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 access to incentives.
A corporation (including a branch) is required to file the final corporate income and consumption tax returns within two months after the end of its annual accounting period. In certain cases, if a corporation cannot file the final return by the deadline, the due date of the final return may be extended for one month (two months in case of a group tax relief filing) with the tax authority’s approval.
Large corporations (with capital at the beginning of the tax year exceeding JPY 10 million) and certain other types of corporations are required to file corporate and local tax returns and consumption tax returns by e-filing.
Payment of tax
Income taxes payable on the final corporate income and consumption tax returns 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 2.4% (for the year 2023) 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.
If the tax return is filed late, a late filing penalty is imposed at 15% to 20% of the tax balance due. Where 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 a tax audit notice is received. For national tax returns for which the filing due date is on or after 1 January 2024, the late filing penalty will be increased to 30% (25% for voluntary filing after the due date) for tax liabilities exceeding JPY 3 million.
An under-payment penalty is imposed at 10% to 15% of additional tax due. Where a corporation amends its tax return and pays any additional tax liabilities voluntarily after the due date, this penalty may not be levied. The penalty is imposed at 5% to 10% once notification of the commencement of a tax audit is received.
In addition, interest for the late payment of tax is levied at 2.4% per annum for the first two months and increases to 8.9% per annum thereafter (for the year 2023).
Tax audit process
Generally speaking, corporate tax audits are performed in cycles of three to five years’ duration. However, this period may be shortened in certain cases, such as: significant tax matters are pointed out in a prior audit, the tax authorities decide to conduct industry-wide audits, the taxpayer is reported in the media for a significant transaction, etc. If a taxpayer requests a downward correction of a tax return in order to obtain a refund, a high level tax audit will also be performed before the refund is granted.
In principle, tax agents are required to notify taxpayers prior to commencement of an audit. Similarly, upon completion of a tax audit, tax officers are in principle required to provide the taxpayer with a brief written summary of their findings.
Once an audit is complete, further audits of the same fiscal periods are generally not permitted. However, if newly acquired information is obtained by the tax authorities that leads them to conclude that the reported taxable income should have been different, another audit can be commenced. 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 ‘desktop review’ only is conducted, with no on-site visits, no limitation applies.
Statute of limitations
The statute of limitations is generally five years, subject to the below exceptions:
- The statute of limitation is ten years for tax losses carried forward (nine years if the tax loss was incurred in the years beginning before 1 April 2018).
- The statute of limitation in relation to transfer pricing tax liabilities is seven years (six years for the years beginning before 1 April 2020).
- The statute of limitation for tax assessments of national tax returns relating to overseas transactions is three years from the date that the Japanese tax authorities issue an information exchange request to the tax authority of the tax treaty partner country (for fiscal years with a filing deadline on or after 1 April 2020).
Topics of focus for tax authorities
Tax authorities are often focused on cross-border, inter-company transactions (i.e. transfer pricing), PEs, and significant group restructurings, among other issues.