doing business in Japan

 

Japanese business expense and entertainment

6.  Japanese business expense and entertainment

In the previous section on Japan recruitment and performance related salary, I suggested salary structures that could reduce your fixed recruitment costs by 30% or more. Now lets take a look at controlling your Japanese subsidiary company's other business expenses, starting with entertainment.

Business entertainment has traditionally been a major expense for Japanese companies, partly because corporate and personal income tax rates were over 60% (much more for high income individuals) but 100% of business entertainment expenses were legitimately tax deductible. The business expense account naturally became a cheap way for companies to add tax-free benefits to executives and managers.

Even in 2004, and unlike the USA and Europe, Japan still allows 80% or more of business entertainment expenses to be deducted from pre-tax corporate income. The definition of 'allowable business entertainment expense' is very vague, but includes the infamous Japanese 'ryoushushou' which is a deliberately vague hand-written receipt showing the total amount paid (but no details) and generically used by restaurants, stores, bars, hostess clubs (where Japanese men pay from US$500 - US$1,500 per person to sit drinking with glamorous young women into the small hours) and worse. In every market you deal in, it is to some extent traditional (although many government and corporate codes of practice now make it illegal and tax laws make it expensive) to wine and dine customers in the hope of improving the level of business you do with them. The difference in Japan is that business entertainment has become almost a corporate institution and many very expensive restaurants (and 90% of the hostess clubs and other private 'clubs') in the more fashionable areas of major cities, earn the majority of their income from business entertainment.

Recent corporate income tax reductions and the gradual reduction in the percentage of business entertainment expenses deductible from pre-tax income, has substantially increased the cost of business entertainment. It is also widely accepted that a substantial percentage of Japanese business entertainment is not the entertainment of legitimate customers (even though it is reported as such) but often the result of managers entertaining friends and colleagues. Those factors, combined with the effects of the 1990s recession on corporate profits and social concern at the increase in alcoholism in Japan, has prompted many of Japan's largest companies to impose strict internal rules on allowable business entertainment. If you want to survive doing business in Japan then you should follow those companies' example and have a written policy regarding just who in your subsidiary is authorized to incur entertainment expense, with whom and when.

One of those infamous myths of the Japanese market dictates that "..you must entertain customers if you want to succeed doing business in Japan..". Agreed you will need to entertain certain Japanese customers, but before allowing that myth to foster a carte blanche 'anything goes' attitude to Japanese business entertainment expenses, you may want to consider that:

  • an evening's formal entertainment in Tokyo for just 2 people can easily cost anywhere from US$300 - US$2,000,
  • Japanese customers often attend meetings, evening meetings included, in groups of 3, 4 or more and if you field 2 or 3 people, you will easily incur a substantial and often unjustifiable expense,
  • it is not unknown for some Japanese (and resident foreigner) executives to accept positions with foreign company subsidiaries in the expectation of an unmonitored (due to remoteness and lack of understanding of Japanese business culture) expense account,
  • it is also not unknown for executives of Japanese companies to use their expense accounts for entertaining friends (including girlfriends) and family.
If not firmly controlled, the cost of Japanese business entertainment will wreck your business in Japan. I knew one executive (not a Japanese) who in 3 years burned through almost US$500k in 'business entertainment', most of which had nothing to do with business and a lot to do with his sex life - meanwhile the subsidiary he was supposed to manage was rotting in the gutter. Japanese business entertainment is one area where you must impose checks and balances to safeguard against abuse and once again, the example set by your Japanese company President is going to be crucially important.

7.  Japanese business expense policy and entertainment >>


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