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Japan Tax Seminar Wirtschaftskammer Österreich AußenwirtschaftsCenter Tokio 9 May 2018
Today s agenda 01 02 03 04 05 Corporate 2 Indirect and 11 16 21 23 Corporate Indirect and 06 24 Slide 2 of 26
Corporate Indirect and Corporate Slide 3 of 26
Effective tax rate (ETR) of national corporate and local income tax Despite reductions, Japan retakes the top spot for highest ETR 45 40 39,5 Corporate Indirect and % tax rate 35 30 25 30,9 30,6 27,2 26,5 25,0 25,0 20 19,0 17,0 15 10 US Japan Japan* Korea US** Austria China UK Singapore * For tax years beginning on or after 1 April 2018 ** Federal rate is 21% from 1 January 2018 and the State rates vary depending on the State Rates at 31 December 2017 unless otherwise stated Slide 4 of 26
ETR of national corporate and local income tax Higher ETR for SMEs vs. large companies as well as Tokyo vs. nonmetropolitan areas [Unit %] SME Large enterprise Corporate Indirect and Tokyo 34.81 Current 34.59 Starting 1 April 2018 30.86 Current 30.62 Starting 1 April 2018 Nonmetropolitan area 33.80 33.59 29.97 29.74 Current Starting 1 April 2018 Current Starting 1 April 2018 Slide 5 of 26
Factor-based enterprise tax Loss making large enterprises might face tax Tax base Income factor Value-added factor Capital factor Taxable income for corporation tax with some adjustments Income < JPY4M 0.395% Total of Taxable income for the year, Employee compensation, Net interest expenses, and Net lease payments Larger of (a) stated capital plus capital surplus for accounting purposes, or (b) capital for tax purposes Corporate Indirect and Tax rate (Tokyo*) JPY4M < Income < JPY8M 0.635% 1.26% 0.525% Income > JPY8M 0.88% * Corporations with offices in three or more prefectures are not eligible for reduced rates for income not exceeding JPY8M Slide 6 of 26
Corporate At a glance Residence A company that has its principal or main office in Japan is considered to be a resident corporation. Local management is not required. Tax basis A resident corporation is taxed on worldwide income; a foreign corporation generally is taxed only on certain Japansource income unless a foreign corporation has a permanent establishment (PE) in Japan in which case any income attributable to this PE is taxable. The corporate tax rate for a branch is the same as for a subsidiary. Tax year A corporation selects its fiscal year (FY) when it begins operations in Japan. The accounting period must not exceed 12 months. A branch s tax year generally is the same as the tax year of its head office. Corporate Indirect and Taxable income The taxable income of a corporation in each accounting period is the excess of gross taxable revenue over total deductible business expenses. No gain or loss generally is recognized for certain assets transferred between 100% subsidiaries. Capital gains Capital gains are taxable as ordinary income; capital losses generally are deductible. Slide 7 of 26
Corporate At a glance (cont d.) Losses Only 55% (50% for FYs starting on or after 1 April 2018) of a company s taxable income may be offset by net operating losses (NOLs). A small or medium-sized enterprise (SME) with share capital of no more than JPY100M is exempt from the NOL restriction, unless the SME is owned by a large corporation. The NOL carryforward period is nine years (10 for NOLs incurred during FYs starting on or after 1 April 2018). SMEs may carry back losses for one year. NOL carryforwards may be further restricted in certain situations, including a change of ownership of more than 50% in connection with a discontinuance of an old business and commencement of a new business. Non-deductible items In general, entertainment expenses, director s bonus, corporate tax payments are (permanently) not deductible for Japanese corporate income tax purposes. Corporate Indirect and Interest limitaton rules Deduction of interest expense (including certain guarantee fees) related to its foreign controlling shareholder (or certain third parties) is subject to limitation under Japan s thin capitalization rule and the earnings stripping rule. Incentives Various tax credits are available, including an R&D credit. There are tax incentives available for increasing wages and salaries which may be taken in the same FY if certain adjustments are made. Special tax incentives have been introduced for qualified companies doing business in designated regions/zones. Slide 8 of 26
2018 Tax Reform Summary of major revisions related to corporate Reform Disallowance of R&D and other incentives Revision of wage increase incentives Introduction of information collaboration incentives Detail For large companies that do not satisfy certain conditions (see details on following slide), the application of the R&D credit and certain other tax incentives that are otherwise available to the company will be disallowed. The tax credits for wage increases applicable to fiscal years beginning on or before 31 March 2018 which were set to expire will be revised and extended by three years. Under revised rules, a tax credit will be available to companies which raise wages and capital investment, and an additional credit will be available to companies which increase training costs. If a company obtains certification under a Productivity Improvement Act for an innovative data utilization plan and develops or enhances software according to that plan, the assets acquired and used for information collaboration will be eligible for either special depreciation or a tax credit. Corporate Indirect and Slide 9 of 26
2018 Tax Reform Disallowance of R&D and other tax incentives bringing out the stick to increase wages and investment Yes Corporate Yes The company is a large company No Yes Profit increased from the previous fiscal year No Yes Average Wage Payments Comparative Average Wage Payments No Domestic Capital Investment Total Depreciation Cost x 10% No Following tax incentives will be disallowed R&D tax credits Promoting future investment in local economies incentives Proposed information collaboration incentives Indirect and Tax incentives continue to be applicable Revisions applicable to fiscal years beginning from 1 April 2018 to 31 March 2021 Slide 10 of 26
New Austria-Japan tax treaty highlights for corporates Entry into force on. Reduction in WHT rates Old Dividends: 10% (50%/12 mos.), or 20% Interest: 10% Royalties: 10% New Dividends: Exempted (10%/6 mos.), or 10% Interest: Exempted Royalties: Exempted Corporate Indirect and Capital gains & real estate rich company concept Capital gains from certain share sales (25/5), and real estate taxable in other state Capital gains generally not taxable in other state (except real estate rich company) Implementation of AOA Profits attributable to PE Recognition of internal dealings between head office and PE BEPS driven anti-avoidance clauses N/A Transparency concept Silent partnerships Limitation on benefits Principal purpose test Slide 11 of 26
Corporate Indirect and trade issues Indirect and Slide 12 of 26
Japanese Consumption Tax (JCT) At a glance Taxable transactions JCT, similar to a European-style VAT, is levied on the supply of goods and services in Japan; the sale or lease of certain assets in Japan; the import of goods; and certain digital services provided in Japan by nonresidents. Rates The current rate is 8% (combined national and local tax rate) for taxable transactions and 0% in certain circumstances (e.g., export transactions). As of 1 October 2019, increase to 10% and introduction of multiple rates - will add complexity to accounting and tax compliance. Registration An existing company may elect to be a JCT payer if taxable sales for JCT purposes do not exceed JPY10M in the base period (two years before the current year, or the first six months of the prior year), subject to certain other conditions. In principle, a new company with share capital of less than JPY10M should be automatically exempt from filing JCT returns until taxable sales exceed JPY10M in the base period or a timely JCT payer election is filed. The election is binding for at least two taxable years. Other than this election, there is a registration requirement for automatically becoming a JCT taxpayer. Corporate Indirect and Filing and payment A company must file a JCT return and remit the applicable tax to the tax authorities if the company is a JCT payer (see above). The frequency of remittances depends on the total JCT collected. The amount of creditable input JCT generally depends on total sales, the taxable sales ratio and the method to determine input JCT. Other thresholds/tests also may be applicable. Introduction of EU VAT-type invoicing system from October 2023. Slide 13 of 26
JCT (cont d.) Small-enterprise exemption Example scenario A Co. is an Austrian resident company that exports good to Japan and sells them to customers in Japan (transfer of title in Japan). A Co. has JCT taxable sales in FY16 thru FY19 as follows: FY16: JPY 3M FY17: JPY 16M (8M in first half, 8M in second half) FY18: JPY 18M Exempt Exempt Exempt JCT Taxpayer Corporate Indirect and FY16 FY17 FY18 FY19 JPY 3M JPY 8M JPY 8M JPY 18M Base Period for FY18 Specified Period for FY18 Current Year Base Period for FY19 Slide 14 of 26
Japan-EU Economic Partnership Agreement (Japan-EU EPA) Entry into force after ratification by EU Parliament and member states, along with Japan's Diet, expected in 2019 On 8 December 2017, the EU and Japan finalized their free trade deal, which was agreed in principle back in July 2017. Signatory countries The EU member states (28 countries, as of May 2018) and Japan as a consequence of Brexit the UK may not benefit from the EPA Impact of the agreement The EU will abolish about 97% of its tariffs, and Japan will do away with over 90%, including those on agricultural products, manufacturing-sector goods, medical devices and pharmaceuticals. This means that this EPA will have a very positive economic impact. Especially, as the applied duty rates of wine, pasta, chocolate, shoes and leather products are relatively high in Japan, this EPA will give EU manufacturers opportunities of duty saving. Corporate Indirect and For instance, Japan agreed to abolish its custom duties on processed pork meat (currently 8.5%) and to significantly reduce its tariffs on fresh pork meat imports (average 4.3%). Tariffs on beef and hard cheese will be reduced from 38.5% to 9% and from up to 29.8% to 0% respectively over 15 years. Existing obtacles to financial services, telecommunications, transport and to procurement in the railway sector will be removed. Current status The European Commission proposed to the Council to approve the Japan-EU EPA (April 2018). Slide 15 of 26
Japan-EU EPA (cont d.) A progressive agreement that goes beyond only Further key elements Non-tariff measures (mitigating import regulatory restrictions) Rules of origin (rules to qualify a good as Japanese or European) Services (including movement of people) Corporate governance Procurement Intellectual property rights Geographical Indications (e.g., Gailtaler Speck or Marchfeldspargel) Competition, subsidies, state owned enterprises SMEs Customs and trade facilitation State to state dispute settlement mechanism Sanitary and phytosanitary measures Trade and sustainable development (commitment to fight climate change) The world s largest free, advanced, industrialized economic zone. Prime Minister Shinzo Abe Corporate Indirect and Slide 16 of 26
Corporate Indirect and Slide 17 of 26
At a glance Basis In general, an individual who is domiciled or who has a residence in Japan for one year or more is a resident. A non- Japanese national who has spent five years or less in Japan in the preceding 10-year period is regarded as a nonpermanent resident. Residence Permanent residents are taxed on their worldwide income. Nonpermanent residents are taxed on all income except foreign source income that is not paid in or remitted into Japan. Nonresidents are taxed on their Japanese-source income. Filing status Joint filing is not permitted. Additionally, the tax rates are uniform and are not dependent on marital or other status. Corporate Indirect and Annual filing and payment Tax year is calendar year. Employment income and investment income generally are withheld at source. Selfemployment business income is calculated in a similar manner as for corporations, and must be self-reported. Penalties Japan imposes various penalties on taxpayers who underreport their total tax due and who fail to timely submit tax payments and tax returns Slide 18 of 26
At a glance (cont d.) Taxable income Taxable income is decided based on residential status of the individual. Generally it includes employment income and investment income. Specified deductions, allowances and credits are available to reduce tax. Capital gains Individuals are taxed on gains from the sale of shares at 20%. Long-term gains of individuals from the sale of real property are taxed at 20%, and short-term gains are taxed at 39%. Deductions and allowances Subject to certain restrictions, deductions are granted for social insurance premiums paid under Japanese government plans, life insurance premiums, earthquake insurance premiums, charitable contributions, qualified medical expenses, etc. Personal deductions are allowed for the individual, a dependent spouse and children aged 16 or older. Exemptions exist for the disabled and the elderly. Corporate Indirect and Rates Progressive rates up to 55% apply (combined national and local inhabitants tax). A surtax of 2.1% applies to national tax due, to help pay for recovery following the 2011 earthquake. Slide 19 of 26
2018 Tax Reform The trend of targeting high earning individuals continues Deduction item Employment income deduction Employment income deduction for high-income earners over JPY8.5M * Public pension income deductions Basic exemption of JPY380,000 Basic exemption for total income of over JPY24M Blue form tax return deductions of JPY650,000 with non-electronic / regular recordkeeping Blue form tax return deductions with electronic recordkeeping / e-tax Revisions Reduced by JPY100,000 Reduced by up to JPY250,000 Reduced by JPY100,000 JPY200,000 Increased by JPY100,000 Phased out and not applicable for total income of over JPY25M Reduced by JPY100,000 Remain unchanged Corporate Indirect and *Deductions for income adjustment will be applicable under certain conditions Revisions applicable from 2020 onward for individual tax, and 2021 onward for inhabitants tax Slide 20 of 26
New Austria-Japan tax treaty highlights for individuals In line with the aims of the OECD BEPS initiatives with regards to antiavoidance and transparency Residence Old Part of a specific diplomatic note exchange New Permanent home Centre of vital interests Nationality Mutual agreement Corporate Indirect and Exchange-of-information Information exchange in normal course of administration for carrying out the convention Information exchange if foreseeably relevant for carrying out the convention Even if information not of interest for providing state Assistance-in-collection N/A Increased scope of taxes subject to collection Japanese inheritance and gift taxes are included Entry into force Generally applicable from the tax year following the year the treaty enters into force With respect to information collection, applicable from date the treaty enters into force Slide 21 of 26
Corporate Indirect and Slide 22 of 26
Five year tail removed for foreign nationals Worldwide property taxable Only Japan property taxable Recipient/Heir Domicile in Japan No domicile in Japan Corporate Donor/Decedent Temporary stay with certain visa *1 Japanese nationality Domicile in Japan within 10 years No domicile in Japan within 10 years No Japanese nationality Indirect and Domicile in Japan Temporary stay with certain visa *1 Domicile in Japan within 10 years No domicile in Japan Foreign national *2 Temporary stay *3 2018 revision No domicile in Japan within 10 years *1: Recipient/Heir or Donor/Decedent who temporarily stays in Japan (i.e., 10 years or less out of last 15 years at the time of gift or death) with certain visa *2: A foreign national Donor/Decedent who stays in Japan for more than 10 out of last 15 years at the time of losing domicile in Japan, excluding where Donor gifts foreign property within two years after losing Japan domicile and regains Japan domicile within the two years *3: A foreign national Donor/Decedent who temporarily stays in Japan (i.e., 10 years or less out of last 15 years at time of gift or death) Slide 23 of 26
Corporate Indirect and Slide 24 of 26
Corporate Indirect and Slide 25 of 26
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Our German-speaking tax team with you today Business Tax Services Lars Dahlen, MSc. Tax Senior Manager Deloitte Tohmatsu Tax Co., Tokyo +81 90 6565 7404 lars.dahlen@tohmatsu.co.jp Global Employer Services Ken Kohlhase, BSc. Tax Associate Deloitte Tohmatsu Tax Co., Tokyo +81 80 4127 6683 ken.kohlhase@tohmatsu.co.jp Corporate Indirect and Organised and hosted by: Dr. Ingomar Lochschmidt Der österreichische Wirtschaftsdelegierte in Tokio AußenwirtschaftsCenter Tokio, tokio@wko.at 3-13-3 Motoazabu, Minato-ku, 106-0046 Tokyo Slide 28 of 26