Business in Japan - Adesse Co., Ltd. Q&A Tax practice in Japan

Q1: What is Houjin Zei(corporate tax)?

A1: It is a tax imposed on the corporate income. The tax rate is 30% as national tax plus 10% as a local tax. The corporate income is calcurated based on the annual revenue minus cost/loss (=net profit), some adjustments defined by the corporate tax law.

Q2: When is the tax filing deadline and the deadline of the payment of the corporate tax?

A2: The tax return form should be submitted to the tax office within 2 months after the business fiscal year-end, and the amount of a tax is paid through the financial institution etc. As to companies of which fiscal year is more than 6months, they need to make interim return. In this case, within 8 months after the fiscal year starts, the interim tax return and payment should be completed.

Q3: When the head office/branch office is located in the country other than Japan, what should be taken care of?

A3:You need to take care the following tax system.
i) "Gaikoku zeigaku koujo"(credit for foreign taxes )
The system that the amount of the tax which a domestic company pays outside Japan will be deducted from the Japanese corporate tax. When a Japanese company receives a share of the profits from the branch outside Japan, the foreign corporate tax which the branch has paid will be regarded that the Japanese head office has paid the tax pro rata and tax deduction will be applied.

ii)"Iten kakaku zeisei"(transfer price taxation)
It is a system that prevents a domestic corporation evade the Japanese taxation by an unusual terms of transaction in which the price of goods/service is intentionally distorted just to decrease income in Japan. The value, lost from the arms-length terms, will be added to the corporate income and it will increase additional tax.

iii)"Kasho shihon zeisei"(thin capitalization taxation)
Thin capitalization rule prevents a foreign corporation from reducing its Japanese income tax by leveraging local (in Japan) operations with more debt/interest expense than would generally be accepted by third parties. In other words, the thin capitalization rules prohibit the artificial earnings reduction.

iv) "Tax Haven zeisei"(tax haven system)
It is the system to prevent a domestic corporation from utilizing, as a tool of tax evasion, the subsidiary company in a country/region of which tax rate is very low (tax haven). The rule requires such a corporation to add the retained earnings of the subsidiary to its own income.

Q4: What is "Shotokuzei (income tax)"?

A4: Income tax is the tax imposed on an individual's income (i.e., the net profit after deducting business expenses from the total revenue). Other than business expenses, there are some special income deductions which are stipulated in the income tax law. Taxable Income is classified in ten categories. "Rishi shotoku (interest income)", "Haitou shotoku(dividend income)", "Hudousan shotoku (real-estate income)", "Jigyo shotoku (business income)", "Kyuyo shotoku (wage income)", "Taishoku shotoku (retirement income)", "Sanrin shotoku (forestry income)", "Jouto shotoku (capital gains)", "Ichiji shotoku (one-time income)" and "Zatsu shotoku (miscellaneous income)".

Q5: How will income tax calculated?

A5: The ten kinds of income should be categorized to either Sogo Kazei Income (Basket Taxed Income: BTI) or Bunri Kazei Income (Separately Taxed Income: STI). BTI includes, but not limited to, Real-estate Income, Business Income, Wage Income One-time Income and Miscellaneous Income. Those are summed up and offset each other if any item is negative, and multiplied by tax rate. STI includes some types of Dividend, Capital Gain, Interest Income and Retirement Income. Each of those incomes has its special tax rate respectively.

Q6: How much is the tax rate?

A6: The tax rate of BTI ranges from 5% to 40% (national tax) plus 10% (local tax). It is so-called graduated taxation system. The higher your income is, the higher rate will be applied. As for STI, the rate is 15% or 30% for a real-estate capital gain and 20% for a financial capital gain.

Q7: When should I file the tax return and pay for the income tax?

A7: You should file and pay from Feb.16 to March 15 every year about your income that is earned between Jan.1 to Dec.31.

Q8: I don’t have Japanese nationality. Should I pay Japanese tax?

A8: If your income is earned in Japan, you must pay Japanese tax regardless of your nationality. This is the rule of thumb. The income earned outside Japan is more complicated. If you have lived in Japan less than one year, you don’t have to pay the tax upon the abroad income. Otherwise, it depends on whether you are recognized as a permanent resident in Japan or not.

Q9: Tell me about the local tax upon an individual.

A9: The Local Individual Tax will be imposed upon a person living in Japan as of Jan.1. The tax is technically divided between a prefecture and a city but usually a taxpayer does not know it because the payment is made as a whole. LIT consists of Kinto Wali (Per-head Local Tax), Rishi Wali (Interest Local Tax) and Shotoku Wali (Income Local Tax).

Q10: Should I file the tax return for LIT other than the national income tax? If not, how should I pay?

A10: In most cases, the filing of LIT is not necessary because your local government calculates it automatically with your national tax amount. If you are not employed in a company, you will receive a tax invoice every year from your local government and you should pay for it accordingly.

Q11: What is the Consumption Tax in Japan?

A11: The Consumption Tax is a tax upon any consumption of goods or services in Japan. The Consumption Tax Law stipulates that any of sales, lending or offering of goods /service by business entity should be taxed. Also, the import of foreign goods is taxed at the port when received by a business entity.

Q12: How much is the rate of the consumption tax?

A12: It consists of the national tax and local tax. The rate of national tax is 4% and the rate of local tax is 1%.

Q13: When should I file the consumption tax?

A13: Basically, it is until March 31 for an individual business. If you are a judicial person (such as a corporation), the due date is the day after two months from its accounting year-end. You can choose a shorter term if you submit a proper documents as an option.

Q14: Is there any party exempted from the consumption tax?

A14: If you have been doing business in Japan for less than two accounting years and if your company’s stated capital is less than 10 million yen, your company is exempted from the tax. Also, if your company’s sales of two years ago were less than 10 million yen, it is exempted.

Q15: What kind of documents should I submit to tax office when I set up a new company?

A15: You should submit the documents in the below list to your local tax office within two months after the setup:
- the form of company setup
- the article of incorporation
- the copy of official registration
- the form of withheld tax declaration
- the form of consumption tax declaration
etc.

Q16: What is Kotei Shisan Zei?

A16: Kotei Shisan Zei is the tax upon major fixed asset of a person or a company (Fixed Asset Tax). If you have any asset more than a stated amount as of Jan.1, then your local government impose on it. The tax rate is 1.4% and the tax standard is the book value of them.

Q17: Tell me about the inheritance tax.

A17: It imposes on you when you inherit a certain amount of asset. The tax standard is your inherent asset minus some tax deductions. The deduction is determined by the kinds of assets and the numbers of heirs. The tax rate ranges from 10% to 50%. The due date of tax return is 10 months after you know the inheritance.

Q18: How about the gift tax?

A18: The gift tax is imposed on the amount of gift that you receive from Jan1 to Dec31. The deduction is 1,100 thousand yen. The tax rate ranges from 10% to 50%. The period for the gift tax return is from Feb.1 to Mar.15 concerning the gift of the previous year.