Direct taxation of businessesi Tax on profitsDetermination of taxable profit
Under the Corporation Tax Act of Japan (CTA), taxable income is derived by subtracting deductible expenses from gross profits. Deductible expenses are similar to accounting expenses, but with some important differences, and exclude certain kinds of accounting expenses. Gross profits are similar to accounting incomes, but with some important differences, and exclude certain kinds of accounting income.
There are major differences between deductible expenses and accounting expenses under the CTA, as follows:
- in respect of depreciable or amortisable assets, the amount of depreciation or amortisation permitted to be included in deductible expenses is limited. Specifically, the amount of depreciation or amortisation deductible for each year is calculated based on the useful life of the relevant asset, which in turn is determined based on the category of the relevant asset, and on the method of depreciation or amortisation adopted by the company. It should also be noted that under the Japanese tax system, depreciation and amortisation are required to be recorded first as accounting expenses before they can be registered as expenses deductible from taxable income in the relevant financial year;
- the amount of remuneration paid to officers shall not be included in the deductible expenses unless the period of remuneration payment is a constant period of one month or less, and the amount thereof is the same at each time of payment, remuneration is paid based on a provision with registration that ascertains an amount to be paid at a fixed time or remuneration is a certain kind of performance-linked remuneration;
- the amount of contribution or donation exceeding a certain amount shall not be included in the deductible expenses; and
- the amount of entertainment account exceeding a certain amount shall not be included in the deductible expenses.
Practically speaking, taxable income is derived from accounting profits. Once accounting profits have been ascertained, taxable incomes can be calculated by adding to the accounting profits the non-deductible expenses referred to above, and deducting therefrom, exclusive of gross profits, such items as certain portions of dividends distributed from a corporation.
In Japan, profits are taxed on an accrual basis and not on a receipt basis. Japanese corporations are subject to taxation on their worldwide income. Foreign corporations, on the other hand, are only subject to taxation on Japan-source income for the purposes of Japanese taxation. A foreign corporation's taxable Japan-source income differs depending on whether the foreign corporation is deemed to have a permanent establishment (PE) in Japan. Japan's system of taxable domestically sourced income adopts the 'attributable income principle'. Under this principle, in relation to taxation on business profits of a foreign corporation, only the portion that is attributable to its PE in Japan will be recognised as Japan-source income and, therefore, subject to Japanese taxation.Capital and income
Realisation of and taxation on capital profits are usually deferred to the time of sale of the relevant asset. Where assets are sold at a profit, corporate income and capital profits will be aggregated and subject to corporate income tax at the corporate income tax rate.LossesTax loss carry back
Where a domestic corporation incurs losses in a financial year, it may, simultaneously with the filing of its tax return, also file a claim for a corporate income tax refund for a certain amount of corporate income tax for any financial year commencing within one year prior to the beginning of the relevant loss-making financial year, depending on the amount of the said loss. However, where a corporation is not a small or medium-sized company (i.e., not a corporation with stated capital of ¥100 million or less, but excluding a corporation that is completely controlled by a corporation with stated capital of ¥500 million or more), this refund will not be applicable.Tax loss carry-forward
When a domestic corporation files a final tax return that indicates losses in a financial year commencing within nine years prior to the first day of each of its financial years (or that indicates losses in a financial year beginning on or after 1 April 2018 and commencing within 10 years prior to the first day of each of its financial years), an amount equivalent to the said loss will be permitted to be included within the deductible expenses for each relevant financial year. However, where a corporation is not a small or medium-sized company and the amount of said loss exceeds the maximum deductible amount stated in the following table for the relevant financial year, inclusion within the deductible expenses will not apply to the amount of the said excess.
|Commencement date of the financial year when the relevant loss is included within the deductible expenses||1 April 2017 to 31 March 2018||1 April 2018 onwards|
|Maximum deductible amount||55 per cent of the taxable income||50 per cent of the taxable income|
In the case of a merger, losses are not usually permitted to be succeeded by the surviving corporation unless certain requirements for exceptional treatment are satisfied.
Under the CTA, taxable income is subject to aggregate taxation and is not taxed on an income category-by-category basis. Accordingly, in cases where losses are incurred by a business, but it receives capital gains from the sale of some assets, then said losses offset the income of the capital gain and reduce the taxable income.Rates
The corporate income tax rate applicable to small or medium-sized companies is 15 per cent for income up to ¥8 million and 23.4 per cent for the portion of income in excess of ¥8 million. The corporate income tax rate applicable to companies other than small or medium-sized companies is 23.4 per cent. The corporate income tax rates will, however, be amended in the manner set forth below.
|Commencement date of the financial year||1 April 2016 to 31 March 2018||1 April 2018 to 31 March 2019||1 April 2019 to 31 March 2020|
|Small or medium-sized companies||Up to ¥8 million||15 per cent||15 per cent||19 per cent|
|Portion in excess of ¥8 million||23.4 per cent||23.2 per cent||23.2 per cent|
|Companies other than small or medium-sized companies||Overall||23.4 per cent||23.2 per cent||23.2 per cent|
Other than corporate income tax, companies are also subject to, inter alia, the following taxes, which are proportional with a rate that is flat or progressive, on profits generated:
- local corporation tax
- special local corporation tax (to be abolished for financial years beginning on or after 1 October 2019);
- inhabitant tax; and
- enterprise tax.
A corporation's effective corporate income tax rate is determined by the amount of its stated capital and the location of its office. Corporations that have stated capital of more than ¥100 million and offices located in an area where the excess tax rate is not applied have an effective corporate income tax rate of 29.97 per cent from 1 April 2016 to 31 March 2018, and 29.74 per cent from 1 April 2018 to 31 March 2019. 'Effective tax rate' means the tax rate taking into account the deductibility of special local corporation tax and enterprise tax payments from taxable income.Administration
Corporations are required to file their final tax return to the district director of the relevant tax office for corporate income tax (national tax) within two months following the end of each financial year (final return). A corporation whose financial year exceeds six months is also required to file an interim tax return to the district director of the relevant tax office within two months of the end of the first six months of its financial year (interim return).
In some cases, the competent district director may extend the filing deadline for a final return by one month or more if such extension is requested. Regardless of whether the deadline is postponed, corporations are required to pay corporate income tax by the original tax return filing deadline. Therefore, where the tax return filing deadline is extended, corporations are liable to pay interest on payable corporate income tax for the period of extension.
The primary objectives of the National Tax Agency (NTA) include the enhancement of transparency in tax filing procedures, creating predictability for taxpayers, encouraging taxpayers' cooperation in investigations by the tax authority, improving the efficiency of the self-assessment system and strengthening accountability.
Matters of national tax (excluding internal consumption tax on imported goods, which is under the jurisdiction of the Customs and Tariff Bureau) are within the NTA's purview. The NTA has 11 regional tax bureaux, a national tax office in Okinawa and around 500 tax offices located throughout Japan.
Matters of local tax fall within the jurisdiction of the relevant prefectural tax office or city office of the relevant local government.
Tax offices have the authority to conduct tax audits for corporate income tax. The timing of such audits is not prescribed in the relevant laws and regulations. Notwithstanding this, there is a general understanding that tax audits are conducted once every few years and are typically focused on corporations whose profits swing widely from year to year.
Revised tax returns may be filed to increase tax liability when the declared tax amount is less than the correct amount stated in the new tax return.
On the other hand, if the declared tax amount is more than the correct amount, corporate income tax reassessments may be requested by taxpayers, provided such requests are conducted within the permitted time frame (as indicated in the table below).
|Type of request for tax reassessment||Permitted time frame (beginning from the deadline for filing of the relevant tax return)|
|Tax reassessment in relation to transfer pricing||Six years|
|Tax reassessment in cases of changes to net loss amount||–31 March 2018||Nine years|
|1 April 2018–||10 years|
The district director of the relevant tax office may conduct reassessments of corporate income tax, provided such reassessments are conducted within the permitted time frame (as indicated in the table below).
|Type of tax reassessment||Permitted time frame (beginning from the deadline for filing of the relevant tax return)|
|Tax reassessment in relation to transfer pricing||Six years|
|Tax reassessment in situations where a taxpayer evades tax through fraud or other wrongful means||Seven years|
|Tax reassessment in cases of changes to the net loss amount||–31 March 2018||Nine years|
|1 April 2018–||10 years|
Taxpayers wishing to appeal a tax assessment can do so through the following avenues:
- making a request for reinvestigation to the director of the relevant tax office that had performed the original tax assessment (taxpayers are not obliged but have the right to request a reinvestigation before requesting a re-examination under (b));
- making a request to the National Tax Tribunal (NTT) for a re-examination of the original tax assessment; and
- filing a lawsuit. (Lawsuits can only be filed, in principle, after the results of the NTT's re-examination under item (b) have been released.)
As stated above, item (c) may be conducted only after following the procedure mentioned in item (b). On the other hand, a taxpayer may skip item (a) and go straight to item (b) instead.Tax grouping
There are two regulatory frameworks in Japan in respect of tax consolidation: the full controlling interest framework and the consolidated return framework.
The full controlling interest framework applies mandatorily to intra-group transactions (including transactions involving transfers of assets, losses, dividends and interest) where all companies in the group are wholly owned (whether directly or indirectly) by the ultimate parent of the group, regardless of whether the ultimate parent is a foreign or domestic company or individual, provided that the parties to the relevant transaction are domestic companies. Under this regulatory framework, taxation on intra-group profits from transfers of certain kinds of assets, such as fixed assets, securities, monetary claims and deferred assets (qualifying assets), is deferred until those assets are transferred outside the group. Additionally, intra-group contributions, donations and dividends are disregarded. Where the full controlling interest framework applies, certain tax incentives to which corporations with stated capital of ¥100 million or less are normally entitled would no longer be available to a small or medium-sized company that is fully controlled by a large corporation with stated capital of ¥500 million or more.
On the other hand, the consolidated return framework is, where approved by the Commissioner of the NTA, only applicable to groups in which all companies are wholly owned (whether directly or indirectly) by the ultimate parent of the group and the companies consist only of domestic companies. Under this framework, corporate income tax is calculated based on the group's consolidated income and payable by the domestic controlling corporation as the taxpayer. In respect of subsidiaries in such groups, unrealised profits and losses of qualifying assets will be imputed to taxable income or losses for the financial year immediately preceding that in which the consolidated return applies to the group. In addition, under the consolidated return framework, taxation on profits from intra-group transfers of qualifying assets is deferred until those assets are transferred outside the group. Intra-group contributions, donations and dividends are also disregarded under the consolidated return framework.ii Other relevant taxes
In addition to corporate income tax and other taxes on profits, which are stated above, the taxes that generally apply to businesses are, inter alia, withholding tax under the Income Tax Act of Japan, fixed property tax, consumption tax, stamp duty, registration tax and real estate acquisition tax.
Fixed property tax is proportional to the book value of the relevant property as indicated in the property register. Consumption tax is imposed on transfers of assets, with the transferor being deemed the taxpayer, although such tax is borne by the transferee in practice. Notwithstanding the above, in certain categories of online transactions, a 'reverse charge' was introduced and the transferee is deemed the taxpayer of consumption tax. Stamp duty is generally imposed on documents such as written contracts. Registration tax is imposed when registration is undertaken with the authorities, such as when real estate is registered on the national real estate register. Real estate acquisition tax, as its name suggests, is imposed on acquirers of real estate.