The tax year is the corporation’s annual accounting period specified in its articles of incorporation. A Japan branch of a foreign corporation must use the same accounting period that is adopted by the corporation in its home country.
Corporate income tax returns (i.e. the national corporation tax return, enterprise tax return, and local inhabitants’ tax return) are self-assessment tax returns.
If a corporation meets certain conditions, such as keeping certain accounting books, and makes an application for it in advance, it is allowed to file a ‘blue form’ tax return. A ‘blue form’ filing corporation may benefit from loss carryforward and other benefits, including incentive tax application.
A corporation (including a branch) is required to file the final tax return within two months after the end of its annual accounting period. If a corporation cannot file the final return because of specific reasons, the due date of the final return may be extended for one month (two months in case of consolidated tax filing) with the tax authority’s approval. Further extension may be allowed by an advanced approval.
Before the 2020 Tax Reform Act, no filing extension for the consumption tax returns are allowed. Under the 2020 Tax Reform Act, a corporate taxpayer will be allowed to apply one month extension for the consumption tax returns by filing an advance application from tax years ending on or after 31 March 2021.
Under the 2018 Tax Reform Act, a large corporation (where the capital amount at the beginning of the tax year exceeds JPY 10 million) and certain types of corporations (investment purpose corporations, special purpose corporations, and mutual corporations) are required to file corporate and local tax returns and consumption tax returns via the e-filing method from tax years beginning on or after 1 April 2020. To encourage greater adoption of electronic bookkeeping by Japanese taxpayers, the 2020 Tax Reform Act further amended the previous system to maintain books and records in electronic form.
Payment of tax
Income taxes payable on the final corporate income tax return should be paid on or before the filing due date of the final tax returns (usually two months after the end of the corporation’s accounting period). If an extension of time for filing is granted, the taxes may be paid on or before the extended due date with interest accrued at a rate of 1.6% (for the year 2020) per annum for the period from the day following the original due date (i.e. two months after the end of an accounting period) to the date of the actual payment.
Provisional tax payments are required for a corporation that has a tax period longer than six months. Provisional taxes generally are computed as one-half of the tax liabilities for the previous year, but they may be reduced by the filing of interim tax returns that reflect semi-annual results of the operations. The provisional tax payment is required to be made within two months after the end of the sixth month of the corporation’s accounting period.
Under the 2020 Tax Reform Act, the interest rate applied by tax offices on delinquency tax and on refunds paid to taxpayers will be reduced from the current 1.6% per annum to 1.1% per annum.
If the tax return is filed late, a late filing penalty is imposed at 15% to 20% of the tax balance due. In the case that a corporation voluntarily files the tax return after the due date, this penalty may be reduced to 5%. The rate is increased to 10% to 15% once the tax audit notice is received.
An under-payment penalty is imposed at 10% to 15% of additional tax due. In the case that a corporation amends a tax return and tax liabilities voluntarily after the due date, this penalty may not be levied. The penalty is imposed at 5% to 10% once the tax audit notice is received.
In addition, interest for the late payment of tax is levied at 2.6% per annum for the first two months and increases to 8.9% per annum thereafter (for the year 2020).
The 2020 Tax Reform Act reviewed the requirements for reporting of overseas property. Where a taxpayer does not submit the required documents to the tax authorities by the designated deadline, the taxpayer will be subject to an additional penalty tax for failure to file the required report, even if the taxpayer is not aware of his or her obligation to file a tax return. This amendment will apply to income tax arising in 2020 and onwards.
The parent company will file the consolidated tax return and pay national corporate income tax for the group. The consolidated tax return and payment due dates are the same as previously discussed; however, the due date of the final return may be extended for two months.
For local corporate income taxes, each member of the consolidated group must separately file the returns and pay the taxes.
The current consolidated tax system will be abolished from the tax years beginning 1 April 2022.
Tax audit process
Generally speaking, corporate tax audit is performed in cycles of three to five years’ duration. However, this period may be shortened in the case that some significant tax matters were pointed out in the prior audit and so on. If taxpayers request a downward correction, a tax audit will be performed to make sure of it.
With regard to tax audit procedures, tax laws have not clarified them thus far. Prior to conducting a tax audit, in principle, tax agents are required to notify taxpayers, and, upon completion of tax audits, tax agents are required to provide to taxpayers a brief written summary of their findings, etc.
Once an audit is complete, the basic principle is that a second audit is not allowed. However, if newly acquired information is obtained by the tax authorities that lead them to conclude that the reported taxable income should have been different, then the tax authorities can conduct another audit of the taxpayer. This limitation on the ability of the tax authorities to conduct a second audit only applies if the first audit was conducted on-site. If a ‘desk audit’ is only conducted, where the tax authorities do not conduct the audit on-site, no limitation applies.
Statute of limitations
The statute of limitations to request a downward correction of prior year tax liabilities is five years from when the original tax return was filed.
The statute of limitations with regard to upward corrections by the tax authorities is also five years.
If a correction is made or requested regarding a tax loss carried forward, the statute of limitations is ten years (nine years if the tax loss was rendered in the years beginning before 1 April 2018).
Under the 2019 Tax Reform Act, the statute of limitation in relation to the transfer pricing tax liabilities was extended from six years to seven years. The extended statute of limitation will apply to the tax returns for the tax year beginning on or after 1 April 2020.
Regardless of the standard statute of limitation generally applicable to corporate income taxes, the statute of limitation for tax assessments relating to overseas transactions was reviewed by the 2020 Tax Reform Act to be extended for three years from the date that the Japanese tax authorities issue an information exchange request to the tax authority of a tax treaty partner country. This amendment will apply to national tax returns, the filing due date of which falls on or after 1 April 2020.
Topics of focus for tax authorities
Tax authorities are often focusing on cross-border, inter-company transactions (i.e. transfer pricing or donation issues), PE, and significant group restructuring, among other issues. Any developments in discussion on the G20/OECD BEPS project will also be of great interest for Japanese authorities.
In the G20 hosted by Japan in July 2019, the OECD tax report was submitted and approved by the G20. Additionally, the work programme on addressing the tax challenges arising from digitalisation was endorsed.