Monday, October 28, 2013

Overview of Japan withholding tax system

Japan’s tax filing system is premised on the self-assessed income tax payment system where an income earner shall calculate annual income and tax amount, filing tax returns. The income subject to withholding tax is determined in accordance with the income classification of tax law. In principle, withheld tax must be paid to the tax office no later than the 10th day of the month following that in which the taxable income is paid. For the payment to a non-resident or foreign corporation, the withholding tax may be paid by the last day of the month following that in which the income is paid. For withholding tax on residents’ salaries and professional service fees, a special exemption is provided to small businesses with fewer than 10 counts on the payroll, allowing paying withholding income tax in six-month installments twice a year.

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Thursday, October 17, 2013

Tax return and tax payment of Japan corporate tax, corporate inhabitant tax and enterprise tax

Japan branch and corporation must file final tax returns for corporate tax, corporate inhabitant tax and enterprise tax on taxable income within two months from the day following the last day of each tax year.  Extension of deadline for filing the final tax returns may be requested, with approval from the director of the tax office, for unavoidable reason (e.g. its audit has not been completed). Owed taxes must also be paid within this same period. The payment schedule and deadline will not be extended even if the deadline for filing the final tax returns were approved; tax deductible late payment charges for the extended period will be imposed if the tax payments shall be overdue.

Japan branch and corporation whose taxable years exceeding six months must file interim returns within two months from the day following the last day of the first six months taxable year, and such entities must pay the interim amount of tax owed accordingly.

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Tuesday, October 15, 2013

Treatment of losses in Japan corporate tax law

Net loss in each business year is carried forward for the next nine years (or seven or five years in certain cases) if Blue Form Tax Return is filed for the business year in which the loss arose, and a final tax return is then filed every subsequent year. If a corporation has capital in excess of 100 million yen or is a wholly owned subsidiary of a large corporation with capital of at least 500 million yen, the amount of loss that may be deducted from income is limited. Except in few cases, certain small and medium-sized enterprises filing the Blue Form Tax Return, are allowed to carry back a loss to the business year commencing not more than one year prior to the date of commencement of the business year in which the loss arose, receiving a full or partial refund of the amount of corporate tax in the business year in which the loss was carried back.

Thursday, October 10, 2013

Remittance from Japan branch and subsidiary company to home country

In general, a remittance made by a branch of a foreign corporation to its head office cannot be treated as expenses of the payer branch. But, a remittance made by subsidiary company to its parent company arise from business-to-business transactions, such as distributions of profits and loans (or repayments of loans) may be regarded as payments of costs/expenses of the said subsidiary and, therefore, certain of these costs/expenses are deductible when calculating the taxable income of the payer subsidiary company. However, certain income of the parent company, such as payments of interest, dividends and usage fees, may be subject to the Japan withholding tax at the source at the time of payment.

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Monday, October 7, 2013

Calculation of income subject to Japan corporate tax

Taxable income subject to corporate tax for each taxable year is determined with tax adjustments to corporate profits calculated under generally accepted corporate accounting standards and other accounting practices. Costs and expenses incurred in earning profits are deductible.

A foreign corporation face no restriction on the location in which costs and expenses are incurred for deduction. However, detailed statements of costs and expenses incurred and deducted from income in Japan must be settled, and these costs and expenses must be allocated fairly in the prescribed manner. Some examples of items for which there are limits on deductible costs and expenses are:

- Corporate tax and penalty imposed
- Donation
- Entertainment and social expense
- Amount exceeding depreciable limit of depreciable and deferred asset
- Compensation of director

Representative office is, in principle, not subject to Japan corporate tax because it is not supposed to engage in income-generating busiess activity, except publicity/advertising, information gathering, market survey and other non-siginificant, subsidiary business tasks.

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Friday, October 4, 2013

Mandatory notification to tax offices of corporation and branch in Japan

When corporation or branch office is newly established in Japan, notification pertaining to start-up must be submitted to tax authorities within a prescribed period after establishment. The tax notification must also be submitted when carrying out business activities through locations or parties under the following conditions:

(1) Construction, installation, assembly and others; or control and supervision of such works extends for a period of more than one year.
(2) Engaging in business through agents as described below:

- Parties having and frequently exercising the authority to conclude business agreements on behalf of a foreign corporation.
- Parties storing assets on behalf of a foreign corporation in a volume/quantity corresponding to the ordinary requirements of customers and delivering those assets in response to customers' requests.
- Parties who regularly carry out a siginificant work required for order acquisition, consultation and other activities for the conclusion of business agreements solely or primarily on behalf of a foreign corporation.

The taxes levied in Japan on income generated by the activities of branch and corporation include corporate tax (national tax), corporate inhabitant tax (local tax) and enterprise tax (local tax) (collectively referred to as "corporate taxes"). A whole income for each business year is the tax basis for determining corporate taxes. Except in instances requiring exceptional treatment, the scope of income subject to corporate inhabitant tax and enterprise tax is calculated in accordance with the provisions for corporate tax. Corporate inhabitant taxes are levied not only on income but also, in principle, on a per capita basis (based on its capital and number of its employees at that time).

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