Japanese withholding and sales taxes
In the previous section about Japanese corporate business taxes that all Japanese companies must pay, we reviewed the first such tax, Japanese business income tax. In this section we will look at the other two taxes all Japanese companies must pay; withholding tax and consumption tax.
Japanese withholding taxes
All royalties a Japanese customer pays to a foreign company, including royalties a Japanese company pays to its foreign parent, are subject to a 20.42% Japanese withholding tax. The Japanese customer must deduct the tax from the invoice it receives from the foreign company and pay it to the Japanese national tax office. Some of Japan’s tax-treaties reduce this withholding tax; for example, it is 0% in the US-Japan tax treaty for payments to US licensors.
All dividends a kabushiki kaisha pays to non-resident foreign shareholders are subject to a 20.42% withholding tax. The kabushiki kaisha must deduct the tax and pay it to the Japanese national tax office. Some of Japan’s tax-treaties reduce this withholding tax; for example, it is 0% in the US-Japan tax treaty for payments to US shareholders with 50% or greater holdings.
All interest a company pays to non-resident foreign lenders, including a foreign parent, are subject to a 20.42% withholding tax. The Japanese company must deduct the tax and pay it to the Japanese national tax office. Again, some of Japan’s tax-treaties reduce this withholding tax; for example, it is 10% in the Australia-Japan tax treaty for payments to Australian lenders.
Japanese consumption tax (VAT or sales tax)
Every company with paid-in capital of JPY10,000,000 or more, including branch-offices in Japan of foreign companies with paid-in capital of JPY10,000,000 or more, must collect consumption tax on every invoice issued to its domestic Japanese companies and consumers. A company whose paid-in capital is less than JPY10,000,000 must collect consumption tax on every invoice it issues to domestic Japanese companies and consumers from the start of the second financial year after that in which it first reports sales income of JPY10,000,000 or more. For example, if a Japanese company with less than JPY10,000,000 paid-in capital reports sales income less than JPY10,000,000 each year until 2018, but in 2018 reports sales income of JPY10,000,000 or higher, then from January 1, 2020 it must collect, report and pay consumption tax on all its domestic sales. Consumption tax registration is automatic for the preceding cases, but any company can apply to register for consumption tax at any time regardless of paid-in capital or income.
A Japanese company or branch-office does not need to collect consumption tax on invoices issued to foreign companies that are not residents of Japan and have no permanent establishment in Japan.
All domestic purchases and imports are subject to consumption tax. A company can offset the consumption tax it pays on purchases against that it collects in sales invoices. If a company pays more consumption tax than it collects, then it can apply for a refund.
If a company pays consumption tax at the end of a financial year, then at the end of its next half-year it will receive an interim consumption tax invoice from the National Tax Agency. The invoice will be for an amount equal to 50% of the consumption tax paid at the previous yearend.
So next lets look at some of the traditional structures that foreign companies use to cut their taxes when doing business in Japan and look at how those structures cope with the challenges of a Japanese tax audit.