Consumption tax interim filing

The shortened taxable period explained in the previous article requires a final tax return for each shortened taxable period.

Unlike this, the interim consumption tax return system explained here assumes that the taxable period is one year, the same as the fiscal year, and a final tax return is filed once a year. Apart from that, the obligation to file one or more interim returns will arise depending on the size of the tax amount.

Companies with a shortened taxable period are not required to file an interim return.

The amount of consumption tax for the previous taxable period (a)Interim payment tax amountNumber of consumption tax returns filed per year
480,000 yen or lessNoneNo interim filing is required.
1 final return.
Over 480,000 yen to 4million yen6/12 of the (a)1 interim filing.
1 final return.
Over 4 million yen to 48 million yen3/12 of the (a)3 interim filing.
1 final return.
Over 48 million yen1/12 of the (a)11 interim filing.
1 final return.

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    Taxable period and Base period for consumption tax

    Principle of taxable period

    For the Japanese consumption tax, which is a value-added tax, the taxable period for corporations is, in principle, the fiscal year.

    The base period refers to the period on which the determination of tax liability is based, which in the case of a corporation is the two fiscal years prior to the current fiscal year.

    More details on consumption tax liability will be explained in another article.

    Exceptions to the taxable period

    A company can use 3 months or 1 month as its taxable period if it notifies the tax office of the special exception.

    It is often used by companies that file consumption tax refunds, such as exporting companies, for cash flow reasons.

    Under the Consumption Tax Law, base period is defined on the basis of “fiscal year” rather than “taxable period”.

    The reason why the base period is defined based on “fiscal year” instead of “taxable period” is to ensure that the result of determination of tax liability is consistent even when the special exception for shortened taxable period is applied.

    Therefore, even if the taxable period is shortened, the determination of tax liability is made based on the “fiscal year,” and the tax liability for the shortened taxable period included in the “fiscal year” is unified.

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      Effective corporate tax rate

      In Japan, there are several types of taxes on corporate income, including national and local taxes. First, we will look at each tax category and tax rate individually.

      Corporate income tax

      Corporate income tax is a national tax levied on corporate income. The tax base is the amount of taxable income, and the tax rates are as follows.

      SMEThe portion of income less than 8 million yen per year19%
      The portion of income exceeding 8 million yen per year23.2%
      non-SME23.2%

      Local corporate tax

      Local corporate tax is a national tax, although it has “local” in its name. The tax base is the amount of corporate tax, and the tax rate is 10.3%.

      Resident tax

      This tax is levied by prefectural and municipal governments on corporations that have a place of business in the city. This tax is levied not only on the head office where the corporation is registered, but also on each of its branches, offices, etc.

      Unlike resident tax rates for individuals, the one for corporations are set independently by each municipality within certain limits.

      In the case of Tokyo, the limiting tax rate is 10.4%, and the tax base is the amount of corporate tax.

      However, for corporations with capital of 100 million yen or less and annual CIT amount of 10 million yen or less, the limiting tax rate is 7%.

      Corporate enterprise tax

      Corporate enterprise tax is a tax levied by the prefectural government on businesses conducted by corporations in accordance with the Local Tax Law.

      This tax is very complicated to calculate, but the tax rate is roughly 4.7% to 10%, depending on the attributes of the corporation and various other conditions, and the tax base is the amount of taxable income.

      Effective corporate tax rate

      These tax items above should be considered together with the company’s tax burden. Since only enterprise taxes can be included as a deductible expense in the calculation of corporate income taxes, simply summing the tax rates of each tax item is not an accurate way to determine the tax burden rate.

      The effective tax rate is determined by the following formula. As an example, here is a case of a company with capital of 10 million yen and annual taxable income of 8 million yen.

      • Corporate income tax rate (CIT) : 19%
      • Local corporate tax rate (LCT) : 10.3%
      • Resident tax (RT) : 7%
      • Enterprise tax (ET) : 9.59%

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        Treatment of executive payroll under the corporate income tax in Japan

        Because executive payroll can easily be used to arbitrarily adjust taxable income, the conditions for deductibility in corporate tax calculations are strictly defined. The term “executive” here refers to a registered officer under the Corporate law in Japan.

        As a general rule, salaries paid to executives are deductible only in the following 3 cases; otherwise, they are not deductible.

        1. Same amount every month

        If the exact same amount is paid each month, the executive payroll can be included in deductible expenses, and the amount paid can be revised only in the following 3 cases.

        • Revisions made before the end of 3 months from the beginning of the fiscal year, limited to once per fiscal year.
        • When there is a change in the officer’s position in the organization or a significant change in the duties of the officer.
        • Revision of salary reductions due to a significant deterioration in the company’s performance.

        2. Bonuses noticed to the tax office in advance

        In addition to a fixed monthly salary, bonuses that are notified in advance to the tax office can also be included in the amount of deductible expenses.

        There is a deadline for notification, which is either one month after the date of the resolution of the shareholders’ meeting or four months after the beginning of the fiscal year, whichever is earlier.

        In other words, the advance notification salary is a system in which the amount and timing of payment are determined in advance near the beginning of the fiscal year, and as long as the payment is made in accordance with the notification, there is no room for profit manipulation, and therefore, the amount can be included in deductible expenses.

        Performance-based salary

        Salaries calculated on the basis of profits or the market price of stocks, which indicate the company’s performance, may also be deductible if certain requirements are met.

        The use of this system is not permitted for family-owned companies, and strict requirements are imposed, such as the fact that the salary must be paid equitably to the executive officers and that the details of the calculation method must be included and disclosed in the annual securities report. In practice, the use of this system is limited to listed companies.

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          Consumption tax invoice system in Japan

          What is the invoice system to be launched in Japan?

          In Japan, a consumption tax invoice system is scheduled to be introduced on October 1, 2023.

          Japan’s consumption tax is a value-added tax, but currently it is not based on the so-called invoice method, but on the bookkeeping method.

          When the invoice system is launched, invoice issuers are required to register and must include mandatory information on the invoice, such as the registration number, applicable tax rate, and consumption tax amount.

          Who will be affected by the introduction of the invoice system?

          The main affected parties by the introduction of the invoice system are current tax-exempt business entities and business partners of tax-exempt business entities. Please refer to another article for a detailed explanation of consumption tax-exempt business entities.

          Link

          (1) Registration as a qualified Invoicing business entity will disqualify you from being a tax-exempt business.

          Even after the introduction of the invoice system, there are no plans to change the criteria for qualifying as a tax-exempt business entities. Therefore, tax-exempt business entities will remain tax-exempt if they do nothing.

          On the other hand, a business entity cannot issue a qualified invoice without registering as a qualified invoicing business entity.

          It is possible for a tax-exempt business entity to register as a qualified invoicing business entity, but in this case, the business entity is assumed to be subject to consumption tax, so once registered, it is no longer a tax-exempt business entity and its consumption tax burden will increase.

          (2) Affects transaction partners with tax-exempt business entities.

          From the perspective of a business entity that purchases from a tax-exempt business entities, it is not possible to receive a qualified invoice and therefore cannot claim the purchase tax credit for that transaction. In other words, the burden of the consumption tax equivalent of the transaction will increase.

          Due to this situation, it is expected that a transaction partner will pressure the tax-exempt business to register as a qualified invoicing business entity, or in some cases, change the supplier to a registered business entity.

          Tax-exempt business entities should comprehensively consider whether to register, not only for their own tax advantages, but also in relation to their business partners.

          (3) No significant impact on taxable businesses

          For current taxable business entities, the impact is not so great, except for the transactions with tax-exempt business entities mentioned above.

          There is not much change from the current situation if we pay attention to the items on invoices and the paperwork involved in transactions with tax-exempt business entities.

          In addition, even after the start of the invoice system, the simplified taxation system can still be selected if the requirements are met, thus reducing the administrative burden in addition to the tax benefits.

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