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How to deal with corporate taxes, payroll and accounting in Japan (Part 1 of 2)

Japanese yen bills.

Not only is the Japanese language a challenge to get around, but there is also a reason why noone is interested in importing Japanese bureaucracy. Quite different from Kai Zen, JIT and other excellent Japanese inventions that are attractive to import and integrate in so many organizations. But, Japanese bureaucracy: No please.

With bureaucracy you can’t choose not to, you need to bite the bullet. Here’s an overview of what you need to prepare yourself for, suggestions on how to solve issues and ^^a shortcut to manage your taxes, payroll and accounting with perfect results and no surprises^^. We also serve you a set of great links, all aimed at assisting you to do your homework.

First out is a great PDF from JETRO (The Japan External Trade Organization) giving you thorough information on everything you need to know from the corporate point of view. From the various available alternatives of setting up operations in Japan to visas, taxes, HMR, Trademark and Design Protection Systems.

Download JETRO’s 88-page-brochure here!

The easy-to-digest overview of corporate taxation in Japan

1. Choose your Japanese accountants (not singular!)

First of all, you may be used to needing only one tax accountant. Not in Japan! Here you will need two. You need a certified public accountant and a tax accountant. Public accountants perform audits under the Certified Public Accountant Law (an 80-page pdf in English here), while tax accountants engage in tax agent services: preparation of documents and tax consultations. They obey the Certified Tax Accountant Law. Both professions also provide additional services such as business consulting. Certified public accountants have a monopoly on the performance of audits, while tax accountants have a monopoly on tax agent services, preparation of tax documentation and tax consultations.

Let’s underline an important fact: your tax accountant is responsible for all communications between your company and the Japanese tax administration and this communication can not be managed in any different way!

2. Japan has four different sets of accounting principles

There are four very different sets of accounting standards that companies in Japan can currently choose from when filing their financial statements. The most common standard is called J-GAAP (Japan’s Generally Accepted Accounting Principles) and are issued by the Financial Service Agency (FSA) and Accounting Standards Board of Japan (ASBJ). The remaining three accounting standards are IFRS, US-GAAP and Japan’s Modified International Standards (JMIS). In 2019, over 30% of the companies listed on the Tokyo Stock Exchange had adopted or planned to adopt IFRS standards.

The accounting principles for any Japanese company are based on the following seven principles, and they shouldn’t surprise anyone:

  • fair and true reporting
  • bookkeeping in an orderly system
  • distinction between capital surplus and earned surplus
  • disclosure
  • consistency
  • prudence and
  • in accordance with reliable accounting records and facts.

3. Your Japanese Fiscal Year

The typical fiscal year in Japan starts on April 1st and runs until March 31st of the next year. This is not mandatory, but…

4. Financial Reporting is straightforward

Financial documents of a fiscal year closing usually consists of the following documents being: Balance Sheet, Profit and Loss statement, a statement of changes in net corporate assets and where needed, also explanatory notes for the aforesaid financial statements.

Joint ventures also need to adhere to some further regulation

A JV (joint venture) with a Japanese partner is usually a Kabushiki Kaisha (KK) registered in Japan. It must give public notice of its balance sheet without delay after the conclusion of the annual shareholders meeting. For a large company, its balance sheet and profit and loss statement. Publicly listed companies are also required to publish their quarterly and annual securities reports.

5. Some profound differences with the accounting principles of Japan and elsewhere

Both the accounting principles and the taxation systems differ profoundly. Depending on the status of the business entity which can vary from representative or branch office over the typical 100% subsidiary as permanent establishment called Kabushiki Kaisha to the lesser known Limited Liability Company (LLC) and Limited Liability Partnership (LLP).

6. E-business taxation rules when selling to Japanese customers

What determines the taxable situation for E-business follow the definitions of a permanent establishment. If a company is conducting E-business in Japan without having a physical presence in Japan, it will generally not be taxable in Japan. However, consulting with a business lawyer before venturing there is prudent, as rules change and there are a number of exceptions.

If you have have a storage in Japan for delivery or other, it may be considered that you have established physical presence in Japan. That would usually mean that your business will be taxable in Japan under Japanese tax law.

However, as there are a number of different tax and trade treaties signed between Japan and many different areas: EU-Japan Free Trade Agreement, for instance, your home country will affect what applicable to your business, under your particular circumstances.

If you are a non-Japanese company engaged in business in Japan with warehousing for the distribution of goods, you may very well be classified as having a permanent establishment in Japan. In such a situation, your company could be subjected to direct, as well as indirect taxes like VAT. If this is the case, you must have a tax agent.

A golden tinge for some European countries’ e-commerce companies

Many EU-based SMEs will not be taxed under the classic permanent establishment definition in the Japanese law. A business conducted from abroad, even with products stored in Japan, will not be taxable in Japan for quite a number of EU-member states. This means that e-commerce companies based in the following countries don’t need to pay tax in Japan, even if they have a physical presence there:

  • Luxembourg
  • Netherlands
  • Poland
  • Portugal
  • Romania
  • Slovakia
  • Spain
  • Sweden
  • UK

7. VAT is managed a little differently in Japan

Consumption tax refunds

Maybe you are accustomed to receiving monthly or quarterly consumption tax refunds in your home country? Well, you guessed it: the Japanese system is different. Common practice is that you file for a refund of taxes within two months after the end of the business year, including VAT.

Companies with taxable sales lower than JPY 10 million (approx £75k, €85k, and $93k) during the base period are exempted from the consumption tax obligation.

Base Period: is the benchmark period for determining whether or not a business is taxable. The base period for sole proprietors is the second preceding year before the Taxable Period, and the base period for corporations is the second preceding business year before the Taxable Period. For instance: EU companies with no taxable sales in Japan, are not eligible for a refund of consumption tax paid on business expenses incurred within Japan.

Japanese taxation rules

Consumption tax for cross-border service provision

In 2015, Japan implemented a reverse charge mechanism for B2B transactions. Providers of B2C digital services have to pay consumption tax. There has also been an overseas business registration system established.

For more details see the link below to: Consumption Taxation on Cross-border Supplies of Services.

The perfect taxation shortcut: WeConnect Japan

The perfect shortcut

To make sure that your bookkeeping and taxes are managed properly we suggest taking a look at weConnect Japan! These guys have over a decade of experience in helping non-Japanese companies navigate setting up entities in Japan and dealing with all the local tax, finance, payroll, HR and corporate secretarial compliance. Their services take management of your back office to the next level. How? By using the latest international and domestic technology to create a customer experience never thought possible from an outsourcing provider. Whether you are in the market for a provider or not, a 30 minute call with weConnect will leave you comfortable to take the next step in entering Japan. They’re Americans, meaning you will not be lost in translation.

Highly recommended!

(Manifestum has no affiliation with WeConnect Japan, we simply endorse what they’re doing.)

Picture of Japanese yen (C) Copyright Japanexperterna.

This article is for informational purposes only and not intended to convey or constitute legal or any other advice. It is not a substitute for advice from qualified professionals.

Some great resources:

weConnect Japan

Jetro on Corporate taxation

EU-Japan Centre on taxes and accounting in Japan

J-GAAP

NTA, Japan’s National Tax Agency on Cross-border taxation

Japan’s 2015 Tax reform outline (pdf, 127 pages)

Author: (C) Copyright Manifestum AB

Our mission is to help European companies establish presence, products or services in the Japanese market. We help you with what you need: research, due diligence, analysis, strategies, networking, opening doors, certification, conformity, meetings, preparations, bureaucracy etc. Manifestum AB is a Swedish company. This means co-operation is simplified for our European clients in areas such as payment (invoicing in €uro) and cultural aspects.