As with most countries, the corporate tax a company pays is based upon how much profit the company makes. Domestic corporations in Japan are taxed on their worldwide incomes including foreign branch income that they may receive while foreign corporations are taxed solely on their Japan-based income.
This article outlines the process of preparing corporation tax returns for businesses operating in Japan. Do note, however, that the information below may be subject to change depending on new guidelines released by the National Tax Agency of Japan.
Who Pays Corporation Tax?
All Japanese companies are required by law to pay corporation tax, these include:
- Kabushiki Kaishas (KK)
- Godo Gaishas (GK)
- Foreign companies with a Japanese branch (Liable to pay Japanese business income tax, withholding taxes and consumption tax)
Preparing and Submitting a Corporation Tax Return
A corporation of any size is required to pay its own tax, file returns as well as supply details of the accounts of taxable income to the local tax office of where the corporation is based.
Recording Daily Transactions
Before the final tax return is submitted, the company needs to organise all documentation related to its daily transactions. Businesses are required to record transactions and get receipts, sales ledgers, invoices, contracts, etc. ready for audit. All records of bank balances and inventory are then finalised. Assets are assessed and their depreciation expense is calculated.
Preparing The Financial Statement
After all, documents related to business transactions are put in order, the company draws up its balance sheet, income statement and other financial statements that determine the company’s net income.
Closing Accounts For Approval
All accounts are closed and financial reports and statements are sent to the shareholders for approval.
Preparing and Filing The Final Tax Return Forms
The company determines the taxable income and corporation tax after the adjustment of the final tax return. After that, the final return form is submitted and the company prepares the tax payment. Filing and tax payment, in general, has to be made within 2 months from the date when the accounts are closed.
Accounting Profits & Taxable Income
Accounting Profits – derived from deducting expenses from the company’s revenue
Taxable Income – gross profits less deductible expenses
Revenues vs. Gross Profits
Revenues and gross profits are treated differently for tax purposes. Expenses and deductible expenses are also considered different. The differences are considered exclusion from gross profits, inclusion in gross profits, exclusion from deductible expense, and deductible expense. All these values are either credited or deducted from a company’s accounting profits and go towards computing taxable income.
Computing Corporation Tax and Taxable Income
To calculate the Corporation Tax, we first need to determine the company’s taxable income. To do that, we need to start by computing the net income – which is the amount of sales minus costs/expenses to make that sale.
The formula for computing the taxable income is as follow:
Net Income + Exclusion from Deductible Expense – Exclusion from Gross Profits = Taxable Income
We then subject the amount of taxable income to a corporation tax rate to get the corporation tax.
Tax adjustment refers to an adjustment done to derive taxable income from net income or accounting profits. It can be made in the closing adjustment or it can also be in the form of an amendment to the final return.
- Closing Adjustment – adjustments made at account closing to record certain items as expense or loss in the final account and classify them as deductible expenses for compliance with tax laws.
- Adjustment of Final Return – this refers to an adjustment made to derive taxable income by deducting from or adding to the net income based on the final account closing.
The following must be adjusted in the final return:
- Corporation tax that is included in a deductible expense
- Exclusion from deductible expenses of donation or contribution
- Social expenses considered exclusions from deductible expenses
- Excess depreciation expense of depreciable assets
- Excess limit of reserve
- Losses from the blue return that are included in a deductible expense
Adjustment of the following items in the final return is voluntary
- Income tax credit
- Exclusion from gross profits of dividends
- Special credit for corporation tax for small and medium enterprises acquiring machinery
Components of Final Return Forms
The final return forms consist of the following documents:
- Income Statement
- Balance Sheet
- Statement of Shareholders’ Equity
- Appended Tables
- Account Subject Itemized Statement
- Business Summary
Every business operation subject to corporation tax is required to organize and submit their final tax returns and make payment within two months from the closing of their accounts. It is important to be thorough in terms of recording all of the company’s transactions to be able to accurately calculate the tax amount the company has to pay for each year.
Corporate Tax FAQs
Can I request for an extension to the deadline for filing of corporation tax return?
There are cases where in an extension to the deadline for filing the final tax return may be granted. These include a case where the annual shareholders’ meeting cannot be conducted within the 2 months after account closing or in certain exceptional circumstances and unavoidable incidents.
If the extension for the deadline of filing the final tax return is granted, will the payment deadline be extended as well?
The payment deadline is not going to be extended even when an extension to the deadline for filing the final tax return has been granted. Overdue tax and other penalties may still be imposed if tax payment is not made by the statutory due date.
How are losses treated in the final tax return?
Net income losses may be carried forward for the succeeding nine years if you file a blue form tax return on the same business year when the loss was incurred and the final tax return is filed every year after that. This is subject to certain conditions such as the amount of capital or the nature of the company’s ownership. Please refer to the National Tax Agency for more guidance on this.
What is the amount of the corporate taxes in percents?
You can find the estimates in percents for different company types and time periods from the Japan External Trade Organization page.
Which institution handles all the tax-related issues?
All the tax-related matters and disputes are handled by the National Tax Agency of Japan also known as NTA.