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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