How to manage Japanese corporate tax
Whether doing business in Japan or any other territory, a sensitive and often misrepresented topic in this era of corporate offshore inversions, outsourcing, and other exotic tax structures, is how to efficiently flow revenues through your corporate structure without losing huge percentages in local (in our case Japanese) corporate and other business taxes.
Before launching into this section on Japanese corporate taxation and tax efficiency, a disclaimer: Venture Japan K.K. is only a provider of bilingual Japanese market entry and business services and does not give paid tax or legal advice. I am not a tax attorney or CPA and do not guarantee the advice in this section. My interest in Japanese corporate taxation is simply on assisting clients to get Japanese revenues out of Japan legitimately with minimal taxes. Your company’s situation and most tax efficient structure for doing business in Japan, will vary according to the inbound tax laws of the country where your company has its head-office 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, 2003, but others have changed more recently. Your company must seek professional guidance before making any final decisions about its 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 companies which structure their operations to cut the corporate taxes they pay are ‘socially unacceptable’. Of course many of those same governments, including the US government, structure their own tax laws to 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 for governments. Cash paid needlessly in taxes because of poor cash flow management and inefficient tax structuring, is cash lost for future growth. Corporations have a duty of care to shareholders to manage cash efficiently, to invest it wisely, and to maximize future value. The markets understand this and tax efficient companies tend to see their market valuations increase.
Efficient international tax structuring often 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 charging $300,000 or more for even a small company’s offshore inversion: fortunately the internet has made it easy for any small company to legally incorporate offshore corporations and open offshore bank-accounts. For less than US $1,000 in first-year costs, it’s possible to set up a BVI (British Virgin Islands) corporation and corporate bank-account using one of several available online services. The skill 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 create a sophisticated global structure that can cut its effective income tax rate from the 35% – 40% typical of higher tax countries to a much more efficient 20% – 25%.
Sophisticated global structuring using offshore corporations and assets in politically stable jurisdictions, enables legitimate, cash-efficient, international growth strategies. A general aim of any such structure is not to illegally evade taxes but to legitimately keep cash offshore, earning interest and untaxed, until your company needs it for growth investment. At that time, your company bring the cash onshore to the relevant territory and pay taxes; that is legitimate corporate income tax deferral.
Many companies plunge into international business without considering the tax implications of their decisions and corporate structure. such companies could improve their cash flows greatly just 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 and paid 40% income taxes on their consolidated group profits at year-end. The company then sent that same cash, less the 40% taxes of course, back to the Japanese subsidiary to pay its expenses. That company 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 don’t 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 company’s parent, wherever that parent is?