Tax Law in Japan

byMasatami OtsukaIchiro OtsukaandEiichiro Nakatani

2001

Kluwer Law InternationalThe Hague • London • Boston

Table of Contents

The Authors vList of Abbreviations xxiGeneral Introduction 1

§ 1. General Background of Japan 1I. Geography and Population 1IL Historical Background 1III. Economie and Politicai Background 2IV. International Context 2

§ 2. Consti tu tional Background 2§ 3. The State and its Subdivisions 3

I. Central/Federai Government 3IL Locai Governments 3

A. Prefectures 3B. Municipalities 3

III. Bases of Tax Competencies of thè State and its Subdivisions 3§ 4. Some Features of thè Public Finance of Japan 4

I. Expenditures 4IL Revenues 4

A. Tax Revenues 4B. Non-tax Revenues 4

§ 5. International Aspects of Major Japanese Taxation Areas 5I. Income Taxation 5

A. Inbound Transactions 5B. Outbound Transactions 6C. Wealth Transfer Taxation 7

Selected Bibliography 11Part I. The General Tax Codes and Other General Tax Regulations 13Chapter 1. Introduction to thè Tax Culture and Structure 14

§ 1. General Outline of thè Japanese Tax System 14I. General Source of Tax Law 14IL National Tax Law 14III. Locai Tax Law 15IV. Legislative Process 16

§ 2. The Organization of thè Tax Administration 16I. National Tax Administration 16II. Locai Tax Administration 17

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§ 3. The organization of thè tax consultancyChapter 2. Administration and Procedures

§ 1. General PrinciplesI. Classification of TaxpayersII. National and Locai Income TaxesIII. Accounting

§ 2. Returns, assessment andpayment§ 3. Collection, offences and penaities§ 4. Anti-avoidance regulations

I. Family Corporations RulesA. Denial of Transaction RuleB. Tax on Undistributed Profits

II. Tax Haven Subsidiaries Rules§ 5. Objection and Appeal§ 6. OtherRights andDuties of Taxpayers

I. Statute of LimitationsIL Reporting requirements

Part IL National Tax Act - Domestic AspectChapter 1. Taxes on Income, Profits and Capital Gains

I. Range of Taxable Income - Comprehensive Taxation v. SeparateTaxation

A. Comprehensive TaxationB. Separate Taxation

II. Tax Base-NetBasis v. Gross BasisA. NetBasisB. Gross Basis

III. Manner of Collection - Self Assessment Taxation v.Withholding Taxation

A. Self Assessment TaxationB. Withholding Taxation

§ 1. IndividuaiI. Overview

A. Comprehensive Taxation by Way of Self AssessmentB. Withholding Taxation

IL General Description of Comprehensive Taxation by Way ofSelf Assessment

A. Taxpayers1. Residents2. Non-Residents

B. Taxable IncomeC. Personal ExemptionD. Excluded/Exempt IncomeE. Attribution of Income

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F. Basic Structure of Calculation of Tax BaseIII. Interest Income (rishi shotoku)

A. DefinitionB. CalculationC. Special Manner of Taxation

IV. Dividend Income Qiaito shotoku)A. DefinitionB. CalculationC. Special Manner of Taxation

1. Securities Investments Trust2. Optional Separate Withholding Taxation3. Others

V. Real Property Income {fudosan shotoku)A. DefinitionB. Calculation

VI. Business Income (jigyo shotoku)A. DefinitionB. Calculation

VII. Salary Income (kyuyo shotoku)A. Definition.B. CalculationC. Exemption of Tax Return

Vili. Retirement Income {taishoku shotoku)A. DefinitionB. CalculationC. Special Manner of Taxation

IX. Forest Income (sanrin shotoku)A. DefinitionB. CalculationC. Special Manner of Taxation

1. Separate Taxation2. SpIit-in-Five Taxation

X. Transfer Income (joto shotoku)A. DefinitionB. CalculationC. Special Manner of Taxation

1. Real Property2. Shares or Other Securities

XI. Occasionai Income (ichiji shotoku)A. DefinitionB. Calculation

XII. Miscellaneous Income (zatsu shotoku)A. Definition

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B. Calculation 42Xffl. Loss/Profit Set-Off 42XIV. Loss Carried Forward/Backward 42XV. Deductions 42XVI. Calculation of Tax Amount 44XVII. TaxCredit 45

A. Credit for Dividend 45B. Foreign Tax Credit 46C. Credit for House Acquisition Expenses 46D. Special Credit 46

XVni. Tax Return and Payment 46A. Time 46B. Piace 46

XIX. Withholding Taxation 46A. Withholding Taxpayer 47B. Withholdable Income 47C. Time of Payment ofWithheld Tax 49D. Piace of Payment ofWithheld Tax 49

XX. Prefectural Inhabitants Tax 49A. Per Capita Basis 50B. Income Basis 50

XXI. Municipal Inhabitants Tax 50A. Per Capita Basis 50B. Income Basis 50

XXII. Enterprise Tax 51§ 2. Corporations 51

I. Overview 51II. General Description of Corporation Tax 51

A. Taxpayers 511. Japanese Corporations .. 52

a. Public Corporations 52b. Public Interest Corporations 52e. Co-operative Associations 52d. Unincorporated Associations 52e. Ordinary Corporations 52

2. Foreign Corporations 53B. Taxable Income 54C. Basic Principleof Calculation of Taxable Income 54

1. Gross Income 542. Deductible Expenses 55

D. Time and Piace ofTax Return and Payment 55III. Adjustment to Gross Income 55

A. Dividend 56

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B. Appreciation in ValueC. TaxRefunds

IV. Adjustment to Deductible ExpensesA. Acquisition Costs of InventoryB. Acquisition Costs of SecuritiesC. Depreciation of Depreciable AssetsD. Deferred ChargesE. Valuation LossF. Salaries, Bonuses and Retirement Allowances to EmployeesG. Salaries, Bonuses and Retirement Allowances to DirectorsH. Welfare ExpensesI. DonationJ. Entertainment ExpensesK. Concealed ExpensesL. Taxes and Public DuesM. DeferraiN. Allowances and Reserves0. Other Special Deductions

V. Calculation of Tax AmountA. TaxRatesB. Family CorporationsC. Transfer of Land

VI. Tax CreditA. Withholding Tax CreditB. Foreign Tax CreditC. Other Tax Credits

VII. Withholding TaxationA. Withholding TaxpayerB. Withholdable IncomeC. Time of Payment ofWithheld TaxD. Piace of Payment of Withheld Tax

Vili. Prefectural Inhabitants TaxA. Per Capita BasisB. Corporation Tax BasisC. Interest Basis

IX. Municipal Inhabitants TaxA. Per Capita BasisB. Corporation Tax Basis

X. Enterprise TaxChapter 2. Social Security Contributions

§ 1. Overview§ 2 Employer/Employees

I. Health Insurance

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A. General Rule 67B. Premiums 67

1. The Programme Administered by thè National Government 672. The Programme Administered by a Health Insurance Union 68

IL Welfare Pension Insurance 68A. General Rule 68B. Premiums 68

III. Employment Insurance 69A. General Rule 69B. Premiums 69

1. Employees 692. Employer 69

IV. Workers' Accident Compensation Insurance 70A. General Rule 70B. Premiums 70

V. Child Allowance 70§ 3. Self-Employment or Non-Employment 70

I. National Health Insurance 70IL National Pension 71

§ 4. Others 711. Nursing Care Insurance 71

Chapter 3. Taxes on Payroll and thè Work Force 73Chapter 4. Taxes on Property 74

§ 1. Recurrent Taxes on Immovable Property 74I. Land Value Tax (Chika Zei) 74

A. Overview 74B. Exempted Land 74C. Calculation ofLVT 75

1. Calculation 752. Basic Deduction 753. Example 754. Filingof Tax Return 75

IL Fixed Assets Tax {Kotei Shisanzei) 76A. Overview 76B. Exemption 76C. PayableAmountofFAT 76D. Due Date 77

III. Special Land Holding Tax (Tokubetsu lochi HoyuZei) 77A. Overview 77B. Exemption 77C. Payable Amount of SLHT 77D. Tax Return and Due Date 78E. Special Provision 78

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F. Special TaxIV. City Planning Tax (ToshiKeikakuZei)

§ 2. Recurrent Taxes on Net Wealth§ 3. Estate, Inheritance and Gift Taxes

I. General RuleA. Wealth Acquisition TaxB. TaxpayerC. Taxable PropertyD. Relationship Between Inheritance Tax and Gift Tax

II. TaxpayerA. General RuleB. Resident and Non-ResidentC. Location of PropertyD. Unincorporated Association & Foundation

III. Property Subject to TaxA. Taxable Property

1. The following is deemed as property received by inheritanceor devise (or bequest) (IHTL Arts. 3 and 3-2):2. The following is deemed as property received as a gift or bydevise (or bequest) (IHTL Arts. 4 to 9):

B. Non-Taxable Property1. The following property shall be excluded from that subjectto Inheritance Tax (IHTL Art. 12):2. The following property is excluded from that subject toGift Tax (IHTL Art. 21-3):

§ 4. Valuation of Property Subject to thè Wealth Acquisition TaxA. OverviewB. Statutory Valuation ProvisionsC. The Property Valuation Basic Circular

1. Overview2. Land3. House4. Stock

a. General Ruleb. Listed Stock & Registered Stocke. Unquoted Stocksd. Special Rule

V. Inheritance Tax ComputationA. OverviewB. Basic DeductionC. TaxCredits

1. Spouse Credit2. Minor Credit

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3. Handicapped Person Credit 904. Successive Inheritance Credit 915. Foreign Tax Credit 91

D. Additional Inheritance Tax 91E. GiftWithinThreeYearsPrecedingDeathofDecedent 92F. Special Rule for Calculating Taxable Amount of Small-ScaleResidential Site, etc. 92G. Example of Computation of Inheritance Tax Assuming thèFollowing Hypothetical Case 92

VI. Computation of Gift Tax 94A. Overview 94B. Basic Deduction 95C. Spouse Exemption 95D. Foreign Tax Credits 95E. Special Rule in Calculation of Gift Tax on Gift of Fundsfor Acquisition of House. 95F. Example of Computation of Gift Tax 95

VII. Filingof Tax Return 96A. Inheritance Tax 96B. Gift Tax 96

Vili. Payment of Inheritance Tax & Gift Tax 97§ 4. Taxes on Financial and Capital Transactions 97

I. Securities Transaction Tax (YukaShokenTorihikiZei) 97II. Bourse Transaction Tax {Torìhikisho Zei) 97

§ 5. Non-recurrent Taxes 97I. Real Estate Acquisition Tax (Fudosan Shutoku Zei) 97IL Special Land Holding Tax {Tokubetsu lochi Hoyu Zei) 98III. Automobile Acquisition Tax {Jidosha Shutoku Zei) 98IV. Land Development Tax {Takuchi Kaihatsu Zei) 98

§ 6. Other Recurrent Taxes 99I. Automobile Tonnage Tax (Jidosha Juryo Zei) 99IL Automobile Tax {Jidosha Zei) 99III. Light Automobile Tax (Keijidosha Zei) 99IV. Business Office Tax (Jigyosho Zei) 100

A. Overview 100B. Payable Amount of Tax 100C. Tax Exemption and Special Discount Rates 100D. Tax Return and Payment 101

V. Water Utility & Land Profit Tax (SuiriChieki Zei) 101Chapter 5. Domestic Taxes on Goods and Services 102

§ 1. General Sales, Turnover or Value-Added Tax 102I. Overview 102IL Taxable Transactions 102

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A. Taxable Domestic Transactions 1021. General Rule 1022. Transactions Without Price 1033. Domestic Transactions 103

a. Locationof AssignmentorLeaseofGoods 103b. Location of Services 105

B. Taxable Import Transactions 106III. Non-taxable Transactions 106

A. Non-taxable Domestic Transactions 106B. Non-taxable Foreign Goods 108

IV. Tax-Exempted Transactions (Export Exemption) 108A. Overview 108B. Tax-Exempted Transactions 108

1. General Rule 1082. Purchase From Duty-Free Shop 1093. Other Tax-Exempted Transactions 109

V. Taxpayer 109A. Overview 109B. Tax Exempted Person 109

VI. Calculation of Amount of Consumption Tax and Credi ts 110A. Payable Amount of Consumption Tax 110B. Prices for thè Taxable Transactions 110

1. Taxable Domestic Transactions 1102. Taxable Import Transactions 111

C. Input Tax Credits 111D. Simplified Tax System for Small and Medium-sized Businesses 112

1. Choice of Deemed Purchase Ratio 1122. Deemed Purchase Ratio 1123. Cancellation of Choice of Deemed Purchase Ratio 113

E. Other Credits 1131. Credits for return of goods or discount 1132. Credit for bad debts 113

VII. Filing Tax Return and Payment of Consumption Tax 113A. General Rule 113B. Interim Tax Return and Payment 114C. Return and Payment of Consumption Tax for Taxable ImportTransaction 114D. RefundofTax Credits and Interim Payment 114

Vili. Locai Consumption Tax 115§ 2. Excise Duties 115

I. National Tax 115A. Liquor Duty {Shu Zei) 115

1. Overview 115

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2. Taxpayers 1153. Tax Base and Tax Rate 1154. Tax Exemption 1165. Return Credits 1166. Tax Return for and Payment of Liquor Duty 116

B. Automotive Spirit Duty (Kihatsuyu Zei) 117C. Locai Road Tax (Chiho Doro Zei) 117D. Petroleum Duty (Sekiyu Zei) 117E. Petroleum Gas Duty {Sekiyu Gas Zei) 118F. AviationFuélDuty (Kokuki Nenryo Zei) 118G. Tobacco Duty 119

IL Locai Tax 119A. Special Locai Consumption Tax (Chiho Tokubetsu Shohi Zei) 119B. LightOilDelivery Duty (Keiyu HikitoriZei) 120C. Locai Tobacco Tax (Chiho Tabako Zei) 120

1. Prefectural Tobacco Duty 1202. Municipal Tobacco Duty 121

D. GolfCourseUseTax(Go//-yo^iyoZeO 121E. Bathing Tax (Nyuto Zei) 121F. Public Facilities Tax (Kyodo Shisetsu Zei) 121

§3. Profits ofFiscalMonopolies 122§ 4. Taxes on Special Services 122§ 5. Taxes on Use of Goods or on Permission to Use Goods or toPerforai Activities 122

I. Mining Allotment Tax (Koku Zei) 122IL Minerai Production Tax (Kosan Zei) 122III. Hunters' Registration Tax (Shuryosha Toroku Zei) 122IV. Hunting Tax (Nyuryo Zei) 123

§ 6. Other Domestic Taxes on Goods and Services 123Chapter 6. Taxes On International Trade and Transactions 124

§ 1. Import Duties 124I. Customs Duties 124

A. Overview 124B. Taxpayers 124C. Payable Amount of Customs Duties 125

1. Calculation of Payable Amount 1252. Taxable Value of Imported Goods 125

a. Basic Method 125b. Fair Market Value Method 126e. Domestic Sales Method 126d. Conversion of Foreign Currencies 126e. Customs Duties Exemption, Reduction and Refund 126

E. TaxRates 127

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F. Special Duties 1271. Beneficiary Duties (Ben-eki Kanzei) 1282. Retaliatory Duties (Hofuku Kanzei) 1283. Countervailing Duties (Sousaì Kanzei) 1284. Anti-Dumping Duties (Futorenbai Kanzei) 1285. Emergency Duties (Kinkyu Kanzei) 129

F. Duty Declaration and Payment of Customs Duties 129II. Other Import Duties 130

§ 2. Export Duties 130§3. Profits of Export or Import Monopolies 130§ 4. Exchange Profits 130§ 5. Exchange Taxes 130§6. Other Taxes on International Trade and Transactions 130

Chapter 7. Other Taxes 131§ 1. Poli Taxes 131§2. Stump Duty (InshiZeii) 131

I. Overview 131A. Taxpayer 131B. Rate of Duty 131C. Payment of Stamp Duty 131

IL Taxable Documents and Ratesof Duty 132§ 3. Other Taxes and Parafiscal Taxes not Elsewhere Classified 135

I. Registration&LicenceTax(roroÀ:«MenÀ^yoZei) 135A. Overview 135B. Taxpayers 135C. Payable Amount of Tax 135D. Special Rule for Reductionof Tax 135E. TaxRates 135F. Payment of Tax 136

II. Municipality General Tax Not Stipulated in Locai Tax Law (ShichosonHoteigai Futsu Zei) 136

Part III. International Aspects 137Chapter 1. Outbound Transactions by Residents 138

A. Foreign Tax Credit Rules 138B. Foreign Currency Translation Rules 138C. Transfer Pricing Rules 138D. Thin Capitalization Rules 138E. Anti Deferrai Rules 138F. Incentives and Disincentives 139G. Enforcement 139

§ 1 Foreign Tax Credit Rules 139I. Outline 139

A. Direct Foreign Tax Credit 139

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B. Indirect Foreign Tax CreditC. Tax Sparing Credit

IL Eligible Foreign TaxesA. GeneralB. Exclusion of High Rate Foreign Taxes

III. Limitation on CreditA. Tax Exempt Foreign IncomeB. Ceiling for Foreign Source Income

IV. Credit against Locai TaxesA. Prefectural GovernmentsB. Municipal GovernmentsC. Metropolitan Tokyo Government

V. Excess Credit Carried Backward and Remaining Credit CarriedBackward

VI. Indirect Foreign Tax CreditA. Eligible Foreign SubsidiaryB. Eligible DividendC. Eligible Tax Amount

VII. Tax Sparing CreditA. Fixed RateB. Deemed Amount

§ 2. Foreign Currency Translation Rules§ 3. Transfer Pricing Rules

I. OutlineIL Foreign Affiliate (kokugai kanrensha)III. Relevant TransactionsIV. Arm'sLengthPrice

A. Comparable Uncontrolled Price Method ('CUP')B. Resale Price Method ('RP')C. Cost Plus Method ('CP')D. Others

V. Pre Confirmation SystemVI. Agreement and Correlative AdjustmentVII. Donation to Foreign Affiliate

§ 4 Thin Capitalization RulesI. OutlineIL Foreign Controlling Shareholder (kokugai shihai kabunushi)III. Debt-Equity RatioIV. Concession

§ 5. Anti Deferrai RulesI. OutlineIL Tax Haven Subsidiary (tokutei gaikoku kogaisha)III. Taxable Shareholder

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IV. Taxable Undistributed Current Earnings 149V. Exemption 149

A. Ineligible Business 150B. Business Conducted with Non-Affiliated Parties 150C. Business Conducted Physically in Tax Haven 150

§6. Incentives and Disincentives 150A. Special Reserve for Market Developmentoflmported Products 151B. Special Reserve for Overseas Investment Loss 151C. Special Reserve for Overseas Mine Prospecting/SpecialDeduction for Mine Prospecting 151D. Additional Depreciation/Special Credit for Increase ofImported Products 151E. Special Deduction for Income from Overseas TechnicalAssistance 151

§ 7. Enforcement 151§ 8. Individuai Residents 152

Chapter 2. Inbound Transactions by Non-Residents 153§ 1. Overview 153

I. Domestic Source Income 153IL Permanent Establishment (PE) 153III. Tax Base: Net Basis v. Gross Basis 153IV. Tax Collection Method: Self Assessment v. Withholding 154V. TaxRates 154VI. National Tax Law v. Tax Treaties 155

A. Classification of Income 155B. Source of Income 155C. Permanent Establishment 155D. Taxrates 155

VII. Illustrations 156A. No Presence 156B. Liaison Office 156C. Branch 156D. Subsidiary 157

§2. Domestic Source Income 157§3. Permanent Establishment 158

I. Branch Type PE 158IL Construction Site Type PE 158III. AgentTypePE 159IV. NoPE 159

§4. Manner of Taxation 160I. NetBasisTaxationby Way of Self Assessment 160

A. Calculation of Tax Amount 160B. Time and Piace of Tax Return and Payment 160

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IL Withholding Taxation 161A. Withholding Taxpayer 161B. Withholdable Income 161C. Exemption 161D. Time of Payment ofWithheld Tax 162E. Piace of Payment ofWithheld Tax 162

Chapter 3. Tax Treaties 163§1 . Income and Capital 163

I. Personal Scope 163IL Taxes Covered 163III. General Definitions 163IV. Resident 163V. Permanent Establishment 164VI. Income from Immovable Property 164VII. Business Profits 164Vili. Shipping, Inland Waterways Transport and Air Transport 164IX. Associated Enterprises 164X. Dividends 165XI. Interest 165XII. Royalties 165XIII. Capital Gains 165XIV. Independent Personal Services 165XV. Dependent Personal Services 166XVI. Directors' Fees 166XVII. Artistes and Sportsmen 166XVIII. Pensions 166XIX. Government Service 166XX. Students 166XXI. Other Income 167XXII. Capital 167XXIII. Exemption Method 167XXIV. Credit Method 167XXV. Non-Discrimination 167XXVI. Mutual Agreement Procedure 167XXVII. Exchange of Information 167XXVIII. MembersofDiplomaticMissionsandConsularPosts 168XXIX. Territorial Extension 168XXX. Entry into Force 168XXXI. Termination 168XXXII. Summary 168

§2. Estate, Inheritance and Gift 170Index 171