II. Corporation Taxes

■ Types of Corporation Taxes

The following are the five types of corporation taxes levied on the income of a corporation in Japan:

1. Corporation Income Tax (national tax)
2. Local Corporation Tax (national tax)
3. Inhabitant Tax (local tax)
4. Enterprise Tax(Business Tax) (local tax)
5. Special Local Corporate Tax (national tax) (to be abolished and restored to Enterprise Tax )

Note that certain closely held companies known as “Specified Family Companies” can be subject to an additional surtax on undistributed retained earnings.

■ Tax Rates

a) Corporation Income Tax (national tax)

The rates of Corporation Income Tax (national tax) are shown in the table below. The applicable tax rates vary and ranges from 23.2% to 23.9% depending on the period during which the corresponding taxable income was earned. However, for corporations with stated capital of 100 million yen or less (“Small and Medium-Sized Corporations”), a reduced tax rate applies to the first 8 million yen of taxable income, and the taxable income in excess of 8 million yen has a tax rate ranging from 23.2% to 23.9% depending on the period during which the corresponding taxable income was earned.

【Tax Rates】

b) Local Corporation Tax (national tax)

For fiscal years beginning after October 1, 2014, corporations are required to file for and pay the Local Corporation Tax with the National Tax Office. The Local Corporation Tax is calculated as follows:

Tax Amount = Corporation Tax before tax credit x tax rate

Tax Base: the amount of national Corporation Tax with some exceptions

(in principale)

【Tax Rates】

c) Inhabitant Tax (local tax)

Prefectures and municipalities usually assess Inhabitant Tax. Inhabitant tax consists of two elements, namely, an 1) income tax calculated based on national Corporation Tax and 2) a per capita tax.

d) Enterprise Tax (Business Tax) (local tax)

Enterprise Tax (business tax) is a tax imposed to a corporation for doing business in the place or area where said corporation has an office or place of business.

The taxable base in computing the Enterprise Tax of a Corporation is its taxable income. In addition, and in the event that the amount of capital of the Corporation is over 100 million yen, Sized-Based Enterprise Tax will also be imposed.

If a corporation conducts electricity, gas supply, or insurance business, Enterprise Tax is imposed on the adjusted gross revenue instead of its taxable income.

e) Special Local Corporation Tax (national tax)

Special Local Corporation Tax is a tax imposed on the income or adjusted gross revenue by the Japanese National Government. This is allocated to local governments to lessen the gap in tax revenue between urban and rural areas. This Special Local Corporation tax was abolished and restored to Business Tax for fiscal years beginning on or after October 1, 2019.

■ Effective Corporate Tax Rates

Effective corporate tax rate is calculated taking into account the tax deductibility of Enterprise Tax and Special Local Corporation Tax payments.

【Effective Corporate Tax Rates]】(Tokyo Tax Rate Basis)

■ Tax administration

<Self-assessment system>

Under the self-assessment system in Japan, each corporation prepares and pays its corporate income tax. Under this system, corporate entities are fully responsible for preparing, computing and filing their own tax returns. Tax returns in Japan are filed with the National Tax Offices and with the prefectural and municipal tax offices where they have offices or places of business. Corporate entities are required to use Japanese language in preparing their tax returns.

<Taxable Year>

The taxable year of a corporation is its accounting period (i.e., fiscal year). Usually, the accounting period of a corporation is provided in a company’s articles of incorporation. A taxable year cannot exceed 12 months in duration but can be less than 12 months.

<Due Date for Corporation Tax Returns >

A corporation is required to file its tax returns within two months after the end of each accounting period or by the extended due date of another one or two months if approved by the tax office.

<Interim Tax Payments>

Corporations, except for newly established corporations, are required to file an interim return and pay interim tax within two months of the end of the first six months of its fiscal year.

<Tax Return Audit>

The Japanese tax authorities may review the tax returns filed by a corporation at any time within five years from the due date as prescribed by the statute of limitations. In case of fraud, the Japanese authorities has seven years from the due date to review a tax return.

During the course of an examination of a tax return, the Japanese tax authorities usually discuss with the taxpayer the result of the examination and propose corrections when required before taking any action

<Tax Disputes>

Under the Japanese tax laws, taxpayers can file a complaint with the competent tax office within two months from the official assessment of additional tax by the tax authorities. If they do not agree with the disposition of their complaint, they can appeal their case to the National Tax Tribunal. If they still disagree with the “NTT” decision, they may bring a case in a District Court.

<Advance Private Ruling>

A taxpayer who is uncertain about the proper tax treatment of a particular transaction may, at the taxpayer’s option, submit an inquiry to the Japanese tax authorities to verify the correct tax treatment of the transaction.

A taxpayer can also informally consult with the Japanese tax authorities on the proper tax treatment of a transaction.

■ Consolidated Taxation

A Japanese corporation (parent company) that has 100% control in other Japanese corporations (subsidiaries), whether directly or indirectly, can elect to file a consolidated tax return. Once election is made, all 100%-owned subsidiaries are required to be included as part of the consolidated group.

■ Transfer Pricing Taxation

Transfer pricing law was enforced in Japan in 1986. Transfer pricing taxation requires that the pricing between a Japanese corporation and its foreign-related corporations should be consistent with the arm’s length price principle.

“Foreign-related corporations” are corporations related to a Japanese corporation by virtue of fifty percent (50%) or more shareholding, either directly or indirectly. “Arm’s length price” is the usual price of a transaction in accordance with current market values and trends, and disregarding any connection such as common ownership of the companies involved.

Transfer pricing taxation is also applied to internal transactions between a head office of foreign corporation and its branch in Japan.

<Pricing Method>

In the case of sales or purchase of inventory, the main methods for calculating the arm’s length price are as follows;

• The Comparable Uncontrolled Price method (“CUP”)
• Resale Price method (“RP”)
• Cost Plus method (“CP”)
• Other methods (i.e. Profit Split method (“PS”) and Transactional Net Margin method (“TNMM”)).

For purpose of arm’s-length price calculation, the most appropriate method should be applied.

<APA>

An agreement between a taxpayer and a tax authority regarding the taxpayer’s transfer pricing during a certain period of time is called an Advance Pricing Agreement (“APA”). An APA can be unilateral if the agreement is between a taxpayer and the NTA or bilateral if the agreement is among the taxpayer, the NTA and the overseas tax authority in the country where the Foreign-Related Corporation is located. To be covered by the proposed APA, a taxpayer should file its request with the Japanese tax authorities on the first day of its first fiscal year.

<Documentation>

Based on the recommendations of OECD’s Base Erosion and Profit Shifting (“BEPS”) Project (Action 13: Guidance on Transfer Pricing Documentation and Country-by-Country Reporting), the transfer pricing documentation rule was partially revised in the 2016 Japanese Tax Reform in fiscal year 2016.

1) Documents to be prepared by multinational enterprise groups 

All Japanese corporations and foreign corporations with permanent establishments (“PE”) that are constituent entities of a multinational enterprise (“MNE”) group with a total consolidated revenue of 100 billion yen or more in the preceding fiscal year (“Specified MNE Group”), must submit the following documents to the National Tax Authorities through the online national tax return filing and tax payment system (e-Tax):

Notification for Ultimate Parent Entity

   ・ Country-by-Country Report (“CbC Report”)

   ・ Master File

Any language may be used in preparing the CbC Report. However, if the file is prepared in a non-Japanese language, the tax authorities may request the submission of a Japanese translation.

Both Japanese and English can be used in preparing the Master File. However, if the file is prepared in English, the tax authorities may request the submission of a Japanese translation.

(This revision applies to the reports or notifications for the ultimate parent entity’s fiscal year beginning April 1, 2016 and thereafter.)

2) Documents to be prepared by corporations engaged in controlled transactions (revised rule)

A Corporations with one Foreign-Related Corporation and engaged in the following transactions must prepare, obtain and keep “documents considered as necessary to calculate and support arm’s length prices for the controlled transactions (Local File)” on or before the deadline for submission of final returns (so-called “duty of contemporaneous documentation”).

(i) Controlled transactions (Note 1) in the total amount of (for the previous business year (Note 2)) five billion yen or more, or

(ii)Transactions of intangibles (Note 3) in the total amount of (for the previous business year) 300 million yen or more

(Note 1) “Controlled transactions” refer to the sale or purchase of assets, provision of services, and other transactions conducted by corporations with Foreign-Related Corporations.

(Note 2) If there is no previous business year, the current business year shall applies.

(Note 3) Transactions of intangibles refer to the transfer or lending of intangible fixed assets such as patent rights, utility model rights and other intangible assets.

Any language may be used in preparing the Local File. However, if the file is prepared in a non-Japanese language, the tax authorities may request the submission of a Japanese translation.

The Local File should be presented or submitted to the tax examiner during the tax audit by the designated day. Otherwise, the tax authorities can impose tax by estimation and inspect persons engaged in similar businesses by asking questions.

(This revision applies to corporation tax for the business year that begins on April 1, 2017 and thereafter.)

■ Thin Capitalization Taxation

If a corporation’s debt to an overseas controlling shareholder exceeds three (3) times its equity, the Thin Capitalization Rule disallows the interest paid on the debt corresponding to the excess.

Generally, a foreign company doing business in Japan through a branch is subject to the Thin Capitalization Rule. However, in the 2014 Japanese tax reform, there is now a new rule applicable to branches relative to the Thin Capitalization Rule. This new rule is applicable to fiscal years beginning April 1, 2016 and thereafter. Under the new rule, if the amount of capital of a branch is smaller or lesser than the capital attributable to the branch, interest expenses corresponding to such deficient portion will not be deductible in calculating income attributable to the branch.

■ Interest Expense Deduction Limitation
(Japanese Earnings Stripping Rule)

If the amounts of net interest payments to, after deducting interests received from, related corporations are over 50% of the adjusted income, the excess amount may not be deducted as expenses for the fiscal year.

Please note that if both this rule and the Thin Capitalization Rule apply, the rules that result in the largest amount of non-deductible interest will apply.

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