in-capital and capital surplus of the corporation and number of staff employed in the municipality concerned.

Effective corporate income tax rate:

The effective corporate income tax rate based on the foregoing tax rates is as shown below, one the assumptions that the amount of paid-in-capital is more than \100 million.

Note:Business tax is deductible from income in the accounting period in which it has become due.

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I-3 Privileges under the blueform return system

This system is intended to encourage taxpayers to maintain proper accounting records and apply thereto fair accounting standards. In order to file a blueform return, it is required to submit to the chief of the competent tax office an application for his approval before the commencement date of the accounting period for which such return is submitted, or in the case of the first accounting period, within three months after the establishment date. Once the approval is obtained, no further application is necessary to continue to file blueform returns.

Privileges for corporations filing blueform returns include the following:

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I-4 Taxable income of Domestic Corporations:

Domestic corporations are liable for corporate income taxes on income for each accounting period at the rates as mentioned above,and on liquidation income upon liquidation. Moreover,certain domestic family corporations are liable for a special tax on retained earnings for each accounting period.

Taxable income represents the net of gross revenue less costs, expenses and losses, no matter where they accrue,calculated in general in accordance with fair accounting standards of Japan and in particular as adjusted in accordance with the requirements of the tax laws of Japan.

Provision and reserves:

The term "provision" herein used refers to those provided for in the Corporation Tax Law which may be established by taxpayer corporations no matter whether they are filing blueform returns or not.
The term "reserve" refers to those in the Special Taxation Measures Law which may be established by corporations filing blueform returns only.
The provisions and reserves are not allowable unless recorded in the books of account and reflected in the financial statements. The reserves may be established, in lieu of charges to income, as appropriations of surplus.

Major provision and reserves are as follows

• Provision for bad debts

• Provision for returned sales

• Provision for bonus

• Provision for employee retirement allowance

• Reserve for overseas investment loss

Provision for bad debts:

The amount of this provision is calculated based on the following alternative methods:

Percentage of receivables outstanding at the end of each accounting period:

This method is eliminated since April 1,1998,but there are transition rates declining for the periods from 1998 to 2002.

Percentage of actual bad debts for the preceding 3 years:

In addition to provision for bad debts, the tax administrative rulings provide for provision for amortization of doubtful receivables,which can be established in case the debtors concerned are deemed to be in a serious financial situation such as suspension of banking transactions. The allowable amount is at least 50 percent of the receivables from such debtors.

Provision for employee retirement allowance:

It is a practice in Japan to pay a retirement or severance allowance calculated in accordance with the enterprise's retirement rules. Incidentally, an enterprise which has ten or more regular employees is required to submit its working regulations to the Labor Standard Office for their approval, incorporating the retirement rules,if any.The rates of retirement allowance usually varies, depending on whether retirement is voluntary or involuntary,etc.,and the minimum rate is applied to voluntary retirement.
The allowable limit is calculated on the basis of the annual accrual at the minimum rate(however, it can not exceed six percent of total payroll of the accounting period concerned, in case the retirement rules are not made known to the employees), and the total accumulated allowable amount can not exceed 40 percent (20 percent since April 1,1998,but declining rates,37% in 1999,33% in 2000,30% in 2001, 27% in 2002, 23% in 2003,and 20% in and after 2004 are available as transition )of the accrued retirement allowance at the minimum rate.

Revenue,cost,expenses and losses to be excluded for the purpose of the computation of taxable income:

(a)Revenue to be excluded:

(b)Costs,expense or losses to be excluded:

Foreign corporation

Foreign corporations are liable for taxes on income derived from sources within Japan only. The scope of taxable income and the manner in which income taxes are payable differ depending on how they stand for Japanese tax purposes.

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I-5 .Filing of returns and payment of taxes

Corporate income tax returns are required to be filed within two months after the end of each accounting period and taxes paid thereon,unless an extension is applied for and approved by the tax office. A one month extension.if applied,is automatically approved.
A final return must be accompanies by financial statements and supporting schedules.

Non-filing of financial returns will cause a non-filing penalty of 5 or 10 percent and will be a reason for cancellation of the blueform return filing privilege.

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II. Individual income taxes

II-1 Individual income taxes of Japan

Individual income taxes of Japan consist of national income tax and local inhabitant tax. Moreover,those individuals who are operating certain specified businesses of their own at fixed places in Japan are liable for enterprise tax assessable by prefectural governments.

Income tax is payable in accordance with the Income Tax Law,and the taxable year is the calendar year. Income tax return for the calendar year is required to be filed and paid by no later than March 15 of the next year.
Inhabitant tax is assessed by the prefectural and municipal governments,on income for the preceding year in accordance with the provisions of the Local Tax Law.


II-2 Classification of individual taxpayers

In determining the tax liabilities of foreign nationals and method of payment of their taxes ,it is of primary importance to determine the categories into which they should be classified. Depending on the categories ,the scope of their taxable income ,tax rates applicable thereto and the method of tax payment are different.

Categories of individual taxpayers:
According to the Income Tax Law of Japan,there are the following categories of individual taxpayers:

(1) Resident
A resident who has a "JUSHO"(Domicile) in Japan, or has had a "KYOSHO" (Residence) in Japan for one year or more.

Note: Generally speaking, you have a "JUSHO" in Japan if your principal establishment for living is in Japan and you have a "KYOSHO" in Japan if you are staying or living in Japan without "JUSHO".

(a) Non-permanent resident:

A resident who has no intention to reside permanently in Japan, but has had his/her "JUSHO" or "KYOSHO" in Japan for five years or less.

(b) Permanent resident

A permanent resident is a resident other than a non-permanent resident. Therefore,an individual who intends to reside in Japan permanently,or has been domiciled or resident in Japan for a period of more than five years even without intention to reside in Japan permanently,falls under this category.

(2) Non-resident

A non-resident is an individual other than a resident. Therefore,an individual who has no domicile or has not been resident for a continuous period of one year or more in Japan falls under this category.

The following table shows the scope of taxable income according to your resident status.

NOTE: As stipulated by Japanese Income Tax Law, salaries, wages or other compensation for personal services performed in Japan are treated as "INCOME FROM SOURCES IN JAPAN", whether they are paid in Japan or abroad.

Filling Income Tax Return

In Japan the individual income tax is based on the self-assessment system, under which each taxpayer is required to compute his/her tax base and tax amount, file a final return with a tax office and pay the tax amount accordingly.
In principle, a taxpayer must add up income for the year, including those income from which taxes were withheld, such as salaries and make a settlement of annual tax liability by filing a Final Tax Return for the year.

Who Must File

You must file a Final Tax Return in principle if you come under any of the following cases.

When and Where to File

You are required to file your final tax return with your tax office during the period from February 16 to March 15 and to pay the tax by March 15.

In case you are leaving Japan without designating a person to administer your tax affairs, your final tax return must be filed by the time of your departure from Japan.

Estimated Tax Prepayment

As a rule, if your "basic tax amount to be prepaid in a year" comes to \150,000 or more, you must make prepayments of your estimated tax in the year. And the amount will be notified by the tax office.

NOTE: "basic tax amount to be prepaid" is, in short, the tax on total taxable income less the tax withheld in the preceding taxable year. The estimated taxes are to be settled by filing the final tax return for the year.

Penalties on Tax

If you fail to file a correct tax return, you will be imposed an additional tax and a delinquent tax.

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II-3 Taxable income

Taxable income is classified into the following ten categories.

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II-4 Ordinary taxable income ,allowable deductions and computation of income tax amount:

A non-permanent or a permanent resident taxpayer who is required to file a final return (other than those who are not required to file such return) should add up various categories of income not subject to separate taxation,deduct allowable deductions from such income and calculate the amount of income tax on the net taxable income. The balance of the deductions,if any ,is deductible from income subject to separate taxation. Such computation procedures are shown on the income tax return form available at the tax office.


Ordinary taxable income:
With reference to II-3 above,the net of the following categories of income (ordinary income) after deduction of applicable cost,expenses and deductions should be added up:

Computation of taxable income and income tax amount:

The following income tax rates are applied to the taxable ordinary income.

Income tax rates from year 2007
Currency:Yen:\

Example: If you have \6.5million as ordinary taxable income,then,
\6.5million x 20% -\427,500=\872,500 as income tax amount to be paid.

Computation of tax payable or (refundable)

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II-5 Inhabitant taxes

Inhabitant tax is assessed by the prefectural and municipal governments,on income for the preceding year in accordance with the provisions of the Local Tax Law.

Prefectural inhabitant tax rate:

Per capita tax is \700 a year.


Municipal inhabitant tax rate:

Per capita tax is as follows:

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III. Japanese income taxes on Expatriates' Compensation

III-1. Expatriates in Japan

Foreign enterprises have various interests in Japan through their branches,joint ventures with Japanese enterprises,liaison offices,and other forms of business arrangements in Japan. Usually the expatriates' assignment in Japan is for more than one year,and,under the Tax Law of Japan,they are liable for Japanese income taxes as resident taxpayers.


The expatriates no doubt have no intention to reside in Japan permanently,and they are treated as non-permanent resident taxpayers for the first five years of their residence in Japan and as permanent resident taxpayers thereafter.

The scope of taxable income in respect of non-permanent resident taxpayers is different from that of permanent resident taxpayers with respect to income from sources abroad which ,if not paid in Japan or remitted to Japan,is not taxable,while a permanent resident taxpayer is liable for income taxes on his/her entire income.

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III-2 Income taxes due by expatriates

Expatriates are liable for income tax (national tax under the Income Tax Law) and inhabitant tax (prefectural and municipal taxes under the Local Tax Law).

Income tax is payable for each calendar year,however, inhabitant tax for the calendar year is calculated based on taxable income for the preceding calendar year. Moreover,inhabitant tax assessed against residents in Japan as of January 1 of the taxable year,and, therefore,if an expatriate terminates his assignment in Japan and leaves Japan on,for example,the second of January, he/she will be liable for the entire inhabitant tax for the year of his/her departure from Japan based on the taxable income for the preceding year regardless of only two days of residence in Japan for the year of departure.

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III-3 Taxable compensation to expatriates

Compensation to expatriates may include the following items:

Note:

In case where the expatriates are corporate officers (members of the board of directors and statutory auditors), the above formula is not applicable but the assessed rental applicable to them is calculated as follows:

On the basis of the taxable value of the property:

On the basis of monthly rental,in case the house is leased from a third party:

Amount to be repaid by the officer to be the company(or the amount of taxable economic benefit):

As rental paid by the company is greater almost without exception,the taxable value corresponding to (G) above usually is 35% of such rental.


"Monthly rental" often includes utility charges, e.g., air-conditioning, electricity, gas and water. Since such utility charges,if paid by the employers,should be included in the expatriates' taxable income,it is advisable that the amount of real rent be clearly agreed upon in a lease agreement to be entered into by the employer with the landlord.

Children's tuition allowance:

Tuition fees for children of expatriates are taxable income to them. However, an exception to such taxable treatment was established by a private tax ruling issued in 1978 with respect to the contribution plan of the American School in Japan under which, if employer companies participate in such contribution plan, the expatriates' dependents may be exempted from tuition fees, the expatriates will not be required to report the benefits as their taxable income. The employer companies are required to treat the contributions as such for corporation tax purposes, the allowable limit of which for their corporate income tax purposes is the total of 1.25% of taxable income and 0.125% of paid-in capital.

Company car:
A company car used primarily for the employers' business is not treated as a taxable economic benefit, even if expatriates sometime use such car for their private purposes.

Home leave transportation:
It has been established that home leave transportation should not be subject to income taxes provided expatriates are not taking home leave more than once a year.

Moving expenses:
Moving expenses fall under non-taxable income under the Income Tax Law.

Furniture storage and accountant's fee:
The tax authorities of Japan have not yet expressed their views as to whether or not these items should be treated as taxable income.


Determination of employment income from sources outside Japan

Expatriates often travel outside Japan on business. Since employment income accrues from the place where employment services are rendered, income corresponding to employment services rendered while they are traveling outside Japan is treated as income from sources abroad. The amount of such income is required to be calculated based on the number of days spent outside Japan by expatriates, and in connection therewith the day of his departure from Japan is not counted as absence from Japan while the day he returns to Japan is counted as absence from Japan. Moreover, in case where expatiates take vacation or home leave, the number of days spent outside Japan is required to be completely eliminated from the computation of allocation of employment income to sources abroad and Japan.

The following is an example of the computation of income attributable to services in Japan:

Income attributable to services in Japan on the basis of the number of days:

(A) x (B)/(D)-(C)= $80,000 x 275/335 =$ 65,672

A non-permanent resident taxpayer is not liable for tax on income from sources abroad,if not paid in Japan or remitted to Japan.

If the total of his compensation paid in Japan and the amount paid abroad and remitted to Japan does not exceed the amount of income attributable to services in Japan, the latter amount will be taxable.
In case,however,where such total exceeds the amount of income attributable to services in Japan,then such total will be taxable. Therefore,it is necessary for non-permanent resident taxpayers to keep a record of remittances to Japan if he receives part of his compensation outside Japan.

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IV. Consumption tax

Effective April 1,1988 the national government imposes 3% consumption tax on all supplies of goods and services in Japan,except for interest,sale or lease of land,etc.
As amended,effective April 1,1997 the consumption tax rate increases to 5% by 2%(1% as national tax plus 1% as prefectural tax).


The rate will be raised to 8 percent on 1 April 2014 and to 10 percent on 1 October 2015.

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Yokoyama CPA Office

Akira Yokoyama
Certified Public Accountant

If you have any questions,please don't hesitate to contact me by E-mail or Fax.
Email： yokoyama-a@hi-ho.ne.jp

Zip code 270-0034, No.5 A1405,7-173,Shinmatsudo,Matsudo-City,Chiba,Japan
Tel 81+47+346+5214 Fax 81+47+346+9636