1. How often is tax law amended and what is the process?
Major national tax laws in Japan such as the Corporation Tax Act, the Income Tax Act (mainly for individuals), the Consumption Tax Act, and some parts of the Local Tax Act concerning local taxes similar to those above mentioned, are amended generally once a year.
In particular, each summer, the Cabinet Office and each ministry (agency) examine the requests for tax reform for the following year from each industry group, and, based on those examinations, submit requests for tax reform to the Ministry of Finance ("MOF").
The MOF organizes the requests for tax reform in September and October. At the same time, the Research Commission on the Tax System, which is an advisory body for inquiry from the Prime Minister of Japan, discusses tax reform for the next year. The outline of the next year's tax reform approved by the Japanese cabinet is announced by the MOF around December every year.
Subsequently, the Diet approves the tax reform bill in around March, and the tax reform laws are enacted on 1 April.
The Ministry of Internal Affairs and Communications handles the tax reform process for local taxes. The flow of local tax reform is generally the same as for national tax reform.
2. What are the principal administrative obligations of a taxpayer, i.e. regarding the filing of tax returns and the maintenance of records?
As an example, in principle, corporate taxpayers are required to file a final tax return for corporation taxes (i.e., corporate income taxes) and consumption taxes no later than two months after the end of the fiscal year (e.g., if the end of fiscal year is 31 March, the deadline will be 31 May.). Certain corporate taxpayers are also required to file an interim return for those taxes.
In addition, corporate taxpayers are also required to keep and hold financial records for up to 10 years.
3. Who are the key tax authorities? How do they engage with taxpayers and how are tax issues resolved?
In Japan, the National Tax Agency (NTA) is responsible for the enforcement of national tax laws. In particular, the 12 Regional Taxation Bureaus and 524 tax offices that are under the supervision of the NTA impose and collect taxes in their general jurisdictions based on individual addresses or corporate registered offices. Each Regional Taxation Bureau is responsible for taxes for companies capitalized at 100 million yen or more, while each tax office is responsible for other companies.
National tax audits are generally conducted every one to three years for large companies, and every five years for mid- and small-sized companies. A tax audit generally takes approximately several months (including several days for site investigations), but may take over one year in complex cases (including audits for transfer pricing).
Local governments are responsible for the enforcement of local tax laws, and generally impose and collect local income taxes based on the filed tax returns or the results of national tax audits. Therefore, local governments are not generally recognized as key regulatory authorities.
4. Are tax disputes heard by a court, tribunal or body independent of the tax authority? How long do such proceedings generally take?
In relation to national taxes, tax disputes may be adjudicated by the National Tax Tribunal or a court.
A taxpayer who is dissatisfied with a disposition made by the district director of a tax office may elect one or both of the following administrative procedures no later than three months after the date on which the taxpayer received the notice of disposition: (1) "Request for Reinvestigation" with the district director of the tax office; or (2) "Request for Examination" with the National Tax Tribunal.
In general, a taxpayer must have completed one (i.e., "Request for Examination") or both of these administrative procedures prior to filing a claim with the court to cancel the disposition (i.e., tax lawsuit).
The National Tax Tribunal, which is independent from taxation bureaus or offices, investigates, and rules on, tax disputes. The National Tax Tribunal has set a standard period of one year for the screening process, and most disputes (95.4% in 2022) were completed within this standard period.
If a taxpayer is dissatisfied with a determination from the National Tax Tribunal, the taxpayer may file a tax lawsuit with the court no later than six months after the day on which the taxpayer received the notice of determination. Tax lawsuits are categorized as administrative lawsuits and are determined in a three-tier court system. The average trial period for administrative lawsuits in 2022 was approximately 16.4 months in the first instance, approximately 7.3 months in the second instance, and approximately 2.4 or 2.9 months in the third instance (depending on the form of appeal).
Further, the process of tax disputes for local taxation is almost similar to that of national taxes, except for the following points:
- there is no procedure corresponding to "Request for Re-investigation" of national taxes; and
- "Request for Examination" is not with the National Tax Tribunal, but with the local governments.
5. What are the typical deadlines for the payment of taxes? Do special rules apply to disputed amounts of tax?
Tax payment due dates are specified. As an example, the due date for payment of corporation taxes and consumption taxes is the due date for filing a final return form, which is no later than two months after the end of the fiscal year.
In addition, taxpayers who meet certain conditions are required to pay corporation taxes and consumption taxes related to an interim tax return, by no later than the deadline for filing the interim return.
Furthermore, in principle, even if an appeal has been filed, the disposition by the tax authority remains valid, and additional taxes (penalties) and delinquent taxes will be imposed until taxpayers complete payment of all taxes due. Therefore, as a practical matter, a taxpayer should file an appeal only after paying all of the taxes that were imposed. If the taxpayer is successful in a lawsuit, the amount of taxes paid will be returned to the taxpayer with statutory interest.
6. Are tax authorities subject to a duty of confidentiality in respect of taxpayer data?
Taxpayer data is recognised as highly confidential and adequately safeguarded by law. A public officer engaged in tax affairs has a duty of confidentiality, and if the public officer violates that duty, the public officer may be punished by imprisonment for not more than two years or a fine of not more than one million yen.
National and local tax authorities share certain information contained in tax returns or statutory reports with each other, but there are no laws or regulations generally authorising the tax authority to cooperate, or share information, with other government agencies. The Supreme Court has not issued a clear position on this matter, so Japanese law remains uncertain.
7. Is this jurisdiction a signatory (or does it propose to become a signatory) to the Common Reporting Standard? Does it maintain (or intend to maintain) a public register of beneficial ownership?
Japan is a signatory to the Common Reporting Standard ("CRS") of OECD, and has already promulgated and enforced domestic legislation to implement the CRS.
There is no public register of beneficial ownership in Japan. However, the NTA has been gathering certain information relating to beneficial ownership through the statutory reports from trustees.
8. What are the tests for determining residence of business entities (including transparent entities)?
In Japan, business entities primarily use corporate forms such as joint-stock companies (Kabushiki-Kaisha) and limited liability companies (Godo-Kaisha).
Pursuant to the Japanese tax laws, a corporation that has its head office or principal office in Japan is generally treated as a domestic corporation, and any other corporation is treated as a foreign corporation. Further, the residence of a corporation is determined not by the principal place of management and control, but by the corporate registration, and therefore, as a practical matter, the residence is determined by the governing laws of the place of incorporation. However, the domestic rule of residence may be superseded by certain tax treaties, if applicable. Tax treaties entered into by Japan may
determine a taxpayer's domicile based on the location of the corporation's head office or principal office, the location of its substantial management, the place where it was established, and any other relevant factors
In addition, partnerships (Kumiai) or investment limited partnerships (Toshi-Jigyo-Yugensekinin-Kumiai) are primarily used as transparent entities in Japan. However, these corporate forms are mainly used for investment vehicles rather than for general business entities. The residence of a transparent entity is determined based on whether the entity is treated as a "corporation" for Japanese tax purposes. If not, the residence of a transparent entity is determined based on the address or dwelling location of each partner or investor.
Please refer to Question 18 for detailed criteria as to the meaning of "corporation" for foreign entities.
9. Do tax authorities in this jurisdiction target cross border transactions within an international group? If so, how?
Recently, cross-border transactions within an international group have been one of the most important issues facing Japanese tax administrations. According to the 2023 NTA report, the NTA has continually focused on cross-border tax avoidance by collecting information through the statutory reports, exchanges of information pursuant to tax treaties, CRS regulations, and transfer price documentation.
10. Is there a controlled foreign corporation (CFC) regime or equivalent?
Japanese tax laws include a CFC regime.
Briefly, the Japanese CFC regime applies to Japanese residents (i.e., individuals) and domestic corporations (collectively, "domestic taxpayers," the same hereinafter) if all of the following requirements are met:
I. Domestic taxpayers directly or indirectly hold more than 50% of the total shares of a foreign corporation ("Foreign related corporation"), or substantially control the Foreign related corporation as though more than 50% of its total shares are held as above; and
II. (a) the direct or indirect ownership ratio of the domestic taxpayers in the Foreign related corporation's shares is 10% or more; (b) the domestic taxpayers have a substantial controlling interest in the Foreign related corporation; (c) a foreign corporation substantially controlled by the taxpayers holds 10% or more of the shares of the Foreign related corporation; or (d) the taxpayers belong to a family shareholder group whose direct or indirect ownership ratio in the Foreign related corporation's shares is 10% or more.
In general, if these requirements are met, the entire or some part of gross income of the Foreign related corporation is added to the calculation of the domestic taxpayer's income. However, if all of the following conditions are met ("Economic Activity Test"), only passive income (i.e., dividends, capital gains from shares, interest on deposits and loans, etc.) of the Foreign related corporation must be added to the income of the taxpayer:
Business Purpose Test The major business of the Foreign related corporation is not shareholding, provision of intangible assets, or lease of vessels or aircraft, etc;
Substance Test The Foreign related corporation has an office, etc. necessary for its principal business in the state of the head office;
Administration and Control Test The Foreign related corporation itself conducts the management, control, and operation of its principal business in the state of the head office; and
Unrelated Party Test / Country Location Test The Foreign related corporation conducts:
A. any of the following businesses in which more than 50% of customers are other than affiliated persons: wholesale business, banking business, trust business, financial instruments business, insurance business, water transportation business, air transportation business or goods leasing business; or
B. any other business mainly conducted in the state of the head office.
In addition, a taxpayer will be exempt from the CFC regime if one of the following conditions applies:
I. the rate of the tax burden of the Foreign related corporation for each business year is 20% or more (30% (27% for the business year that will start on or after 1 April, 2024) or more if the Foreign related corporation is a shell company or a cash-box-company); or
II. the gross amount of the income of the Foreign related corporation does not exceed JPY 20 million or 5% of net income before tax, and the Economic Activity Test has been satisfied.
11. Is there a transfer pricing regime? Is there a "thin capitalization" regime? Is there a "safe harbour" or is it possible to obtain an advance pricing agreement?
1) Transfer Pricing Regime
Japanese tax laws provide a transfer pricing regime for corporate taxpayers, which is based on the OECD transfer pricing guidelines. In particular, the applicable method for calculating the arm's length price in Japan is in line with the method approved in the OECD guidelines.
Details of the Japanese transfer pricing regime are contained in the guidelines published by the NTA.
In addition, taxpayers may obtain an advance pricing agreement (APA).
There are two types of APA in Japan: (i) an APA by the Japanese authorities alone (Unilateral APA); and (ii) an APA based on mutual agreement with foreign authorities (Bilateral APA). The NTA actively promotes Bilateral APA. In principle, an APA is valid for the three to five fiscal years, and taxpayers may request renewal of an APA.
In addition, the following four types of transfer price documentation are required: (i) a NUPE (Notification for Ultimate Parent Entity) form; (ii) a CbCR (Country-byCountry Report); (iii) a master file; and (iv) a local file
The first three types of documentation are applicable to subsidiaries or branches in Japan that are constituent entities of a specified multinational enterprise (MNE). The local file is applicable to all corporate taxpayers engaging in transactions with foreign affiliates.
2) Thin Cap regime
If a domestic corporation pays interest on debt to a foreign controlling shareholder (i.e., non-resident or foreign corporation that holds, directly or indirectly, 50% or more of the shares of the domestic corporation), or to a fund provider that is related to the domestic corporation, the portion of the interest shall be disallowed as a nondeductible expense if both of the following ratios exceed 3:1:
I. The average total interest-bearing debt amount as compared to the equity amount; and
II. The average interest-bearing debt amount from a foreign related shareholder as compared to the equity amount attributable to the foreign controlling shareholder or the fund provider.
Corporate taxpayers in Japan should also pay attention to the earning stripping rules under Japanese tax laws.
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Originally Published by Legalease Ltd
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
