Stuck wading through reams of paperwork on Japan’s corporate tax? Not sure if you should just throw it all at an accountant or trudge through to save money? We’ve put together a beginner’s guide to taxes and bookkeeping in Japan to help you make an informed choice.
We’ll start with an overview of corporate taxes and tax returns in Japan, then dive into audits and accountants, as well as the topic of sales tax.
Corporate tax in Japan
Corporate tax in Japan is comprised of several separate taxes, such as corporate income tax, corporate inhabitant tax, and enterprise tax, among others. There are different tax brackets for businesses earning up to 4 million yen (small), between 4 and 8 million yen (medium), and over 8 million yen (large) annually.
The tax breakdowns can be seen on the Japan External Trade Organization (JETRO) website, but the effective rates are 22.40% for small businesses, 24.86% for medium, and 36.80% for large.
Filing a corporate tax return
Businesses must submit their corporate tax returns within two months of the company’s financial year-end, although they can request extensions. Late and under-payment of taxes will incur fees at a percentage of your tax bill.
Late filing can result in a penalty. The amount will typically range between 5% and 15% of the final tax bill, depending on how late the return was submitted, and a number of other factors. This applies where a tax audit notice has not been issued.
If a tax audit notice is issued, the penalty might be 10% – 15% of the final tax bill due, though it could go all the way up to 20% in extreme cases.
Audits in Japan
Generally, companies should expect to be audited by the Japanese National Tax Agency in cycles of 3 to 5 years. Audits focus on bookkeeping accuracy, correct filing of tax returns, and deduction claims. While you can claim deductions for a variety of expenses, auditors might scrutinize them, so make sure the paper trail for your deductions is watertight.
Should I get an accountant?
Hiring an accountant in Japan can save you time, reduce your stress, and ideally give expert advice to save you money. However, full-service accounting is expensive. If you’re a small business, you may not need this for your day-to-day bookkeeping. With the rise in accounting software options, it’s easier than ever for small businesses to keep their ledgers in order, in house.
However, as your business expands and you take on more clients and employees, you can quickly find your bookkeeping spiraling into a mammoth task. At this point, it’s likely worth the cost to hire an accountant.
If you have an upcoming tax audit, it’s also worth consulting with an accountant to ensure your evidence and ledgers are in order. Most accountants offer a pre-audit option as a one-off preparatory service before you’re audited. While this isn’t cheap (¥400,000 was one quote we received), for medium-sized companies it’s a negligible amount compared to the potential tax penalties from auditing issues.
What to look for in an accountant in Japan
The most expensive option with an accountant is complete outsourcing — a bespoke bookkeeping system that they handle exclusively. That’s probably excessive for small and medium businesses.
Instead, look for an accountant who can work with your existing bookkeeping system. In the initial consultation, make sure your accountant is familiar with your system. The more work the accountant needs to do to manage your books, the more it will end up costing you.
Also, look for someone who is proactive and knowledgeable. A good accountant should actively be trying to save you money and informing you of tax breaks or deductions. While many accountants are happy to just fill out the forms, the best ones will offer practical tax advice you can apply to your books.
Finally, if your Japanese skills are not strong, there are plenty of bilingual accountants, especially in Tokyo. However, many treat this as an extra service, and as such are more expensive than Japanese-only accountants.
What about sales tax in Japan?
Sales tax (or consumption tax) is Japan’s tax on domestic and import transactions. Any time a corporation makes a transaction, it qualifies as taxable income for consumption tax. Japan’s system is similar to the British VAT system, with rates of 10% on most goods and a reduced rate of 8% on food, drinks, and newspapers.
You’ll notice, however, that we haven’t mentioned consumption tax in our list of taxes to be paid. While you might think of it as universal, considering it’s on everything from food to Ferraris, it isn’t in some cases.
For businesses whose taxable sales are under 10 million yen a year, there’s an exemption from the tax. This exemption applies automatically unless a company files a notification that it wants to be taxed.
Why would I want to be charged tax?
It might seem strange to want to be taxed, but there can be several benefits in applying to be taxed voluntarily. First, if your company is nearing the ¥10 million threshold in taxable income, filing voluntarily can give you more time to adjust and prepare your bookkeeping system before it becomes mandatory.
Also, if you work with larger companies that do charge tax, it might make the invoicing easier on both of you to have consumption tax included. Their bookkeeping system might automatically account for the tax, creating more issues for them when it’s not charged, or for you when it is.
Finally, as consumption tax is levied on larger businesses, charging it comes with a sense of legitimacy and of being a reputable company. This legitimacy can be a crucial part of landing contracts and clients, as we mentioned when comparing the perks of registering as a KK over a GK business.
Of course, there are downsides too. Besides the revenue loss or increased pricing to compensate for the tax, consumption tax is another layer of bureaucracy added to your bookkeeping system.
As it is applied to all taxable sales, it will increase your accounting complexity significantly. Also, as the tax is self-assessed, it is another area of scrutiny for auditors, so be especially cautious if you’re choosing to enroll with an upcoming audit!
Disclaimer: This article is intended only as a basic guide to corporate tax in Japan. Tax dealings are complex areas, so we recommend that you obtain professional advice before making any financial decisions. Fast Train Ltd. cannot guarantee the accuracy, currency or completeness of any of the material and information on this website and accepts no responsibility or liability arising from or connected to the material on the website.