Japanese tax structuring

 

Reducing your Japanese business taxes

2.  reducing Japanese business tax

In the previous section introducing Japanese tax planning, I noted that many foreign companies doing business in Japan are not properly tax structured. That may be because there is not a lot of clear and unambiguous tax advice available regarding business in Japan. My personal experience supports that statement - while managing a US software vendor's Japanese subsidiary, I asked several partners of the Tokyo office of our 'Big-5' corporate auditor the following question: "We are losing a fortune in Japanese taxes - can someone here please tell me how we can better structure our US - Japan operations to get more cash back to the head-office?" In 6 years and despite a constant stream of cash lost to Japanese taxes I never got a direct answer to that question and eventually figured it out for myself!

In the next couple of sections I will try to give you the benefit of my experience and answer the above question. First though, a few points need to be emphasized regarding the Japanese judicial system because all high-tax countries, Japan included, often make subtle judgments regarding what is illegal 'tax evasion' and what is legitimate 'tax deferral' or 'tax reduction'.

In Japan there are no 'trials by jury' - all trials are 'bench trials' where the judge (or judges) hear evidence and pass judgment. Japanese judges have a conviction rate of 99.9% - of all the cases heard each year only a few defendants are acquitted. 'Case law' (where decisions made by judges in similar previous trials are used as precedent) applies in Japan but whereas in the US case law often creates conflicting precedents that tend to soften and blur the original intent of a statute, the decisions of Japanese judges tend to reinforce and harden statutes (explaining the high conviction rate). Directors of Japanese companies are held socially and legally responsible for corporate misdemeanors and are much less protected by the 'corporate veil' than their counterparts in the US and Europe. When doing business in Japan, you must thoroughly research the Japanese laws relating to your industry and the establishment, management and taxation of your Japanese business. If not properly implemented tax reduction and tax deferral can verge on tax evasion and prior to commencing any tax structuring strategy you must take legal advice from a Japanese attorney to ensure that your strategy is not considered evasion. Please remember I AM NOT AN ATTORNEY.

So how do you legitimately reduce your Japanese business tax?"

First we need to consider the factors that will determine how you structure your business in Japan to achieve tax efficiency. The 3 key factors will be:

  1. the type of physical presence you have in Japan:
    • no physical presence (i.e. operating purely through independent 3rd-parties),
    • branch-office,
    • dependent 3rd-party agent,
    • subsidiary company
      • yugen kaisha (limited liability company),
      • kabushiki kaisha (corporation).
  2. the local margins you realize on your Japanese revenues:
    • high Japanese cost of sales (including local manufacturing and assembly costs),
    • low Japanese cost of sales.
  3. the nature of the products and services you sell in Japan:
    • licensed products (e.g. media, intellectual property, software and other 'soft' products) produced by a foreign parent and sublicensed in Japan,
    • physical products and components produced by a foreign parent and resold in Japan,
    • physical products manufactured, assembled and sold in Japan using components produced by a foreign parent,
    • human resource services (IT outsourcing, consulting etc.) sourced at a foreign parent and resold in Japan,
    • services and business processes licensed/franchised from a foreign parent and resold in Japan.

We can simplify the process because most foreign companies doing business in Japan will fall into one of the following seven categories:

  1. soft product licensor with no Japanese presence licensing to a totally independent Japanese sub-licensor distributor or OEM reseller.
  2. physical product supplier with no Japanese presence supplying a totally independent Japanese distributor or OEM.
  3. soft product supplier licensing through a dependent Japanese sub-licensor whose costs are relatively low.
  4. physical product company selling through a dependent Japanese reseller whose costs are relatively low.
  5. physical product company selling to a dependent Japanese 'manufacture/assemble and resell' company whose costs are relatively high.
  6. service company licensing/franchising to a dependent Japanese sub-licensor/franchisee whose local costs are relatively high.
  7. human resources (IT outsourcing and consulting) company selling through a dependent Japanese reseller whose local costs are relatively low.

So next we need to understand the various Japanese corporate income (business) taxes you will need to pay.

3.  Japanese business taxes >>


Japanese tax structuring

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