Hello, I am Soga, a Certified Public Tax Accountant of Japan providing international tax services in Nagoya.
Corporations that operate across national borders (assuming Japanese corporations) are subject to many more tax issues than those that do not. This is because it is necessary to consider not only Japanese tax law but also the tax law of the other country and tax treaties. In addition, even under Japanese tax law, there are some unique issues that arise.
In this article, we will discuss international tax issues in typical transactions.
For Japanese corporations without overseas subsidiaries and offices
Import/export of goods
- 0% Japan consumption tax (“JCT”) for export transactions
- Deduction of import JCT
If a corporation only imports and exports goods or products, there are not many international tax issues. Since the treatment of JCT is different from purely domestic transactions, care should be taken to ensure proper processing, including the retention of necessary documents.
Overseas local procurement of goods plus sales
- Overseas local value added tax (“VAT”)
If Japanese corporations purchase goods from overseas suppliers and sell them in the same country, it might need to declare and pay VAT of that country, although JCT is not applicable.
Service and license transactions with overseas business partners
- Overseas withholding tax at the time of payment from business partners
- Japanese domestic withholding tax obligation at the time of remittance to the overseas counterparty
- JCT/ overseas local VAT
Next are transactions that do not involve goods. This is where things get a little more difficult.
In some cases, the payer of the payment may be required to withhold (deduct) the recipient’s tax from the amount paid. Whether or not withholding is required and the tax rate may vary depending on tax treaties. Taxes withheld overseas might be recoverable in Japan through foreign tax credits.
In some cases, JCT/ overseas local VAT may also be applicable.
Overseas Business Travel
- Overseas local Permanent Establishment (“PE”) taxation
- Overseas local payroll taxation
Even if the company does not legally have an overseas presence, there may be a risk that the presence of business travelers in a country may cause the Japanese corporation to pay local corporate income tax if it has a Permanent Establishment (PE) in the country.
There may also be a risk that the business traveler will be subject to personal income tax locally.
For Japanese corporations with overseas subsidiaries and offices
In addition to tax issues for corporations without overseas subsidiaries and offices, the following issues arise.
Transactions with overseas subsidiaries
- Transfer pricing taxation, donations to foreign related parties
In transactions between related parties, transaction prices can be arbitrarily manipulated to evade taxation in either country. To prevent this, many countries, including Japan, have transfer pricing taxation systems, which require that the transaction price be at arm’s length.
Transfer pricing taxation also applies to transactions between an overseas branch and the head office in Japan (internal transactions).
Injection or withdrawal of funds to an overseas subsidiary
- Taxation of dividends and interest
- Restrictions on deductibility of interest paid (thin cap rule, earnings stripping rule)
- Capital gains tax on sale of subsidiaries
The amount of overseas and Japanese taxation differs depending on whether the profits of the overseas subsidiary are returned to the Japanese parent company as dividends or as interest on loans from the Japanese parent company.
Secondment overseas
- Overseas local payroll taxation
Compliance of local personal income tax return/payment during the period of secondment and upon assignment or return may be required.
Other
- Anti-tax haven rule (Japan CFC rule)
The CFC rule is designed to prevent overseas subsidiaries in low-tax countries from earning income that has no economic substance. Even if the subsidiary is not in a low-tax country, it may be subject to the CFC rule if it is a paper company or if the actual tax rate is lower due to tax holidays.
Conclusion
As mentioned above, you can see that there are many tax issues for corporations operating across national borders.
If you do not know or understand these issues in the first place, you run the risk of paying (or have already paid) unnecessary taxes, which is something you should consider in advance.
