Japanese tax structuring

 

Getting your cash out of Japan.

1.  Getting your cash out of Japan.

Whether doing business in Japan or any other non-domestic territory, a sensitive and often misrepresented topic in this era of corporate offshore inversions and post-Enron fallout, is the issue of how to most efficiently flow revenues through your corporate structure without losing huge percentages in local (in our case Japanese) taxation.

Before launching into this section I must emphasize that I am a businessman, not a tax accountant or attorney. My interest in Japanese corporate tax is purely as a businessman and very much focused simply on getting Japanese revenues out of Japan legitimately with minimal taxes. Your situation and your ultimate tax efficient structure for doing business in Japan will vary according to the inbound tax laws of the country in which your head-office is situated and the tax treaty in effect between that country and Japan. Tax laws change, tax rates change and tax treaties change - the US-Japan tax treaty last changed in November 6, 2003, others have changed much more recently. You must seek professional guidance prior to making any final decisions concerning your tax structure for doing business in Japan.

Governments of countries with effective corporate tax rates of 30% or more, naturally tend to encourage a public belief that those companies which structure their operations to minimize the corporate taxes they pay are somehow socially unacceptable. Of course many of those same governments (including the vociferous US government) structure their own tax codes to tax-exempt many transactions and investments by non-residents, including of course non-resident companies!

Cash is the life-blood of any corporation. Corporations need cash to grow, to create more jobs and employee prosperity, thereby generating higher and more sustainable future tax revenues. Cash paid unnecessarily in taxes as the result of poor cash flow management and inefficient tax structuring is cash lost for future growth. Corporations have a duty of care to shareholders (and for that matter to their home governments) to be efficient, preserve cash and maximize future value. The markets understand this fact and tax efficient companies have tended to see their market valuations increase accordingly.

Because efficient international tax structuring necessarily involves the incorporation and management of offshore corporations and bank accounts in different tax jurisdictions, setting up such a structure has traditionally been the domain of high-end accounting firms who charge $300,000 or more for even a small company's offshore inversion. Fortunately the Internet has made it possible for any small company to incorporate offshore corporations and bank accounts - for less than US $1,000 in first-year costs, a BVI (British Virgin Islands) corporation and corporate bank account can be set up using one of several available online services. The expertise required to engineer the flow of cash through such an organization has not changed, but if you are fortunate to have an innovative CFO, even a small company can now implement a sophisticated global structure that can reduce its effective income tax rate from the 35% - 40% typical of higher tax countries to a much more efficient 25% - 30%.

"..keep cash offshore, earning interest and untaxed until it is needed.."

Sophisticated global structuring based on offshore corporations and assets in politically stable jurisdictions enables very efficient international growth strategies to be pursued. A general objective of any such structure is to keep cash offshore, earning interest and untaxed until it is needed for growth investment at which time it is brought 'onshore' to the relevant territory and taxes paid - this is legitimate corporate income tax deferral.

Many companies plunge into international business without considering the tax implications of their decisions and corporate structure and could improve their cash flows significantly simply by taking a few weeks to analyze and rationalize their corporate structures and inter-company agreements. I spent several years with one company whose US financial group insisted on taking all the Japanese business revenues back to their head-office, paid 40% income taxes on their consolidated group profits at year-end and then sent that same cash (less the 40% taxes of course!) back to the Japanese subsidiary to fund expansion! They threw away millions of dollars and worse, their reduced ability to invest in their #1 market - the Japanese market - lost them millions of dollars in potential business. Tax efficient companies do not make those mistakes.

So what can you do to avoid those mistakes and make doing business in Japan tax efficient and achieve the most efficient flow of cash back to your Japanese subsidiary's parent - wherever that parent may be.

2.  reducing Japanese business tax >>


Japanese tax structuring

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