Doing business in Japan information
by Venture Japan
In the previous section on taxes you will need to pay when doing business with Japan, it was apparent that there are two fundamental categories of tax, income taxes and withholding taxes, that need to be considered.
Traditionally there have been 3 simple structures used by foreign companies to reduce the tax they pay doing business in Japan:
In the 1980's Japan's economy was booming, tax coffers were full and foreign company activities in the Japanese market were at relatively low levels. At that time any of the four structures described above could substantially reduce a foreign company's Japanese corporate tax burden without drawing undue attention from the Japanese tax authorities. Unfortunately all good things (especially tax breaks!) come to an end and since the early 1990's the decline in tax revenues caused by Japan's recession and the steady rise in the number of foreign companies succeeding in Japan has caused tax inspectors to more carefully scrutinize foreign companies' activities here and to increase the frequency of auditing them.
If you do business in Japan through a subsidiary company or office then that company or office will be directly liable for Japanese income tax and you should expect it to be audited by the tax authorities within 3 - 5 years of starting Japanese business. If you do business in Japan solely through a bona-fide economically independent 3rd party distributor then you will not be directly audited because you will have no Japanese income tax liability. Japan's tax codes place the initial burden of collection and payment of applicable withholding taxes, consumption taxes and tariffs on the Japanese importer. The independent distributor will be subject to audit though; at which time its contracts and the transfer prices paid to you, may come under scrutiny.
Based on my personal experience of Japanese tax audits, if you are doing business in Japan using one of the four structures described above, then you will need to satisfactorily answer questions regarding the following concerns:
In my experience, Japanese tax inspectors tend to be far more amicable, helpful and much less obtrusive than their US or European counterparts - unless of course they suspect you are deliberately abusing the system. When compared with the US or Europe, the Japanese tax codes and especially Japanese revenue recognition rules are still relatively relaxed - there is plenty of scope to legitimately reduce taxes while staying within accepted legal boundaries.
If you satisfactorily answered the above concerns, then your tax structuring is legitimate - but that does not necessarily mean it is the most efficient.
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