ACCOUNTING & TAX

	INTRODUCTION

	ENTERING THE JAPANESE MARKET

	BUSINESS START UP

	ACCOUNTING & TAX

	SOCIAL INSURANCE

	SALARY AND TAXES

	PDF File
	(J,E,C,K)

Notification

Please note that K.K. in the following sentences means both K.K. and Branch unless otherwise stated separately.

Reporting and Elections

Reporting and elections for tax purposes are required after a K.K. (Kabushiki Kaisha) is established or a Branch is commenced for legal purposes. Following is a list of documents to be filed with the tax offices.

National Tax Office	Filing due
1. Report on establishment of company (KK only) A copy of articles of incorporation and a certified copy of company register must also be submitted	Within 2 months after establishment
2. Report on the establishment of a foreign corporation (Branch only)	Within 2 months after commencement
3. Application for approval of filing a blue tax return	Within 3 months after the date of establishment or the first fiscal year-end, whichever is earlier
4. Application for extension of filing due date for corporate tax return - if needed	The end of the fiscal year
5. Report on commencement of payroll payment	Within 1 month after establishment of office
6. Application for approval of paying withholding tax by every July 10 and January 10	Anytime if the number of employees is less than 10
7. Report on depreciation method of depreciable fixed assets	Filing due date for the first tax return
8. Report on method of evaluation of inventory assets	Same as 7 above

Local Tax Office	Filing due
1. Report on commencement of business A copy of articles of incorporation and a certified copy of company register must also be submitted	Within 15 days after starting business
2. Application for extension of filing due date for enterprise and inhabitant tax return - if needed	Same as 4 above

Blue tax return system

(1) Blue tax return system

Largely due to several privileges associated with blue tax returns, such as carry-forward of net operating loss, special measures for depreciation etc., a large number of companies presently file a blue tax return.

(2) Approval by NTA

A newly established company wishing to file a blue 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.

(3) Bookkeeping and maintaining accounting records

Under the blue tax return system, a company is required to keep proper accounting records, to maintain accounting books and reports for its income for 7 years at an office in Japan, based on the proper records and double-entry accounting in Japanese yen.

(4) Japanese Yen based bookkeeping

It is sometimes observed that Japanese Yen transactions are booked in foreign currency by applying applicable exchange rate. Then, the foreign currency base financial statements are retranslated into Japanese Yen at year-end for Japanese tax reporting purpose. As a result of this, cumulative translation adjustment account would be recognized in the Japanese Yen base financial statement.

However, such foreign currency base bookkeeping and retranslated financial statement are NOT allowed for Japanese tax purpose. As long as the business activities are conducted in Japan, functional currency must be Japanese Yen and Yen base bookkeeping is mandatory requirement for tax reporting purpose.

(5) Japanese GAAP vs. Other GAAP

Books and records should be maintained in accordance with the Japanese GAAP. If different GAAP such as US GAAP and/or IFRS is adopted, appropriate reconciliations between GAAPs must be made and the supporting documents should be maintained in Japan.

Although there is no significant difference in Japanese GAAP and others, typical differences at small foreign start-up companies would be:
1. Length of useful life for depreciation
2. Capitalization rule for properties
3. Capital lease accounting
4. Accrued vacation expense
5. Deferred tax
(6) Accounting system

In case that the company uses foreign made accounting package system, it may not process consumption tax properly. The company may need to make an extra effort to segregate consumption tax portion with all transactions.

On the other hand, the Japanese accounting package system automatically segregates consumption tax and generates the analysis and reconciliation of consumption tax.

Generally speaking, using Japanese accounting package facilitates both bookkeeping process and consumption tax return preparation process.

Tax Return

Reports	Due date	To be filed with
Interim corporate tax return Interim consumption tax return Interim enterprise and inhabitant tax returns	Within 2 months after the end of the first 6 months	National tax office National tax office Local tax office
Final corporate tax return (see 1) Final consumption tax return Final enterprise and inhabitant tax returns (see 1)	Within 2 months after the fiscal year-end	National tax office National tax office Local tax office
Depreciable assets return	January 31	Local tax office

*1 Within 3 months, if one-month extension is applied.

Consumption tax

(1) Outline

Consumption tax is categorized as an indirect taxation to which almost every domestic transaction and every transaction for the import of foreign goods is subject at the rate of 5%, except for financial transactions, capital transactions, medical services, welfare services and educational services. The basic formula to calculate the tax due from the company is as follows:

Tax due

Total amount of
consumption tax on sales
(5% of taxable sales)

Total amount of
consumption tax on purchases
(5% of taxable purchases) (Note)

(Note) A prerequisite for the application of purchase tax credit is the keeping of books and bills, etc. with respect to purchase tax credits in the taxable period.

(2) Timing of application for election to be a taxable enterprise

A newly established company with capital of ¥10 million or more is not exempt from tax during its first and second fiscal years.
A newly established company, except for a company who’s capital is ¥10 million or more as mentioned above, is not required to file a consumption tax return for its first two fiscal years. However, this does mean that newly established companies, except for the taxable company mentioned above, are disadvantaged in that they cannot claim a consumption tax refund during the first two fiscal years, even if the consumption tax paid on purchases is greater than the consumption tax received on sales. To compensate this disadvantage, the law allows a company to make an election to be a taxable enterprise during its first two years.

(3) Interim returns

In some cases, the monthly, quarterly or semiannual interim return is required.

Net operating losses (NOL)

Most newly established companies are unlikely to make profits in their initial operating periods. For corporate tax purposes, a company that files a blue return may carry back losses to the previous fiscal year or carry forward losses to subsequent years, up to a maximum of seven years.
Audit requirement

In Japan, you must hold a regular shareholders' meeting of a company no later than 3 months after the company’s fiscal year end. The financial statements (balance sheet, profit and loss statement, statement of change of shareholders’ equities and statement of explanatory notes) of the company must be approved by the regular shareholders' meeting.

It is possible to hold the regular shareholders' meeting on paper only, subject to the size and the approval of the company. In this case, the minutes of the meeting will be prepared by an attorney.

Under the new Corporate law, a statutory auditor (so called Kansa-yaku) is not mandatory required for a Small-Medium Closed company. On the other hand, once the statutory auditor is elected, he/she is responsible for not only accounting matters but also operational issues, unless his/her responsibility is restricted to the accounting audit by the articles of incorporation. In case that the responsibility is limited to accounting audit, the wording of statutory auditor’s report might be:

"I, Statutory auditor, have examined the balance sheet of [Company Name] as of d/m/y, the related income statement, business report and statement of change of shareholders’ equity for the period ended d/m/y.

In my opinion, such financial statements present legally and fairly the financial position and results of operation of [Company Name].”

The auditor's report should be dated in accordance with legal guidelines.

External Audit

There is no external independent audit (CPA's independent audit) requirement for Medium-Small Corporation (capital amount less than ¥500 million and total liabilities less than ¥20 billion)

If a foreign Parent company wants an external audit for its small Japanese subsidiary or branch, a voluntary audit arrangement (or agreed upon review arrangement) can be made between the Parent auditor and a local audit firm in Japan.

Comparative chart between Branch and Corporation (K.K.)

The following shows the Japanese taxation and related matters comparing a branch and a corporation.

Item

Branch

Corporation

1.	Scope of taxable income

Japanese source income

Worldwide income

Entity Tax Rates

(1)

Corporate tax

30%

(2)

Enterprise Tax (Note 2)

9.6% (Note 1)

(3)

Inhabitants Tax on Corporate tax Due

17.3%

(4)

Total (1) - (3)

44.8%

0.	Effective Tax Rate (4) x 1/(1+(2))

40.9%

Dividend to a parent company, or Remittance of Profit to a home office

(1)

Withholding tax

N/A (Remittance)

20% (Dividend) This tax rate is reduced to 0%, 5% or 10% by most tax treaties.

(2)

Remittance guarantee

Guaranteed

Expense Allocation between the Home Office and a Branch, or Parent and Subsidiary

Expenses paid by the home office or a parent on behalf of a branch or a subsidiary is deductible in Japan as far as such expense can be identified specifically. However, it is easier for a branch to deduct general administrative type of expenses than for a subsidiary. This is because most treaties allow the deduction. Any expense incurred for a specific service is deductible by the company who receives the service.

Tax Credit

(1)

Interest

Creditable

(2)

Dividends received from Japanese companies

Not creditable

Creditable

Scope of Financial Statements to be attached to the Corporate Tax Returns

The combined financial statements are required to be filed.

Only financial statements of a subsidiary are required to be filed.

Legal Audit under the Japanese Commercial Code

N/A

Necessary if a subsidiary meets at least one of the following conditions.

	Amount of paid in capital exceeds ¥500 million yen
	Amount of the total liabilities exceeds ¥20 billion yen
	Listed in Stock Exchange

Compensation

Bonus to a director of the branch or subsidiary

Not deductible
(deductible if reported to tax authorities in advance)
The company should minimize the number of the board members.

Not deductible
(deductible if reported to tax authorities in advance)
The company must have at least 1 director.

Regular compensation

Deductible

Accounting Report

Not as strict as a subsidiary

Japanese accounting standards must be strictly followed.

(Note 1)
The tax ratio is applied to a company whose capital is less or equal to ¥100 million yen.

(Note 2)
A company with capital exceeding ¥100 million yen is subject to the Factor-Based Enterprise Tax. In such circumstances, a certain amount of enterprise tax will be imposed based on the value added factor and capital factor, even if the company has no taxable income.
Please refer to a tax specialist for details.