Taxation for the corporation

Questions and Answers

Could you tell us about the tax rate which is imposed on the corporate income?

The rate of tax imposed on the corporate income is around 24.8 to 40.8% if:
-the capital of the company is less than 100mil yen,
-the capital of the company’s 100% parent company is under 500mil yen and
-the company has only one office in Tokyo etc.

Name	National / Local	0 to 4mil yen	4 to 8mil yen	Over 8mil yen-
Corporate tax	National tax	18.0%	18.0%	30.0%
Inhabitants tax	Local tax	8.1%	10.4%	14.7%
Total		26.1%	28.4%	44.7%
Effective tax rate		24.8%	26.4%	40.8%
(information as of Oct 2010)

Diet is currently discussing to decrease the above tax rate to improve international competitiveness in Asia.

Is there VAT or sales tax system in Japan?

Yes. We have “Consumption tax” in Japan. The tax rate is 5%.
However, Diet is currently discussing whether this 5% is to be increased or not to strengthen Japanese financial condition.

The basic formula to calculate the tax due from the company is as follows:

Does every company due the above consumption tax?

No. If the company’s taxable sales during a "base period" are under 10mil yen, the company is not required to file consumption tax return nor pay consumption tax for the current year. A company’s "base period" is a fiscal year for which the company has two fiscal years prior to the current year.

Our company is newly established and does not have a “base period”. Do we need to file consumption tax return and pay consumption tax?

A newly established company which “capital” is lower than 10mil yen is not required to file consumption tax return nor pay consumption tax for its first two fiscal years.

However, if the company plans to heavily purchase a property etc and expect to be a refund position during first two years, the company should consider to being a “Taxable enterprise” to refund the tax. If the company wants to elect to be a “Taxable enterprise”, an application should be submitted in advance before the beginning of the fiscal year in which the company wants to become a taxable enterprise.

When is the deadline of the tax return filing and payment?

Tax	Dead line	Extension
Corporate tax	within two months after the fiscal year end	If a regular shareholder meeting is held within three months after the fiscal year end, one month extension is allowed. (necessary application filing is required)
Inhabitants tax
Consumption tax		Not allowed

Our company is located in US and has a 100% subsidiary (KK) in Japan. If we fund our subsidiary in Japan, is it tax beneficial to make a loan compare to capital investment?

It is tax beneficial for the subsidiary to be funded by loan since interest payment on loan is tax deductible while dividend payment on capital investment is not tax deductible.

However, if the loan balance exceeds three times of the balance of capital amount, the excess loan amount is deemed as a capital and the interest on the excess amount is not allowed to deduct from taxable income. This is called as “Thin capitalization taxation”.

Can the company carry forward losses to subsequent years in tax calculation?

A company which files a blue color tax return (see Q8 below) may carry back losses to the previous fiscal year or carry forward losses to subsequent years, up to a maximum of seven years.

What is "blue color tax return" system?

The blue color return system was introduced shortly after World War II in Japan. Largely due to several privileges associated with blue color tax returns, such as losses carry forward, special measures for depreciation etc., a large number of companies presently file a blue return.

A newly established company wishing to file a blue color tax return must apply to the appropriate National Tax Office by the earlier of the following dates: 3 months after its establishment or the end of the company’s first fiscal year.

Under the blue return system, a company is required to keep proper accounting records, maintain accounting books and report its income, based on those books and records, properly.

Does the tax office check company’s tax return frequently in Japan?

The frequency of tax audit by tax office seems to depend on the scale of the company. It could be held every year or once in ten years. Typically the tax office will contact your company in advance and schedule the date of audit.

In case they visit your company without any contacts to check your company’s accounting documents, you could decline it. Legally, unless it is criminal case, all your company required is to voluntarily respond to their requests for the audit. The tax officers are not allowed to audit without the taxpayer’s acceptance. It is needless to say that decline leaves tax office bad impression, though.

When the tax audit is stared upon your company’s acceptance, they visit your office for one to three days in general, review original documents (receipts, contracts etc) and ask you questions. If you weren’t able to answer to such questions immediately, you should request them to wait until you look closer to it. At the tax audit, conflicts of views between tax office and your company happens all the time. However you should make an assertion when needing it.

Our experienced tax accountants will advice you accurately to the tax audit focused on very specific points. We will take the responsibility of the tax audit from witnessing to negotiating, taking a stance of the tax payers, so you could attend the tax audit with complacency.