Get our post in your mailbox

Income Tax in Japan



In Japan, permanent resident taxpayers are taxed on their worldwide income. Non-resident taxpayers are taxed only on their Japan-sourced income. Non-permanent resident taxpayers are taxed on their Japan-sourced income plus potentially part of their non-Japan-sourced income that is paid in or remitted to Japan.

Concept of residence and taxable income:

Residents:

Persons having a domicile in Japan(*) and persons having a residence in Japan for one year or more are termed residents. The worldwide income of residents, regardless of the location of the source of income, is subject to income tax.

(Note)Non-permanent residents: Residents having no Japanese citizenship and having a domicile or residence in Japan for five years or less within the period of ten years are non-permanent residents.

The scope of taxation for non-permanent residents corresponds to that for residents, but tax will not be assessed in Japan on income sourced outside Japan as long as that income is not paid within Japan or is not remitted to Japan. However, the salary paid based on the work in Japan is applicable to domestic-sourced income even if it is paid outside Japan, and income tax will be assessed summing the salary paid within and outside Japan.

Non-residents:

Persons not qualifying as residents are termed non-residents. Japanese income tax for non-residents will be assessed on income sourced within Japan. As described in 3.4.4 above, the scope of taxable income for withholding tax on non-residents is covered under the provisions for domestic-sourced income, so, except in special cases, taxation for non-residents is now more commonly completed only through withholding at source procedures.

* "Domicile" as used above refers to the principal base and center of one's life. "Residence" refers to a location in which an individual continually resides for a certain time but which does not qualify as a base and center of his/her life.

Individual income tax rates:

Brackets of Taxable Income
Tax Rates
-
Or under 1,950,000 yen
5%
Over 1,950,000 yen
Or under 3,300,000 yen
10%
Over 3,300,000 yen
Or under 6,950,000 yen
20%
Over 6,950,000 yen
Or under 9,000,000 yen
23%
Over 9,000,000 yen
Or under 18,000,000 yen
33%
Over 18,000,000 yen
Or under 40,000,000 yen
40%
Over 40,000,000 yen
-
45%

Income tax on employment income is calculated based on the amount obtained by deducting the following employment income deductions from income.

Employment income deductions:

Employment Income
Employment Income Deductions
Up to 1,625,000 yen
650,000 yen
Over 1,625,000 yen and up to 1,800,000 yen
(employment income) x 40%
Over 1,800,000 yen and up to 3,600,000 yen
(employment income) x 30% + 180,000 yen
Over 3,600,000 yen and up to 6,600,000 yen
(employment income) x 20% + 540,000 yen
Over 6,600,000 yen and up to 10,000,000 yen
(employment income) x 10% + 1,200,000 yen
Over 10,000,000 yen and up to 12,000,000 yen
(employment income) x 5% + 1,700,000 yen*
Over 12,000,000 yen*
2,300,000 yen

* From 2017 onwards, employment income deduction for the income of over 10,000,000 yen will be 2,200,000 yen.

Capital Gains:

Capital gains are, in principle, aggregated with other income after deductions for necessary expenses and after a statutory deduction of a maximum of JPY 500,000.

If the transferred assets were owned for more than five years, the gain is regarded as a long-term capital gain, and the taxable basis is reduced to 50% of the net capital gain.

Capital gains from sales of real property (land, building and structures) are taxed separately from other sources of income.

Capital gains from sales of certain securities (including shares/equity interest in corporations, warrant bonds, etc.) are taxed separately from other sources of income at a flat rate of 20.315% (i.e. 15.315% national tax and 5% local inhabitant’s tax).

Listed shares are shares listed on Japanese or foreign stock exchanges and transacted through a financial institution licensed in Japan. Unlisted shares are shares other than listed shares indicated above, including shares listed on Japanese or foreign stock exchanges that are not transacted through a financial institution licensed in Japan.

While capital gains/losses arising from the sale of listed shares can currently be offset against capital losses/gains arising from the sale of non-listed shares, this will no longer be possible under the 2013 Tax Reforms. From 1 January 2016, capital gains/losses arising from the sale of listed shares cannot be used to offset capital losses/gains arising from the sale of non-listed shares.

Dividend Income:

In principle, dividends are either taxed at (i) graduated rates after being aggregated with other sources of income or (ii) separately from other sources of income; however, certain capital losses may be used to absorb dividend income (see Losses in the Deductions section for more information). If paid onshore, dividends are subject to withholding tax (WHT). Dividends paid by corporations listed on an exchange qualify for the separate taxation treatment.

Interest Income:

Interest on domestic bank deposits and/or certain designated financial instruments is taxed separately from other income and is subject to 20.315% WHT (i.e. 15.315% national tax and 5% local inhabitant’s tax) if paid onshore. Interest paid by offshore financial institutions is taxed at graduated rates.

Rental Income:

Rental income consists of gross rents received in connection with the letting of real estate to either an individual or commercial tenant. To arrive at the taxable amount, any allowable expenses and depreciation are deducted from the gross income. To the extent a taxpayer has a net rental loss, this loss can be used to offset other types of income. Note that mortgage interest payments allocable to the ownership of land can’t be used to offset other types of non-rental income.

Overview of withholding income tax:

Japan’s tax filing system is based as a rule on self-assessed income tax payment where individuals (tax payers) calculate their annual income and tax amount, and file tax returns by themselves. In addition, a tax withholding system where companies (salary payers) collect income tax on the date of payment and pay the tax on behalf of individuals (income earners), is also introduced for specific incomes. Withholding income tax is assessed against payments of certain taxable income, whether paid to an individual or a corporation. Income subject to withholding income tax is determined in accordance with the type of income and the classification of the recipient of that income.

Withholding at source and payment procedures:

Persons/companies who pay income subject to withholding at source must pay the taxation office the amount of tax withheld at source no later than the 10th day of the month following that the income was paid. However, when a payer with a domicile or business office in Japan pays income to a non-resident or a foreign corporation in another country, the withholding income tax may be paid by the last day of the month following that the income was paid. Regarding withholding tax paid on residents’ salaries, certain professional fees, a special exemption is provided for small businesses with fewer than 10 persons on the payroll that allows them to make a prescribed election to pay withholding income tax in six-month installments twice a year (by July 10 and by January 20).

Withholding tax on residents (individuals):

Payments made in Japan of the following or other prescribed income to residents are subject to withholding at source:
·        Interest
·        Dividends
·        Salary, wages, bonuses and similar compensation
·        Retirement allowances
·        Compensation, fees, etc., to certain professionals

Withholding tax on domestic corporations

Payments made in Japan of the following or other prescribed income to domestic corporations are subject to withholding at source:
·        Interest
·        Dividends

Withholding tax on non-residents and foreign corporations:

Upon the payments made in Japan of the income to a non-resident or a foreign corporation, or such payments made overseas by payers with a domicile or business office, etc. in Japan, tax should be withheld. Of these payments, payments of certain categories of income as prescribed for non-residents and for foreign corporations to a non-resident or a foreign corporation with a permanent establishment within Japan are exempt from withholding taxation, provided that a certificate from the taxation office is presented to the payer attesting that the income will be attributed to that permanent establishment and will be added to business income subject to self-assessment for tax purposes.

Individual - Tax administration

Taxable period:

The Japanese individual income tax year runs from 1 January to 31 December.

Tax Returns:

All income tax returns are filed on an individual basis in Japan; joint tax returns are not permitted. The tax year is the calendar year for all resident-status individuals, and a taxpayer is required to file a national tax return by 15 March of the following year.

If a taxpayer’s income consists only of employment income paid by one local employer (including a Japanese branch of a foreign corporation) that does not exceed JPY 20 million in a year, the payer of the income makes a so-called ‘year-end adjustment’ on the employment income, and if total income other than employment income is JPY 200,000 or less, the employee is not required to file an income tax return.

Beginning with tax year 2013, permanent resident taxpayers with overseas assets that exceed JPY 50 million in gross value are required to submit a report of these assets to the tax authorities along with their annual tax returns. There are penalties associated with not filing or incorrectly filing the report, which differs from similar reporting requirements.

Assets and Liabilities Reporting:

Currently, individuals whose taxable income in the year exceeds JPY 20 million are required to disclose their worldwide assets and liabilities. Effective from 1 January 2016, this form will be renamed to 'Zaisan Saimu Chosho' (for this purpose, 'Assets and Liabilities Reporting'), from the current 'Zaisan Saimu Meisaisho' ('Assets and Liabilities Statement'), and additional criteria will be instituted to determine whether there is a requirement to file this form. In addition to the current condition on the amount of taxable income, only individuals whose assets with a fair value of JPY 300 million or more, or assets subject to the exit tax amounting to JPY 100 million or more, as of 31 December would be required to file this form.

Payment Of Tax:

If salary is paid in Japan by a local employer, monthly withholding of both national and local income taxes is required. The tax due on overseas payments of salary is payable when the tax return is filed, rather than through payroll withholding. Two provisional payments of national tax are required in July and November if the previous year’s final tax liability (after the deduction of WHT) was JPY 150,000 or more.

Tax audit process:

The tax authority of Japan is the National Tax Agency, and audits are conducted randomly.

Statute Of Limitations:

The standard statute of limitations under audit is currently five years, though this can be extended in cases of tax evasion.




Corporation Tax:

A domestic corporation in Japan is taxed on its worldwide income, including foreign branch income, while 95% of dividends received by a company from a foreign company in which it has held at least 25% (or could be lower under relevant tax treaties) of the outstanding shares for a continuous period of six months or more can be excluded from the company’s taxable income.
The corporation tax rates are provided in the table below (effective from fiscal years beginning on or after 1 April 2016 and 1 April 2018).

Company size and income
Corporation tax rate (%)
1 April 2016
1 April 2018
Paid-in capital of over 100 million Japanese yen (JPY)
23.4
23.2
Paid-in capital of JPY 100 million or less, except for a company wholly owned by a company that has paid-in capital of JPY 500 million or more:


First JPY 8 million per annum
15.0
15.0
Over JPY 8 million per annum
23.4
23.2

National local corporate tax:

As of 1 April 2017, corporate taxpayers are obligated to file and pay the national local corporate tax at a fixed rate of 10.3% of their corporate tax liabilities. Previously, the national local corporate tax rate was 4.4%.

Standard enterprise tax (and local corporate special tax):

Enterprise tax is imposed on a corporation’s income allocated to each prefecture. This allocation is generally made on the basis of the number of employees and number of offices in each location. The local corporate special tax, which is a rate multiplied by the income portion of enterprise tax, will be abolished from tax years beginning on or after 1 October 2019 and replaced by enterprise tax (including a size-based tax regime).

The standard rates of enterprise tax, including local corporate special tax, are shown below.

Taxable Base
Enterprise Tax (%)
Local Corporate Special Tax
First JPY 4 million per annum
3.4
43.2% of the current enterprise tax
Next JPY 4 million per annum
5.1
Over JPY 8 million per annum
6.7

If the paid-in capital of a corporation is JPY 10 million or more and the corporation has places of business in more than two prefectures, the graduated rates above are not applicable.

For utilities and insurance companies, the standard tax rate is shown as follows:

Taxable Base
Enterprise Tax (%)
Local Corporate Special Tax
Net revenue (net utility charges or net insurance premiums)
0.9
43.2% of the current enterprise tax


Size-based enterprise tax (and local corporate special tax):

Instead of the above general enterprise tax, a ‘size-based’ enterprise tax (Gaikei Hyojun Kazei) is applied to a company whose paid-in capital is more than JPY 100 million as of the year end.

Factors such as the size of a corporation’s personnel costs and its capital (the amount of paid-in capital) will determine the additional amount of tax payable. The existing profit-based enterprise tax will also continue to apply at the tax rates indicated below. Therefore, a loss company in Japan may be required to pay tax based on value-added activities and the corporation’s paid-in capital.

The applicable standard rates are as follows:

Taxable Base

Size-Based Enterprise Tax (%)
2015 Tax Reform
2016 Tax Reform And Further Amendments Per The Amendment Bill
Fiscal year beginning
1 April 2015
1 October 2019
Value added base
0.72
1.2
Capital base
0.3
0.5
Income base *


First JPY 4 million
3.1(1.6)
1.9(0.3)
Next JPY 4 million
4.6(2.3)
2.7(0.5)
Over JPY 8 million
6.0(3.1)
3.6(0.7)
Local corporate special tax (the rate is multiplied by the income base of size-based enterprise tax), which is collected as national tax by filing corporate tax returns
93.5
414.2**

* The rate shown for the income base is the total income-based tax including (i) the portion collected as part of the national tax return and (ii) the portion included as part of the enterprise tax return. The portion in parentheses of the income base column shows the amount collected as an enterprise local tax (the difference is collected as a national tax). The above rate changes for income base may not affect taxpayers who have elected consolidated taxation since consolidation is not applicable for local tax purposes.

** The local corporate special tax will be abolished from 1 October 2019 and replaced with an increase to the enterprise tax rate.

Inhabitant's Tax:

Inhabitant’s tax is imposed on a corporation’s income allocated to each prefecture and city (municipal borough). The allocation is generally made on the basis of the number of employees, in the same way as enterprise tax.

The standard tax rate is 3.2% as prefectural tax and 9.7% as municipal tax. However, the tax rate is increased to 4.2% for prefectural tax and 12.1% for municipal tax, depending upon the determination of each local government. From fiscal years beginning on or after 1 October 2019, the rate is increased as follows:


Inhabitant’s tax
Current
Expected from 1 October 2019
Standard rate (%)
Maximum rate (%)
Standard rate (%)
Maximum rate (%)
Prefectural tax portion
3.2
4.2
1.0
2.0
Municipal tax rate
9.7
12.1
6.0
8.4
Local corporate tax rate
4.4
10.3

In addition to the above, inhabitant’s tax is imposed on a per capita basis, in the range from JPY 70,000 (in cases where the amount of paid-in capital is JPY 10 million or less and the number of employees in each prefecture and city is 50 or less) to JPY 3.8 million (in cases where the amount of paid-in capital is over JPY 5 billion and the number of employees in each prefecture and city is over 50). The inhabitant’s tax amount is determined by the local government by the factors of paid-in capital and the number of employees.

Effective tax rate:

The total corporate income tax burden (i.e. effective tax rate) varies depending upon the size of a company’s paid-in capital. Since enterprise tax is deductible, the effective tax rate is less than the total of the statutory rates of corporation tax, inhabitant’s tax, and enterprise tax.

The following is the summary of the effective applicable tax rates in the case of small and medium enterprises (SMEs) and large corporations operating in Tokyo (taking no thought of an additional-value-based tax and capital-based tax out of the enterprise tax above):

Tax Year
Effective Corporation Tax Rate (%)
SMEs
Large corporations
Beginning on or after 1 April 2016
34.81
30.86
Beginning on or after 1 April 2018
34.60
30.62

Corporate - Tax administration

Taxable period:

The tax year is the corporation’s annual accounting period specified in its articles of incorporation. A Japan branch of a foreign corporation must use the same accounting period that is adopted by the corporation in its home country.

Tax returns:

Corporate income tax returns (i.e. the national corporation tax return, enterprise tax return, and local inhabitants’ tax return) are self-assessment tax returns.

If a corporation meets certain conditions, such as keeping certain accounting books, and makes an application for it in advance, it is allowed to file a ‘blue form’ tax return. A ‘blue form’ filing corporation may benefit from loss carry forward and other benefits.

A corporation (including a branch) is required to file the final tax return within two months after the end of its annual accounting period. If a corporation cannot file the final return because of specific reasons, the due date of the final return may be extended by up to four months (a corporation should be a company subject to the statutory financial audit as required in the corporate law) with the tax authority’s approval.

Payment of tax:

Income taxes payable on the final corporate income tax return should be paid on or before the filing due date of the final tax returns (usually two months after the end of the corporation’s accounting period). If an extension of time for filing is granted, the taxes may be paid on or before the extended due date with interest accrued at a rate of 1.7% (for the year 2017) per annum for the period from the day following the original due date (i.e. two months after the end of an accounting period) to the date of the actual payment.

Provisional tax payments are required for a corporation that has a fiscal period longer than six months. Provisional taxes generally are computed as one-half of the tax liabilities for the previous year, but they may be reduced by the filing of interim tax returns that reflect semi-annual results of the operations. The provisional tax payment is required to be made within two months after the end of the sixth month of the corporation’s accounting period.

Penalties:

If the tax return is filed late, a late filing penalty is imposed at 15% to 20% of the tax balance due. In the case that a corporation voluntarily files the tax return after the due date, this penalty may be reduced to 5% (15% for voluntarily filing after the tax audit notice is received).

An under-payment penalty is imposed at 10% to 15% of additional tax due. In the case that a corporation amends a tax return and tax liabilities voluntarily after the due date, this penalty may not be levied (10% for amending filing after the tax audit notice is received).

In addition, interest for the late payment of tax is levied at 2.7% per annum for the first two months and increases to 9.0% per annum thereafter (for the year 2017).

Consolidated taxation:

The parent company will file the consolidated tax return and pay national corporate income tax for the group. The consolidated tax return and payment due dates are the same as previously discussed; however, the due date of the final return may be extended for two months.

For local corporate income taxes, each member of the consolidated group must separately file the returns and pay the taxes.

Tax audit process:

Generally speaking, corporate tax audit is performed in cycles of three to five years’ duration. However, this period may be shortened in the case that some significant tax matters were pointed out in the prior audit and so on. If taxpayers request a downward correction, a tax audit will be performed to make sure of it.

With regard to tax audit procedures, tax laws have not clarified them thus far. Prior to conducting a tax audit, in principle, tax agents are required to notify taxpayers, and, upon completion of tax audits, tax agents are required to provide to taxpayers a brief written summary of their findings, etc.

Once an audit is complete, the basic principle is that a second audit is not allowed. However, if newly acquired information is obtained by the tax authorities that lead them to conclude that the reported taxable income should have been different, then the tax authorities can conduct another audit of the taxpayer. This limitation on the ability of the tax authorities to conduct a second audit only applies if the first audit was conducted on-site. If a ‘desk audit’ is only conducted, where the tax authorities do not conduct the audit on-site, no limitation applies.

Statute of limitations:

The statute of limitations to request a downward correction of prior year tax liabilities is five years (six years for transfer pricing) from when the original tax return was filed.


The statute of limitations with regard to upward corrections by the tax authorities is also five years (six years for transfer pricing).



-------------------------------------------------------------------------------------------------

Note: Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.

No comments:

Post a Comment

This blog is Created by CA Anil Kumar Jain.