Ask the ExpertsTaxation in Japan

Description: "JETRO" logo is displayed on the upper right corner of the screen. The title appears. The letters "Ask the Experts" appear one by one. In the background, there are two women and two men talking. The small blue text "Taxation in Japan" appears under the text "Ask the Experts." There is a moving geometric pattern in the background. A short-haired woman in a white shirt and black pants appears facing the camera.

Caption: MAAYA KONISHI/MC

MC: Hello everyone, this is "Ask the Experts." When starting a full-fledged business in Japan, it is very important to establish a company in Japan as a base for localization and business development.

Description: The screen changes to show the MC from the chest up, viewed from the front right.

MC: For establishing the base, you need to proceed in accordance with Japanese laws and regulations.

Description: The MC is talking facing the camera.

MC: In this video series, experts in the field of incorporation will explain the advantageous information that foreign companies need to know when incorporating in Japan.

Description: The screen changes to show the MC from the shoulder up, viewed from the front right. A white arrow appears on the right of the screen with the blue text "Taxation in Japan."

MC: In this episode, we will be focusing on Taxation in Japan. Experts will explain the topics that many foreign companies have questions about when establishing a base in Japan.

Description: The screen fades to white, and the text "Tax procedures of incorporating in Japan" appears in three lines in the middle of the screen. The screen clears up to shows the legs of a person in pink pants and a gray jacket sitting on a chair over an ornamental foliage plant. The screen changes to show a short-haired woman in a gray jacket from the chest up.

Caption: NAOKO SATO Representative director of Akia Tax Consultants K.K.

MC: Let me introduce Ms. Sato. Thank you so much for joining us.

Sato: Thank you for having me.

Description: The screen changes to show the MC from the chest up. A white box appears on the right of the screen with the text "What are the important points when establishing a corporation?"

MC: It feels overwhelming thinking about all the things we have to do. Where should we start?

Description: The screen changes to show Sato, who starts talking. A blue arrow appears on the left of the screen with the text "SCHEDULING."

Caption: What are the important points when establishing a corporation?

Sato: I think the first important matter is scheduling. Each of the procedures just introduced has its own deadline. So it's important to plan ahead accordingly, so you do not miss the deadline for submitting your documents.

Description: The screen shows the MC and Sato together, who are sitting facing each other on chairs positioned at angles in front of the camera. Sato is talking.

Sato: This may sound a lot of work, but if you follow and understand the rules and apply certain procedures, it can often be advantageous for tax purposes. So in this video, I would like to share you the key points you need to know.

Description: The screen changes to show the white text "Differences in accounting standards between Japan and home country" in four lines. The screen clears up to show a profile of the MC over an ornamental foliage plant.
The screen changes to show the MC from the chest up. A white box appears on the right of the screen with the text "How are Japanese accounting standards different from other countries?"

MC: My first question is how are accounting standards between Japan and other countries different?

Description: The screen changes to show Sato, who answers.

Caption: How are Japanese accounting standards different from other countries?

Sato: Well, the bookkeeping system, which is the basis of accounting is a universal rule. So to some extent, the same rules can be applied to any companies. However, there are some cases where the rules are treated differently. So at the time of setup, the following two points should be noted in particular.

Description: The screen shows the MC and Sato together, who are sitting facing each other on chairs positioned at angles in front of the camera. Sato is talking. A large blue box appears to the left side of Sato from the bottom of the screen. The box contains a dark blue arrow with an illustration of paper and pen on the left side and the words "Prior Notification" on the right side. Check boxes appear under the arrow that are labeled, from top to bottom, with the white text "Depreciation," "Inventory evaluation," and "Receivables and payables in foreign currency."

Sato: First of all, if you want to apply the rules of your home country, you may be able to continue by prior notification. There is statutory valuation method, stipulated in Japan such as depreciation method, inventory valuation, or valuation of receivables and payables in foreign currency. However, if you wish to adopt the method that differs from the statutory method, there are other options you can choose. In order to do so, you are required to submit a notification in advance.

Description: The screen changes to show the MC and Sato. Sato puts her left hand up and raises her two fingers. A blue arrow appears to the left of Sato, containing an illustration of a bag with a dollar sign on the left side and the text "Director Remuneration" on the right side.

Sato: The second point is to know special tax rules in Japan. Well known example is Director remuneration. Whether director remuneration is recognized as expense for tax varies from country to country. But in Japan fluctuating portion of director remuneration is not recognized as expenses for tax. There are solutions which can be taken in advance. So again, it is important to be aware of such rules.

Description: The screen changes to show the white text "How to determine the capital amount" in two lines.
The screen clears up to show the MC and Sato together, who are sitting facing each other on chairs positioned at angles in front of the camera. The MC talks to Sato. The screen changes to show the MC from the chest up.
A white box appears on the right of the screen with the text "How should capital amount be determined?"

MC: Next, we need to think about capital. I hear that this is a common question that has been asked. How should we think about capital from a taxation point of view?

Description: The screen changes to show Sato, who answers.

Caption: How should capital amount be determined?

Description: A blue arrow appears to the left of Sato with the white text "Smaller amount," to the right of which an illustration of thumb up appears.

Sato: Basically, the smaller the amount of capital, the better it is from a tax standpoint. Firstly, small medium sized enterprises with capital amount of 100 million yen or less are eligible for a reduced corporate tax rate.

Description: The screen changes. A blue arrow appears with an illustration of three bags with a dollar sign and the text "100 million yen or less" under the illustration. A white box with the same height as that of the arrow extends from it to the right side of the screen. The box contains the blue text "Reduced corporate tax." The field of view moves downward to the left. A similar blue arrow appears under the first blue arrow. It contains an illustration of a coin with a dollar sign and three stacks of coins, under which there is the white text "Less than 10 million yen." A white box with the same height as that of the arrow extends from it to the right side of the screen. The box contains the blue text "Tax exempt enterprise on consumption tax." The field of view moves further downward to the left. A similar blue arrow appears. It contains an illustration of a coin with a dollar sign and three stacks of coins, under which there is the white text "10 million yen or less." A white box with the same height as that of the arrow extends from it to the right side of the screen. The box contains the blue text "Lowest bracket applied for per capita levy of corporate inhabitant tax." The camera zooms out to show the three arrows with the corresponding white boxes in a stacked manner.

Sato: Furthermore, a corporation with capital amount of less than 10 million yen can become a tax exempt enterprise for consumption tax purposes during its first year of operation. In addition, the per capita tax levy of the corporate inhabitant tax is also determined by the amount of capital and the number of employees, and the minimum amount is set for companies with capital of 10 million yen or less.

Description: The screen changes to show the MC, who talks to Sato.

MC: Let me just clarify, so the less capital the less tax burden you will have.

Description: The screen changes to show Sato, who answers. Sato talks with her two fingers up.

Sato: Yes, but there are two points to be noted.

Description: A blue arrow appears to the left of Sato, containing an illustration of a bag with a dollar sign on the left side and the white text "Taxes can be affected by...parent company's capital amount" on the right side.

Sato: One is that even if the capital of the subsidiary is set low, if the capital of the parent company is high, the reduced tax rate may not be applied in some cases. Therefore, it's important to check the conditions of the parent company. Specifically, if the parent company that owns 100% of the subsidiary is a large corporation with capital of 500 million yen or more, the reduced tax rate will not apply, even if the subsidiary's capital is less than 100 million yen.

Description: The screen shows the MC and Sato together, who are sitting facing each other on chairs positioned at angles in front of the camera. Sato is talking.

Sato: Therefore, please be careful when the parent company is listed on a stock exchange in your home country or when the parent company increases its capital in the middle of a fiscal year.

Description: A blue arrow appears to the left of Sato with the white text "Thin-capitalization taxation."
Sato talks with her two fingers up.

Sato: The second point is thin-capitalization taxation. When the company is short of fund and needs financing from parent company, you will either need to increase the capital contribution or get a loan from your parent company.

Description: The screen changes to show an illustration of a stack of several cards with a dollar sign on the top against an all-white background, above which there is the blue text "Investment." The field of view moves to the right. The blue text "Borrowing" and an illustration appear, showing the previous card with a dollar sign being inserted into a slot. The camera zooms out, and you can see the illustration of a slot with the text "Borrowing" on the right, at the position of 3 O'clock, from which an arrow is drawn counterclockwise to the position of 12 O'clock, where there is an illustration of a two-block building with the text "Japan." From that position, an arc is drawn to the position of 9 o'clock, where there is the text "Interest," under which there is an illustration of a clock with a circled dollar sign in the foreground. From that position, an arrow is drawn counterclockwise to the position of 6 O'clock, where there are the text "Other countries" and an illustration of a large building. An arc is also drawn between the position of "Other countries" and that of "Borrowing." The camera further zooms out, and a blue line appears under the four illustrated components of the cycle, under which there is the blue text "Increasing interest," followed by the red text "reduces taxable income." The whole diagram containing what has been mentioned so far moves to the right of the screen, and another white box appears on the left. The white box contains similar illustrated components of a cycle. In this diagram, there are the text "Investment" and an illustration of a stack of several cards with a dollar sign on the top at the position of 3 O'clock, from which an arrow is drawn counterclockwise to the position of 12 O'clock, where there are the text "Japan" and an illustration of a two-block building. From that position, an arc is drawn counterclockwise to the position of 9 O'clock, where there is an illustration of a card with a dollar sign, above which there is the text "Dividends." From that position, an arrow is drawn counterclockwise to the position of 6 O'clock, where there are the text "Other countries" and an illustration of a large building. An arc is also drawn between the position of "Other countries" and that of "Investment." A blue line is drawn under the four illustrated components of the cycle, under which there is the text "Increasing investments does not reduce taxable income." Its part "does not reduce taxable income" is in bold. The camera further zooms out, and a square balloon appears under the first white box containing a cycle diagram on the right. The balloon contains the text "Interest payments over a certain amount are not allowed as expenses for tax purposes."

Sato: In the case of borrowing, the interest payment can be treated as an expense for tax purposes, whereas payment of dividends to the capital contribution is not tax deductible expenses. So taxable income will be lower in case of the loan, thus, in order to prevent excessive tax avoidance, a rule has been established that interest payments exceeding a certain amount are not deductible as expenses for tax purposes.

Description: Sato is talking with her three fingers up.

Sato: Specifically, this rule applies to loans exceeding three times the amount of capital. But this calculation is very complicated. So companies finding to make large capital investments are companies with small capital that plans to borrow from parent company from beginning, it will be a good idea to consult with your tax advisor.

Description: The screen changes to show the MC, who talks to Sato. The screen shows the MC and Sato together, who are sitting facing each other on chairs positioned at angles in front of the camera.
Blue text appears in a white box between the two, reading "Is capital relevant to company registration?"

MC: I see. So there are multiple tax systems that you need to keep in mind when deciding on capital amount. Speaking of capital, I think we need to refer to how it affects registration.

Description: The screen changes to show Sato, who answers.

Caption: Is capital relevant to company registration?

Sato: Yes, apart from tax perspective, too little capital is also not a good idea, according to JETRO's advisor. In Japan, capital tends to be seen as a criterion of measuring a company's business scale and credibility. Therefore, it's not recommended to keep the amount extremely small.

Description: A blue arrow appears to the left of Sato with the white text "Business Scale and Credibility." The screen changes to show the MC, who talks to Sato.

MC: I see. So there are multiple factors we need to take into consideration when deciding capital amount.

Description: The screen changes to show Sato, who answers.

Sato: I agree, I think each company has its own way of deciding the amount of capital. For details, please consult with JETRO and get advice from experts for the right amount of capital that suits your company the best.

Description: The screen changes to show the white text "Easy to overlook taxes" in one line. The screen clears up to show the MC and Sato together, who are sitting facing each other on chairs positioned at angles in front of the camera. The MC talks to Sato. The screen changes to show a white box to the right of the MC with the text "What taxes are easily overlooked by foreign companies?"

MC: Here's my next question. There are many different types of taxes in Japan. Are there any we should particularly pay attention to?

Description: The screen changes to show Sato, who answers.

Caption: What taxes are easily overlooked by foreign companies?

Description: The screen changes to show a blue arrow to the left of Sato with the white text "Withholding Tax."

Sato: I would say that would be withholding tax. Normally, the person who earns the income pays the tax. But in the case of withholding tax, the payer deducts income tax first and then pays to the tax to the tax office.
A typical withholding tax would be on salaries and in many countries including Japan, the tax on salary is deducted by the company and paid to the wage earner. The withholding tax I would like to introduce you today is the case applied to overseas payments.

Description: An illustration of a two-block building appears against a white background, under which there is the text "Japan." The field of view moves slightly toward the upper left, and a deep pink balloon appears with the white text "Withholding tax needs to be deducted." An arrow is drawn from the illustration of the building to the left to an illustration of a large building with the text "Overseas business partners" underneath. There is a dollar sign is in the middle of the arrow. Above the arrow is the text "Pays dividend, royalty, interest, etc." The field of view moves toward the right. When the previous illustrations become half invisible, an arrow is drawn to the right from the illustration of the two-block building with the text "Japan." There is an illustration of a card with a dollar sign on the arrow. Above the arrow is the text "Withholding Tax Payment." At the tip of the arrow is an illustration of a temple-like structure with the text "Government" underneath. The camera zooms out to show the whole diagram, centered around "Japan." A blue line is drawn under these illustrations, under which there is the text "Withholding tax is required for certain payments to overseas. If there is tax treaty between two countries, lower rate may be applied."

Sato: For example, withholding tax is required when remitting dividends, interests or license fees. Before making such payments, it is advisable to check whether withholding tax is applicable. Also, if the country has tax treaties with Japan, you may be able to receive tax reductions by submitting a notification, so you should check this point as well.

Description: The screen changes to show the MC on the left and the text "What happens if I miss a withholding tax?" on the right.

MC: Are there cases where someone forgets withholding taxes and gets into trouble?

Description: The screen changes to show Sato, who answers.

Caption: What happens if I miss a withholding tax?

Description: A blue arrow appears to the left of Sato with the white text "Late Payment Charge." A deep pink box with the white text "PENALTY!" overlaps the upper right corner of the arrow.

Sato: Yes, for example, there are cases where you remit money without knowing about withholding tax for several years. And later when you check your past records, you realize that it was subject to withholding tax. You can pay it later, but late payment charge will be added as penalty. If it was pointing out a tax audit, the unpaid withholding tax for several years could be a large amount. And so with the penalty portion, since the recipient has already received the payment, they may not agree to refund the withholding tax even if you explain the situation. In such cases, the company may have to pay the withholding tax as well.

Description: The screen changes to show the MC, who talks to Sato.

MC: Wow, there are such cases like that.

Description: The screen changes, and the white text "Transfer pricing taxation" appears in two lines.
The screen clears up to show the MC and Sato together, who are sitting facing each other on chairs positioned at angles in front of the camera. The MC talks to Sato. The screen changes to show a white box to the right of the MC with the text "Does transfer pricing taxation apply in Japan?"

MC: Moving on to the next topic, a topic popular among international taxation, transfer pricing taxation. Does transfer pricing taxation apply in Japan?

Description: The screen changes to show Sato, who answers.

Caption: Does transfer pricing taxation apply in Japan?

Sato: Yes, it's applicable in Japan too. Transfer pricing taxation is an international rule that states that transactions with foreign affiliates are calculated as if they were conducted at the same price as a transaction with a third party.

Description: An illustration of a large building appears with the blue text "Other countries" against a white background. When the camera zooms out, double arrows are drawn from the illustration of the large building to the right and left sides. There is an illustration of shaking hands in the middle of each arrow with the text "Transaction" above. There is an illustration of a human from the chest up to the right of the double arrow on the right, with the text Japan (Subsidiary) underneath. There is an illustration of a two-block building to the left of the double arrow on the left, with the text "Japan (Third party)" underneath. The camera further zooms out, and dotted lines become visible that are drawn from the illustrations of shaking hands on the horizontal double arrows toward the center of the screen, under the text "Other countries." There is a blue rectangle containing the white text "Deem as same price" at the destination of the dotted lines. A long, blue line is drawn under it to cover the entire connection of the three entities, under which there is the text "Transactions with overseas affiliates are deemed to have occurred at the same prices as those with third parties for tax purposes." Its part "at the same prices as those with third parties" is pink in boldface, and the other part is blue in lightface.

Sato: For example, when a foreign parent company sells or provides services to a Japanese subsidiary, he cannot charge an extremely low or high price just because it is an affiliate, but must charge the same price as if it were dealing with a third party. Some of the multinational corporations have long been pointed out to reduce their tax burden by manipulating their group companies to make less profit in the countries with higher taxes. Transfer pricing taxation is a rule to prevent this price control and it is also included in the BEPS project, a program led by OECD and Japan is also taking part in it.

Description: A blue box appears to the left of the Sato from the bottom of the screen. It contains a dark blue arrow with the white text "OCED BEPS PROJECT" and the white text "Tackling profit manipulation by multinational corporations to reduce tax burden" underneath. The screen changes to show the MC, who talks to Sato.

MC: What do we need to pay attention to in particular here?

Description: The screen changes to show Sato, who answers.

Sato: For example, parent company owns a right of software and licenses to directly to a Japanese customer without going through a Japanese subsidiary. In that case, it may seem that transfer pricing taxation is not relevant, because the payment is not made directly to the subsidiary. But if the Japanese subsidiary provides some support or contributes to the sales of parent company, the parent company may have to pay a certain fee or compensation to the subsidiary. Such payment amount will be subject to transfer pricing taxation.

Description: The screen shows the MC and Sato together, who are sitting facing each other on chairs positioned at angles in front of the camera. The MC talks to Sato.

MC: I see, so it's important to check the conditions here.

Description: The screen changes, and the white text "For companies considering expansion into Japan" appears in three lines. The screen changes to show the MC and Sato together, who are sitting facing each other on chairs positioned at angles in front of the camera. The MC talks to Sato.

MC: Thank you for sharing with us such beneficial information. Could you give us a message for those who are thinking of expanding their businesses in Japan?

Description: The screen changes to show Sato, who talks facing the camera.

Sato: As introduced in today's video, it is true that there are many rules and procedures that must be followed in order to start a business in Japan. On the other hand, there are also various efforts to support businesses in Japan.
For example, there is a tax credit system for companies that increase jobs in difficult economy situation, a system that allows startup companies that initially have more expenses than sales to carry forward losses to offset with future profits. In a system that allows tax credits and special depreciation for companies with large capital investments. We hope that you will make good use of such treatments. Therefore, we recommend that you seek advice from experts through JETRO for various procedures. We will be happy to advise you on the issues we have discussed today, the latest information and other points that will help your company receive preferential treatments and manage your business advantageously in Japan.

Description: The screen changes to show an opened laptop. It displays a webpage with the text "Setting up business," in the background of which there is an image of hands of people working while examining graphs on sheets of paper and a tablet. The laptop screen scrolls down to show the text "How to Set up Business in Japan Video Series" and the text "Steps of Setting Up Business," under which there are a flowchart and some photos. The screen changes to show the MC and Sato together, who are sitting facing each other on chairs positioned at angles in front of the camera. The MC talks to Sato.

MC: Thank you very much Ms. Sato. We hope you all understood the important points of taxation when incorporating in Japan. In addition to this taxation video, there are also videos on company registrations and visas and human resources management. If you'd like please check out these videos as well.

Description: The screen changes to show the MC, who talks facing the camera. Two white arrows appear to the right of the MC. One contains the blue text "Company Registration and Visas" and the other contains "Human Resources Management." The screen fades to white, and the text "JETRO’s support" appears in the center of the screen. The screen changes to show the MC, who talks facing the camera. A navy-themed world map titled "JETRO worldwide offices" appears on the right, where a balloon with a number is displayed for each of the relevant countries and regions. From the left: Europe 15, Africa 9, Middle East 5, Russia CIS 3, Asia 27, Japan 51, Oceania 2, North America 8, and Central & South America 7.

MC: JETRO has more than 70 overseas offices to support foreign companies entering the Japanese market and developing their business. If you are a foreign company considering expanding your business to Japan, or establishing a base in Japan, please visit your nearest JETRO office or contact us through the inquiry form provided in the description below. Our experienced staff will be happy to guide you through the process. We wish you success in the Japanese market. See you soon.

Description: The screen fades to white. The logo of "JETRO Japan External Trade Organization" appears, under which letters appear randomly to form the large blue text "Succeed Together in Japan and Beyond."