朝日税理士法人

II. Corporation Taxes

 II. Corporation Taxes

■ Type of Corporation Taxes

 

The taxes for a corporation in Japan are the following:

  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 these were earned or incurred. 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 shall have a tax rate ranging from 23.2% to 23.9% depending on the time these were earned or incurred.

 

Tax Rates

Size of Corporations

Fiscal years beginning between April 1, 2015 and March 31, 2016

Fiscal years beginning between April 1, 2016 and March 31, 2018

Fiscal years beginning on or after April 1, 2018

Large-sized corporations

23.9%

23.4%

23.2%

Small and medium-sized corporations

Taxable income up to 8 million yen in a year

 15%

15%

15%(For fiscal years beginning on or before March 13, 2019)

Taxable income in excess of 8 million yen in a year

23.9%

23.4%

23.2%

 

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 National Tax Office. The local corporation tax is calculated as follow:

Tax Amount = Corporation tax before tax credit x Tax rate

Tax Base: The amount of national corporation tax with some exceptions

(In principal)

Tax Rates

Fiscal years beginning between October 1, 2014 and March 31, 2017

Fiscal years beginning on or after April 1, 2017

Local Corporation tax

4.4%

10.3%

 

c) Inhabitant Tax (Local Tax)

 

Prefectures and Municipalities usually assess Inhabitant Tax. Inhabitant tax consists 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 shall also be imposed.

 

If a Corporation conducts electricity/gas supply business 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/adjusted gross revenue by the Japanese National Government. This is allocated to local governments in order to decrease and lessen the gap in tax revenue between urban and rural areas. This special local corporation tax will be abolished and restored to business tax for fiscal years beginning on or after April 1, 2017.

 

■ 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)

Fiscal years beginning between April 1, 2015 and March 31, 2016

Fiscal years beginning between April 1, 2016 and March 31, 2018

Fiscal years beginning on or after April 1, 2018

Corporations with stated capital 100 million yen or more

33.06%

30.86%

30.62%

Corporations with stated capital less than 100 million yen

 (For the taxable income in excess of 8 million yen

in a year)

35.36%

34.81%

34.60%

 

■ Tax administration

 

<Self-assessment system>

Corporations prepare and pay their corporate income tax in Japan by means of self-assessment method. Under the method, Corporate entities shall be entirely responsible in 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 place of business. Corporate entities are required to use Japanese language in the preparation of their tax returns.

 

<Taxable Year>

The taxable year of a Corporation shall be its accounting period (i.e. fiscal year). Usually, the accounting period of a Corporation is provided in the 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 2 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 during the following 5 years from the due date as prescribed by the statute of limitations. In case of fraud, the Japanese authorities shall have 7 years from the due date to review the 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. In the event that they are not agreeable with the disposition of their complaint, they can appeal their case to the National Tax Tribunal. After which and if they are still not agreeable, they may take the action in Court.

 

<Advance Private Ruling>

In the event that a taxpayer is uncertain and unsure as to the proper tax treatment of a particular transaction, he, at his option, may 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 directly or indirectly 100% control relationships of other Japanese corporations (subsidiaries) can elect to file consolidated tax return. Once election is made, all subsidiaries having 100 % control relationships are required to be included as part of consolidated group.

 

■ Transfer Pricing Taxation

 

Transfer pricing law was enforced in Japan in 1986. Pursuant to transfer pricing taxation, it is required that the pricing between Japanese corporations 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>

Unilateral and bilateral Advanced Pricing Agreements (APA) may also be availed of. To be covered by the proposed APA, the 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 (New rule) 

 All Japanese corporations and foreign corporations with permanent establishments (PE) that is a Constituent Entity 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

 

 

 

For the preparation of the CbC Report, any language may be used. However, if the file is prepared in a non-Japanese language, the tax authorities may request corporations to submit the Japanese translation.

For the preparation of the Master File, both Japanese and English can be used. However, if the file is prepared in English, the tax authorities may request corporations to submit the 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)

Corporations with one foreign-related party 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 parties.

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

(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.

 

For the preparation of the Local File, any language may be used. However, if the file is prepared in a non-Japanese language, the tax authorities may request corporations to submit its Japanese translation.

 

The Local File should be presented or submitted to the tax examiner during the tax audit by the day designated. 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 interest paid on the debt corresponding to the excess shall be disallowed (Thin Capitalization Rules).

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 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 shall not be deductible as expenses for the fiscal year.

Please note that if both this rule and the Thin Capitalization taxation are applicable, the rules that the non-deductible amount would be greater shall apply.