Basic framework of international taxation systems for economic players pertaining to Japan business.
There are two sides of international taxation systems in Japan. One is Out-bound side in which economic players in Japan invest in overseas entities. The other is In-bound side in which overseas economic players invest in Japan.
Out-bound side ( Invest in overseas entities)
Taxation framework in Japan levy all companies in Japan including subsidiaries of overseas companies (Gaishikei companies in Japan) corporate tax on not only income from economic activities in Japan but also overseas economic activities. Without preventive measures, the companies would pay taxes both in Japan and overseas countries pertaining to identical incomes. Therefore, tax authority in Japan offer these four international taxation systems as below, aiming at adequate taxation between Japan and counterparts, taking advantages of international industry allocation and strengthening tax compliance.
- Dividends from Overseas Subsidiaries Deduction : The parent company shall not add 95% of received dividends from its overseas subsidiaries to taxable income because these net received dividends had already been excluded withholding tax.
- Foreign Tax Credit : Companies fundamentally shall deduct foreign corporate tax at the maximum of a part of current year’s corporate tax in proportion to taxable income of its overseas branches. This system also aims at avoiding double taxation between Japan and its counterpart where the branch exists.
- Overseas Subsidiaries Tax Return Filing Jointly with parent’s tax return : The parent company fundamentally shall add taxable income of the overseas subsidiaries whose taxable rate are under 20% to prevent escape of taxation in Japan. The company also can apply exemption of this taxation system with all four specific conditions of the subsidiaries as follows. a. non-holding company, b. real office at registered address of the subsidiary , c. control function at registered address of the subsidiary, d. over 50% of sales or main transactions are not for affiliates (applicable for wholesaler, banking, trust, financial instruments trading , insurance, shipping or airline) or operate mainly in the country where the subsidiary exists. (other industries) Understanding of these conditions is critical success factor for international taxation strategies.
- Transfer Price: Business deals with a partner abroad where the amount of consideration to be received is less than the arms’ length price or the amount of consideration to be paid exceeds the arms’ length price are regarded as having been made at the arms’ length price. This system also aims at preventing escape of taxation in Japan. Furthermore, recently, a lot of companies in Japan adopt Advance Pricing Agreement (APA) Program between tax authorities in Japan and counterparts for effective international tax planing and avoidance of potential additional tax risks.
With regard to these four Out-bound International taxation systems, each system require detailed formula and conditions. We recommend you to consult with Certified Public Tax Accountant pertaining to these International taxation matters.
Updated Nov 20, 2012
Certified Public Tax Accountant Jun Domon
Ichiro Sudo, CPA in Japan (2011). CPE Training Text “Basic and Practical International Taxation” : The Japanese Institute of Certified Public Accountant.
Guide to Japanese Taxes:Japan Federation of Certified Public Tax Accountants’ Associations