starting operations in Japan This PwC Japan Tax publication

Transcription

1 Starting Operations in Japan 2011 This PwC Japan Tax publication provides general information regarding certain Japanese tax and other administrative considerations for a foreign corporation starting operations in Japan. January 2011

2 INDEX I. Preface 2 II. Representative office (Rep Office) 3 1. Overview 2. Practical aspects 3 3 III. Branch or corporation 4 1. Business considerations 2. Taxation of a Japanese branch of a foreign corporation compared to a domestic corporation 3. Corporate entities 4. Filing requirements 5. Blue form tax return IV. Corporate income tax deduction for employment compensation 1. Representative office 2. Branch office and domestic corporation V. Withholding taxes 7 1. Obligation to withhold taxes 2. Reporting requirements 3. Payment of withholding tax 4. Penalties and interest VI. Social security taxes 9 1. Types and insurance premiums 2. Social insurance (health and welfare pension) 3. Labor insurance VII. Intercompany transactions Service fee approach 2. Buy-sell approach VIII. Individual income tax Resident status 2. Taxation of employment income 14 14

3 I Preface An important aspect of starting operations in Japan is the choice of the corporate structure through which the operations will be conducted. This publication will discuss the activities which may be undertaken by the most common structures and the tax consequences of each. However, in many cases, the appropriate structure will be dictated by the scale and nature of the business itself. In addition, this publication also describes the payroll withholding tax and social insurance system aspects of hiring employees and directors in Japan. In many cases, tax treaties which Japan has negotiated will affect the taxation of a foreign investor. In this publication, only the effect of the Japan-U.S. income tax treaty ( US Treaty ) will be discussed. Investors from other countries must review the treaty between their country and Japan to determine whether similar benefits are offered. PwC Note: Our office s various Newsletters which provide information on corporate and individual income tax developments can be accessed from the following link: 2 Starting Operations in Japan 2011

4 II. Representative office ( Rep Office ) 1. Overview The simplest form of business structure is a Rep Office. The advantage of a Rep Office is that it is not subject to Japanese tax and does not require legal registration as an office in Japan. The disadvantage is that the activities that can be performed by a Rep Office are limited. Under Japanese domestic law, the activities of a Rep Office are limited to liaisontype functions such as market research, advertising, information gathering, and other non-income generating activities performed for the home office of the entity which establishes the Rep Office. Tax treaties often permit a little more flexibility in the activities of a Rep Office. For example, Article 5(4) of the US Treaty permits the Rep Office of a U.S. company to: a. use facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise; b. maintain a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery; c. maintain a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; d. maintain a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise; e. maintain a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character; and f. maintain a fixed place of business solely for any combination of activities mentioned in subparagraphs (a) to (e), provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character. If activities increase above these limited levels, there is a significant risk that Rep Office status will be lost and the activity will be subject to full Japanese taxation. If sales activities are to be one of the functions of the Japan office, a Rep Office is not appropriate. 2. Practical aspects In order to help avoid a Rep Office from being treated as a permanent establishment ( PE ), it is recommended that any business cards that the Rep Office operator uses in Japan have the term Representative Office printed on the cards. As a Rep Office, the home office can only open a non-resident bank account in Japan. In practice, a Japanese bank account used to pay Rep Office expenses in Japan will normally be opened in the name of the Rep Office representative in his/her individual name and capacity. The home office can transfer funds for the Rep Office activities to the Rep Office representative for deposit into the account (the Rep Office representative will often have a second bank account for personal expenses, salary, etc.). Starting Operations in Japan

5 III. Branch or corporation Once it has been determined that the proposed business activities cannot be conducted through a Rep Office, a decision must be made whether to register a Japanese branch office ( JBO ) or a corporation such as a Kabushiki Kaisha ( KK ). The following business and tax issues should be considered in determining what type of entity to establish. 1. Business considerations Theoretically, a JBO and a KK should be able to conduct their business in Japan in the same manner. A company entering Japan for the first time will need to assess whether this is true from a commercial standpoint. As a matter of business perception, a KK may convey a more stable commitment to the Japanese market than a JBO. This may facilitate recruiting of personnel. In addition, a KK may be better received by potential Japanese customers than a JBO and it may be easier for a KK to obtain bank financing. The benefits of these perceptions are difficult to quantify. Similar perception issues should also be considered if a Godo Kaisha ( GK ) corporation will be established, instead of a KK. The benefit of a GK is that for US tax purposes, it can be treated as a pass-through entity (i.e. it is not treated as a per se corporation under the US check-the-box rules). 2. Taxation of a Japanese branch of a foreign corporation compared to a domestic corporation In terms of tax rates, tax filings and other requirements, the Japanese tax implications of operating through a JBO are generally the same as in the case of a Japanese subsidiary corporation. There are several important differences between a JBO and a corporation, including the following: a. A JBO may remit earnings to its home office free of Japanese withholding tax. Dividends paid to a foreign shareholder are subject to a 20% (domestic rate) withholding tax, unless a treaty applies to reduce the withholding tax rate. The US Treaty reduces the withholding tax to 0%, 5% or 10%, depending on various factors. b. Generally, a corporation may not deduct irregular payments (e.g. bonus PwC Note: The following link provides access to additional information on (i) withholding taxes that may be imposed on payments from a Japanese subsidiary corporation as well as (ii) calculating the amount of branch income of a foreign corporation: pwc.com/gx/en/worldwide-tax-summaries/index.jhtml (you will need to complete a brief registration form to access this PwC website). Once you access this website, please select Japan as the country that you would like to view tax information for. 4 Starting Operations in Japan 2011

6 payments) to directors or deemed directors. In contrast, irregular payments to a JBO manager are deductible. c. A JBO may allocate a portion of its head office administrative expenses to the JBO activities and obtain a tax benefit in Japan. Administrative expenses cannot be allocated from a parent company to a subsidiary corporation, but may only be charged to the corporation when it can be demonstrated that they were incurred for the benefit of the subsidiary corporation. This usually requires that there be a prior written agreement under which the subsidiary corporation requests that the services be performed. Consumption tax issues will also have to be considered in connection with the establishment of a JBO or corporation. 3. Corporate entities The KK is the most common Japanese business entity selected for significant business operations in Japan and is the entity most likely to be respected by potential Japanese partner companies, contractors, customers, and employees. The GK, which is similar to a U.S. limited liability company, is taxed as a corporation for Japanese tax purposes, but may be treated as a pass-through entity by other countries (e.g. a GK is eligible for check-the-box treatment for US tax purposes). 4. Filing requirements Branches and corporations are required to file final corporate tax returns (comprised of the national, enterprise, and inhabitants tax returns) within two months after the end of its business year. A two to three month extension is most common for a branch and one month extension to file corporation returns, respectively, are available upon the filing of the appropriate application. Corporate taxes must be paid within two months after the end of the year. Branches and corporations must generally file interim tax returns at the end of the first six months of its tax year. The amount of tax that must be paid with the interim return can either be based on one-half of the preceding year s tax liability or on the income generated for the first six months of the current tax year. The interim return must be filed within two months after the six-month period. Branches and corporations are required to file a final consumption tax return and pay any tax within two months after the end of its business year. No extension is available for filing the return. Interim tax returns may have to be filed on a monthly, quarterly, or semi-annual basis, depending on the company s annual consumption tax liability. 5. Blue form tax return A branch or corporation may file a blue form tax return with the approval of the tax office. Approval is normally granted if the application to file a blue form tax return is filed on a timely basis. A branch or corporation which is permitted to file a blue form tax return must keep a journal, a general ledger, and other necessary books and records of all transactions which affect assets, liabilities, and capital. Moreover, such books and records must be kept according to Japanese tax and accounting principles so that taxable income can be calculated correctly. Privileges granted to blue form return corporations and branches include the ability to carry forward tax losses, claiming special depreciation allowances and tax-deductible reserves, and the requirement that the tax authorities must provide explanations for any audit tax adjustments. PwC Note: The following link will provide access to additional information on the corporate income and other taxes that could be imposed as well as the group taxation rules: (you will need to complete a brief registration form to access this PwC website). Once you access this website, please select Japan as the country that you would like to view tax information for. Starting Operations in Japan

7 IV. Corporate income tax deduction for employment compensation 1. Representative office If a foreign corporation operates in Japan through a Rep Office whose activities do not give rise to Japanese taxation, the foreign corporation will have no Japanese taxable income against which to claim deductions for compensation paid to employees or directors operating the Rep Office. Therefore, the deduction available overseas will be the only deduction available. 2. Branch office and domestic corporation a. Employees compensation Compensation paid to an employee of a JBO or corporation is deductible in Japan. This includes salaries, wages, overtime, seasonal bonuses, severance allowances, and other types of employment allowances. There are no limits on the tax deductibility of payments to employees provided the services are rendered for the benefit of the JBO or Japanese corporation. b. Directors remuneration, bonuses and severance payments There are restrictions on the tax deductibility of payments to directors. A director includes both an elected member of the Board and a staff member without specific employee duties who participates in the management of the corporation (i.e. a deemed director). If an employee who is not a director is appointed as the manager of a JBO, he/she will be regarded as an employee of the company rather than a director. Director s regular remuneration is tax deductible unless it is in excess of what the tax authorities consider to be a reasonable amount. If the maximum limit of the amount of remuneration to be paid to directors is stated in the Articles of Incorporation or has been authorized by a resolution at a general shareholders meeting, the portion in excess of this maximum limit would not be deductible. Generally, any irregular payment such as bonuses (other than a retirement payment) will be regarded as a non-tax deductible remuneration. However, if certain legal and disclosure procedures are taken, it may be possible to treat such bonuses paid to directors as a deductible expense. A severance or retirement payment to a director in excess of a reasonable amount or any amount charged to retained earnings will not be deductible. A reasonable severance or retirement payment to a director would normally be deductible in the accounting period during which the payment is approved at a shareholders meeting. 6 Starting Operations in Japan 2011

8 V. Withholding taxes 1. Obligation to withhold taxes The requirement to withhold Japanese national income tax and local inhabitants tax on compensation paid to a corporation s employees or directors depends on whether an individual is a non-resident or resident of Japan, whether compensation is paid inside or outside Japan, and whether the employer is a Japanese corporation or a foreign corporation. Withholding is applied as follows: Paid to Paid to Entity in Japan Rep Office or JBO - Paid by head office outside Japan Non-residents 20% Residents No withholding - Payment in Japan 20% Graduated rates Japanese corporation - Paid by affiliate outside Japan No withholding No withholding - Payment in Japan 20% Graduated rates a. Non-residents A non-resident is an individual who has no domicile in Japan and whose assignment under normal circumstances would not require staying in Japan continuously for one year or more. A non-resident is generally subject to Japanese national income tax at a flat rate of 20% on Japan source compensation. This is determined by prorating total remuneration on the basis of the number of days in Japan against the total number of days covered by the payment. If the individual s tax obligations in Japan are satisfied through such withholding, there is no need for him/her to file a tax return. The local inhabitants tax is not assessed against non-residents. A non-resident who is exempt from Japanese income tax by application of an income tax treaty should file an application form for income tax convention treatment with the tax office through his/her employing company before the salary is paid to prevent withholding. b. Residents An individual who does not qualify as a non-resident of Japan is a resident. Japanese residents are classified as either non-permanent or permanent residents. In either case, the employer is generally required to withhold national income tax and local inhabitants tax on total compensation paid in Japan, whether Japanese or foreign source, at the graduated Japanese income tax rates. The local inhabitants tax is assessed on an individual who is a resident taxpayer as of January 1. Inhabitants tax is based on the taxable income for the preceding calendar year. If a resident individual receives gross employment income of 20 million or less in Japan, the employer generally settles the individual s final national tax liability through a year-end payroll withholding tax adjustment. In this case, and provided the resident individual does not have other income in excess of 200,000, the individual need not file a tax return, unless he/she wants to claim deductions for casualty losses, medical expenses, charitable contributions, loss carryforward, foreign tax credits, etc. as permitted. Withholding is not required if (i) a Japanese resident works for a Rep Office or JBO of a foreign corporation and the foreign corporation pays the individual outside Japan, for example by making payments into a foreign bank account or (ii) the individual is seconded to a Japanese corporation, and his/her salary is paid outside Japan by an affiliate which is also responsible for the administration of employment related matters. In these cases, the individual will file his/her own Starting Operations in Japan

9 annual tax return and pay his/her own Japanese taxes. 2. Reporting requirements A summary report for the calendar year of salary payments and the related withholding income tax (the summary report) must be submitted to the relevant national tax office on or before January 31 of the following year. A certificate of salary payments and the related withholding income tax (GENSEN- CHOSHUHYO) should be issued to each employee on or before January 31. A copy must be attached to the summary report if the salary payment exceeds the threshold amount designated by the law. A salary payment report for each employee should be submitted to the local tax office administering the area in which each employee resides as of January 1 so that the local inhabitants tax can be assessed. The summary report also requires disclosure of certain additional information such as rental payments, professional fees, and retirement allowances paid during the year. 3. Payment of withholding tax Tax withheld at source is payable to the tax office (through a bank or post office) by the tenth day of the month following the month in which the salary payments are made. The tax withheld on Japan source income payments made by the head office outside Japan to a nonresident who worked in Japan is payable by the end of the month following the month in which the payments are made. Such payments may be made on a semiannual basis instead of monthly where the number of employees is usually less than ten and an application has been filed with the relevant tax office. In this case, payment of withholding income tax for the six months to June 30 is due on July 10, and payment for the second six months to December 31 is due on January Penalties and interest An employer which fails to pay the correct amount of withholding income tax to the tax authorities on the due date is subject to a 10% penalty on the underpayment. If the employer recognizes and corrects its error prior to the tax authorities starting a tax audit, the penalty is reduced to 5%. In the case of tax evasion, a 35% penalty can be assessed. Interest on the amount of the underpayment is generally assessed at the rate of 4.3% per annum (from January 1, 2010) for the period up to one year from the tax payment due date. The interest is updated annually as of January 1st and is based on the lower of (i) the Bank of Japan s basic discount rate as of the preceding year s November 30th plus 4% or (ii) 7.3%. PwC Note: The following link provides access to the National Tax Agency s English language website that contains additional information on Japanese income taxes, including an Income Tax Guide for Foreigners: 8 Starting Operations in Japan 2011

10 VI. Social security taxes 1. Types and insurance premiums The social security program in Japan includes health insurance, long-term care insurance, welfare pension insurance, employment insurance, and workmen s accident compensation insurance. The social security taxes are calculated on an individual s monthly remuneration and bonus in Japan, including fringe benefits, and are borne by both the employee and employer. The employee s premium is collected through payroll withholdings on a monthly basis and through bonus payments. 2. Social insurance (health and welfare pension) a. Coverage In general, all persons residing in Japan are included in the Japanese social insurance system and may not be excluded simply because they are not Japanese. Therefore, expatriates as well as Japanese citizens who are employed in Japan by a Rep Office, JBO, or a Japanese corporation are required to participate in the Japanese social insurance system, notwithstanding that they may not receive actual pension benefits in the future. However, Japan has concluded totalization agreements (social insurance reciprocal agreements) with various countries and is negotiating the implementation of such agreements with several other countries. Under a totalization agreement, employees temporarily dispatched from a business entity in a contracting country to another contracting country (maximum period of time is 5 years) are not required to participate in the social insurance system of the other contracting country. Namely, it is enough for such employees to obtain a certificate of coverage from their home country and also continue to participate in the home country s social security system. In the case where the corporate headquarters in the home country of the expatriate assigned to Japan pays salary and bonus directly to the expatriate, the social insurance premium is not collected on the grounds that for social insurance purposes, such salary and bonus is not regarded as a compensation for labor which is provided to the Japan office that is covered by the social insurance system. The Japanese government may change this treatment in the future. b. Benefits The health insurance system covers 70% of the medical expenses of the insured person or their dependents in the event of injury or sickness due to non-occupational causes. The insurance also pays 60% of the average daily wages for a maximum of 18 months while the employee is unable to work due to ongoing medical care. The payment is reduced by the actual amount of salary paid by the employer during this period. Certain other benefits such as cash reimbursement for dependent s medical costs and excessive medical costs, childbirth and nursing allowances and maternity allowances are also provided by this insurance. The welfare pension insurance is a system that provides for old age, disability pension, and survivors basic pension. In the case of old-age, welfare pension insurance provides for a life-time pension for a person who participated in the program for at least 25 years and is 65 years old or more. Since 2001, the age of a person receiving the old-age pension has been gradually extended from 60 to 65 years. Survivors of eligible employees are entitled to a life-time pension equivalent to 75% of the old-age pension due to the eligible employee. c. Lump-sum reimbursement of premiums for non-japanese citizens Many foreign employees are enrolled in the Japanese welfare pension system and contribute part of their monthly salary to it. Since most of them work in Japan for only a few years, they will not be eligible to receive pension payments. However, if they were enrolled in the welfare pension insurance system for at least six months, they are entitled to a lump-sum reimbursement. Refunds are calculated on the basis of six-monthly periods up to three years and are made once the employee has returned to his/her home country. The refunded amount approximates the employee s contribution to the pension system and can only be claimed by that person within two years after leaving Japan. However, there is the case Starting Operations in Japan

11 where under certain conditions, foreign employees can receive pension payments in Japan after aggregating the enrollment period in their home country to that in Japan if their home country has an agreement with Japan regarding the aggregation of the pension enrollment period in both countries. It should be noted that in this case, the enrollment period cannot be aggregated if the lumpsum reimbursement is received. d. Administrative procedures All employing companies must enroll in the social insurance system when operations in Japan commence. For a Rep Office with fewer than five employees, enrollment is optional. Application for enrollment is made with the Social Insurance Office. It can take up to two months for the employer to enroll in the system for the first time since the payroll register together with a withholding tax payment receipt are generally required to be presented to the Social Insurance Office. Until the entity has been enrolled, employees are required to enroll individually in the national health and pension system through their local ward office and pay the premiums personally. In principle, a representative of a Rep Office cannot be enrolled in the social insurance system since he/she would be deemed as an employer for this insurance purpose. However, enrollment may be accepted if a statement that he/she is an employee is submitted to the social insurance office in the jurisdiction of the office in order to appeal that he/she is an employee hired by a business entity in a foreign country. Once the entity has been enrolled, premiums are payable monthly against bills received from the Social Insurance Office. A common procedure is to have the bills sent to the employer s bank for automatic withdrawal from the employer s bank account. An annual report, which includes the information required to compute social insurance premiums, must be filed with the Social Insurance Office within the period from July 1 to July 10. The annual report will list the total monthly compensation paid to each employee for the period from April through June. In addition, a report must be filed with the Social Insurance Office whenever there are significant changes in an employee s compensation or whenever an employee is hired or retired. e. Social insurance types and premium rates Japanese social security taxes are calculated on an individual s monthly salary and bonus in Japan, including fringe benefits, and are borne by both the employer and employee. The standard premiums for each type of insurance are listed below: Type of Insurance Social insurance (Note 1): Health (Note 2 & 3) Long-Term Care (Note 4) Labor insurance (Note 6): Employment Welfare pension (Note 5) Workmens Accident Compensation Employee s Share % Employer s Share % Total % From 0.5 to 12.9 From 0.5 to 12.9 (Notes): (1) The insurance premium for the social insurance which is administered by certain trade associations differs from the above standard rates. (2) The maximum amount of monthly remuneration and a bonus subject to the health insurance premium is 1,210,000 and 5,400,000 of the total annual bonus, respectively. The health insurance premium is shared by the employee and employer. (3) The premium rates shown are applicable to Tokyo and will vary slightly from prefecture to prefecture. (4) The insurance premium for long-term care is calculated at 1.50% of the monthly standard remuneration for health insurance purposes. The premium is payable by those employees whose age is between 40 and 65, and it is shared by the employee and employer. (5) The maximum amount of monthly remuneration and bonus subject to the welfare pension insurance premium is 620,000 and 1,500,000, respectively. The welfare pension insurance premium is shared by the employee and employer. (6) There is no maximum insurance premium for labor insurance. The premium rates depend upon the type of industry. PwC Note: The following link provides access to the Social Insurance Agency s English language website that contains information for foreigners who are covered by the Japanese pension system Starting Operations in Japan 2011

12 3. Labor insurance a. Coverage Labor insurance technically extends to non-japanese citizens working in Japan. However, the Ministry of Labor has an internal general rule that the following non-japanese citizens working in Japan shall not receive employment insurance (during periods of unemployment) and therefore shall not be insured: i. A civil servant of a non-japanese government, ii. A person who is provided with similar insurance by a non-japanese government, or iii. A non-japanese citizen working for an entity in Japan who was employed elsewhere by the non- Japanese employer before his/her assignment to Japan and who will leave Japan upon termination of his/her position in Japan. Under workmen s accident compensation insurance, non-japanese citizens will be provided with coverage if they work in Japan. However, directors of a company are not generally treated as workers and thus are not covered by labor insurance. b. Benefits Employment insurance benefits are available to an individual who was covered by the insurance for at least twelve months during a two year period before employment ceased. A basic daily allowance of 50% to 80% of the individual s daily average wages (with a minimum of 1,640 and maximum of 7,685 per day, as of August 1, 2009) will be paid for an unemployed period up to a maximum of 150 days. Workmen s accident compensation insurance covers medical expenses incurred at designated hospitals for injuries sustained in the course of or due to employment, including commuting (as defined). During absence from work due to an accident, compensation is paid at the rate of 60% of daily average wages based on the most recent three months, if the employer does not pay any remuneration during the period of absence. Compensation is also provided for disability and there are provisions for payments to survivors, etc. c. Administrative procedures Application for enrollment in the labor insurance system should be made to the Labor Standards Bureau within 10 days of the commencement of operations in Japan. A return on the estimated labor insurance premiums should also be filed with this office within 50 days from the next day of operations commencing. Application for enrollment in the employment insurance system with a report on the persons to be enrolled should be made with the Labor Employment Office within the first 10 days of the month following that in which the employees join the company. A report of employee changes (newly hired or retired) is also filed with this office. In practice, these filing dates for labor insurance have not been strictly enforced. However, if the filings are late, insurance premiums will be adjusted retroactively as if the filing had been made on the correct date. The payment of the estimated premium for labor insurance for the initial insurance year ending March 31 (regardless of the Japanese business entity s yearend) is made at a bank which remits the amount to the Labor Standards Bureau. A return for the final labor insurance premiums for the year, indicating the amount of adjustment from the estimated payment made in advance, is submitted in the period from July 1 to July 20 of the following year. In the same return, an estimate of next year s labor insurance premium is also submitted and the amount paid. PwC Note: The following links provide further information regarding social security taxes. (Japanese language only); (The Japan Institute For Labour Policy and Training English language website); Starting Operations in Japan

13 VII. Intercompany transactions There are two main methods in which intercompany transactions may be structured. Regardless of the method, the pricing of transactions must conform to the arm's length principle. The two methods are: 1. Service fee approach - the JBO or corporation receives a service fee equal to the JBO or corporation s costs of conducting the Japan operations plus a reasonable mark-up. This approach is generally acceptable when the JBO or corporation s activities are limited to the performance of services as described below. It is not appropriate for full sales activities. The profit is normally determined as a percentage (e.g. 10%) of the JBO or corporation s actual costs, depending on the services performed. 2. Buy-sell approach - the foreign seller sells products to the JBO or corporation which takes title as an importer and resells them in Japan. This is an appropriate approach where significant sales activities take place in Japan. A commission approach in which the JBO or corporation receives a commission based on sales in Japan is sometimes not recommended because this model creates a PE risk to the foreign selling company. A commissionaire model in which a Commissionaire for an undisclosed Principal sells to customers in Japan in its own name, for the account of the Principal, could be a viable structure to consider, if there are business reasons for the model and the Principal has sufficient substance. 1. Service fee approach A Japanese company (either a JBO or corporation) which engages in liaison and marketing activities on behalf of its foreign affiliate may generally compute its taxable income under the cost plus mark-up method. The employees of the Japanese company could engage in sales promotion and advertising activities without being deemed to be a PE of its foreign affiliate, provided the service company does not have or habitually exercise any authority to conclude contracts which would be binding on its foreign affiliate. Although no guidelines exist, a cost plus service fee arrangement should generally be accepted by the tax authorities when the Japanese service provider s services are limited to the performance of auxiliary activities such as the following: 1. Information gathering, customer relations, etc.; 2. Providing technical assistance to customers; 3. Training customer personnel in the use of products sold; 4. Product presentation to the customer; and 5. Performing other service-type activities. If the JBO or corporation engages in any substantive negotiation of sales to customers or distributors on behalf of 12 Starting Operations in Japan 2011

14 the foreign seller, it may be deemed to be a PE of the foreign seller. An applicable treaty may provide some protection, but this will depend on the particular facts. For example, the US Treaty provides that a Japanese company will be an agent and thus a PE of the foreign seller if it has, and habitually exercises in Japan, an authority to conclude contracts in the name of the foreign seller. The Japanese tax authorities may interpret the conclusion of a contract to include the negotiation of the principal elements of the contract and may not limit the term to only the final signing of the contract. The Japanese company can avoid being a PE if it is an independent agent acting in the ordinary course of its business. The Service Agreement between a foreign seller and Japanese company should clearly indicate that the employees of the JBO or corporation have no authority to negotiate or conclude contracts or bind the foreign seller in any manner. The JBO or corporation should regularly monitor its activities to ensure that its staff are only performing liaison type of activities. 2. Buy-sell approach When business conditions dictate that the JBO or corporation perform sales activities in Japan, a buy-sell approach is often recommended. A commissionaire model can also be considered, if there are business reasons for the model and the Principal has sufficient substance. If a buy-sell approach is used, the JBO or corporation would purchase products in its own name and resell them to customers in Japan. The purchase price paid by the JBO or corporation would need to be arm s length, in accordance with Japan s transfer pricing rules. If a commissionaire model is used, the JBO or corporation would act as a Commissionaire for an undisclosed Principal, and would sell to customers in Japan in its own name, but for the account of the Principal. Title to the products would pass directly from the Principal to the customers in Japan. The Principal would compensate the Commissionaire for its commissionaire services. The compensation would need to be arm s length, in accordance with Japan s transfer pricing rules. Japan s cross-border intercompany transfer pricing rules are generally consistent with the OECD guidelines and prescribe three basic transfer pricing methods (i.e., comparable uncontrolled price, resale price and cost-plus methods). If none of these three methods can be applied, methods similar to these three methods or other methods prescribed by cabinet order (i.e., the transactional net margin method or profit split methods (the contribution profit split method, the residual profit split method and the comparable profit split method )) can be used. Starting Operations in Japan

15 VIII. Individual income tax 1. Resident status a. Non-residents Resident status for Japanese income tax purposes is determined according to the intended length of stay. Generally, if an individual intends to stay in Japan for less than one year, then the individual will be considered a non-resident. If the stay is longer than initially intended, the resident status may change from nonresident to non-permanent or permanent resident. b. Non-permanent and permanent residents If an individual intends to stay in Japan for one year or more, the individual will be either a non-permanent or permanent resident of Japan. A permanent resident includes: An individual who intends to reside in Japan permanently; or An individual who has resided in Japan for a total of 5 years or more within the preceding 10 year period and is not a Japanese citizen. A non-permanent resident will include an individual who is neither a non-resident or a permanent resident. 2. Taxation of employment income a. Non-residents A non-resident taxpayer is subject to national income tax only at the rate of 20% on salary, remuneration and allowances received for services rendered in Japan (i.e. Japan-source income). No deductions for personal allowances or the earned income deduction are allowed. For short-term transfers into Japan (i.e. usually less than six months), the applicable tax treaty with the individual s resident country may provide relief from Japanese income tax when the cost of such short-term transfers is not borne in Japan. b. Non-permanent residents A non-permanent resident taxpayer is generally subject to Japanese national and local inhabitants tax at graduated income tax rates on Japan-source income regardless of where paid (i.e. amounts paid offshore are Japanese-source income if paid for services rendered in Japan). Total remittances may be subject to Japanese income tax to the extent of annual worldwide income where annual remittances into Japan exceed annual Japanese-source income. For example, where total worldwide income is 100 and Japanese-source income is 70, if 150 were remitted into Japan, 100 would be subject to Japanese income tax rather than 70. c. Permanent residents A permanent resident is subject to Japanese income tax on worldwide income and losses. Offshore losses (e.g. on rental properties) can shelter Japanese-source income. PwC Note: Our International Assignment Services (IAS) team focuses on the needs and challenges of international assignment programs, HR coordination and management, assignment tax planning, and individual income tax issues arising from cross border transfers. Additional information about our IAS team can be accessed from the following link: 14 Starting Operations in Japan 2011

16 For more information, please do not hesitate to contact any of the following members: Zeirishi-Hojin PricewaterhouseCoopers Kasumigaseki Bldg. 15F, 2-5 Kasumigaseki 3-chome, Chiyoda-ku, Tokyo Telephone: Masanori Kato Partner Jack Bird Partner Alfred Zencak Managing Director Ken Leong Managing Director Kirk Dove Senior Manager The Tax Practice of PricewaterhouseCoopers Japan (Zeirishi-Hojin PricewaterhouseCoopers) is one of the largest professional tax corporations in Japan with more than 540 people. In addition to tax compliance services our tax professionals are experienced in providing tax consulting advice in all aspects of domestic/international taxation including financial and real estate, transfer pricing, M&A, group reorganization, global tax planning, and the consolidated tax system to clients in various industries. PwC firms provide industry-focused assurance, tax and advisory services to enhance value for their clients. More than 161,000 people in 154 countries in firms across the PwC network share their thinking, experience and solutions to develop fresh perspectives and practical advice. See pwc.com for more information. This document has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this document without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this document, and, to the extent permitted by law, Zeirishi-Hojin PricewaterhouseCoopers, its employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this document or for any decision based on it Zeirishi-Hojin PricewaterhouseCoopers. All rights reserved. In this document, PwC refers to Zeirishi-Hojin PricewaterhouseCoopers, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. Starting Operations in Japan