Introduction
Every August is an important time for many companies and individual business owners to conduct a comprehensive review of their tax compliance status. By the end of July, the deadline for the first installment of estimated income tax and special reconstruction income tax arrives, and depending on the fiscal year-end, corporations may also have interim declarations or estimated tax payments for corporate tax, local corporate tax, and consumption tax. Additionally, for individuals, the regular and special collection of resident tax is ongoing, making it a crucial timing from the perspective of annual tax management.
In recent years, the importance of tax compliance goes beyond merely responding to tax audits. In the case of foreign residents renewing their residency status or applying for permanent residency, the payment status of income tax and resident tax is increasingly emphasized. Furthermore, in situations such as loan assessments by financial institutions, governance reviews by overseas parent companies, M&A due diligence, and IPO preparations, there are more instances where it is confirmed whether timely and appropriate tax payments are being made.
In such an environment, managing tax compliance is important not only in terms of "whether you are filing" but also "whether you are making appropriate payments by the statutory deadline." This article will organize the income tax, corporate tax, local corporate tax, consumption tax, and resident tax that should be confirmed by the end of August, taking into account the perspective of international tax practice.
1. Income Tax - First, confirm the estimated tax payment
The first thing to confirm regarding income tax is whether the first installment of estimated tax has been properly paid. The estimated tax system is a system where, if the estimated tax base amount calculated based on the income and tax amount from the previous year as of May 15 of that year is 150,000 yen or more, a portion of the income tax and special reconstruction income tax is paid in advance. The tax amount paid as estimated tax is settled at the time of the final tax return the following year, positioning it as a prepayment system rather than an additional tax.
The standard amount for estimated tax payments is generally calculated based on the tax amount declared for the previous year. However, if there were capital gains, temporary income, certain miscellaneous income, foreign tax credits, or the application of disaster relief laws in the previous year, it will be recalculated based on Article 104 of the Income Tax Act, etc. Especially for taxpayers with foreign income or foreign tax credits, it is important to check the contents of the estimated tax payment notification sent by the tax office, as the tax amount paid on the previous year's final tax return alone may not accurately determine the estimated tax payment obligation.
The due date for the first installment for the 2026 tax year is July 31, and by August, the due date has already passed. Therefore, the most important thing at this time is to confirm whether the estimated tax payment has been properly paid or automatically withdrawn from the account. If you are using e-Tax notifications, paper notifications may not be mailed, so it is also necessary to check the message box and the account withdrawal history.
Furthermore, if this year's income is expected to decrease significantly compared to the previous year, it is advisable to consider the possibility of applying for a reduction for the second installment early. Particularly in cases where the income structure changes significantly due to the end of overseas assignments, business downsizing, or the completion of real estate sales, there may be a significant discrepancy between the estimated tax amount for the current year and the estimated tax payment amount.
2. Corporate Tax and Local Corporate Tax - Confirmation of Intermediate Filing Obligations
For corporations, there is an intermediate filing system for corporate tax and local corporate tax, which corresponds to the estimated tax payments for income tax. Certain corporations are required to file intermediate returns and make intermediate payments, either based on the previous year's performance or based on a provisional settlement.
Under the previous performance method, the intermediate payment amount is calculated based on the confirmed corporate tax amount for the previous business year, which may require a certain amount of payment even if performance deteriorates during the business year. On the other hand, under the provisional settlement method, the tax amount is calculated based on the performance up to the intermediate point, which may reduce the financial burden if performance has significantly worsened.
However, the provisional settlement method requires more settlement work than the usual intermediate filing, so it is important to compare not only the tax benefits but also the accounting and administrative costs. Especially for companies with many group companies, it is necessary to choose while considering the consistency with the consolidated settlement schedule.
Additionally, there are cases where intermediate filing obligations arise for foreign corporations with branches in Japan or foreign corporations with permanent establishments (PE) in Japan. Since overseas parent companies are often unfamiliar with Japan's unique intermediate filing system, it is important for the Japanese representatives to manage the payment deadlines appropriately.
In recent years, electronic filing and electronic tax payments via e-Tax have become common, and the use of direct payments and electronic tax payments is recommended to prevent payment omissions. Missing the payment deadline can result in penalties such as late payment tax, so it is important to establish an internal management system that includes not only the settlement and filing schedule but also the execution of payments.
3. Consumption Tax - Response to Intermediate Filing and Invoice System
For consumption tax, an intermediate filing and payment system is established for businesses above a certain scale. Depending on the consumption tax amount for the previous year or the previous business year, intermediate filings may be required once a year, three times a year, or eleven times a year, which can result in more payment occurrences than corporate tax.
Since the introduction of the invoice system, managing consumption tax now requires not only calculating the tax amount but also includes compliance with qualified invoice storage requirements, input tax credit requirements, and the Electronic Bookkeeping Act. Companies that conduct transactions with overseas businesses are particularly required to perform appropriate segmented accounting for export exemptions, reverse charges, and digital service transactions with foreign operators.
Foreign corporations may also have a tax payment obligation for consumption tax if they have taxable sales in Japan. It is important to appropriately respond to Japan's unique systems, such as appointing a tax representative, registering for invoices, and complying with electronic filing, as it is not easy for overseas headquarters to grasp the entire system.
Also, regarding consumption tax, it is important to confirm not only the amount of tax to be paid but also the payment methods. Since the administrative procedures and usage conditions differ depending on the payment method used, such as direct payment, internet banking, or credit card payment, it is necessary to choose a method that is suitable for your company's fund management and internal controls.
As of August, it is desirable to confirm whether there will be a mid-year consumption tax return scheduled for the latter half of this year, as well as to review the operational status after the start of the invoice system. Particularly for companies with many overseas transactions, it is important to check whether the classifications of export tax-exempt transactions, overseas transactions, and non-taxable transactions are being conducted appropriately, as this will help reduce the burden during year-end and final tax return periods.
4. Individual Resident Tax - A tax item that is becoming increasingly important in relation to residency status management
Along with income tax, individual resident tax is a tax item that both foreigners and Japanese should confirm. Since resident tax is levied in the following year based on the income of the previous year, the timing of taxation differs from income tax, but in recent years it has become an extremely important tax item for evaluating overall tax compliance.
For salaried employees, it is common for the employer to carry out special withholding, but for sole proprietors or in certain cases, it becomes ordinary withholding, and they need to pay by the due date themselves. In ordinary withholding, payments are usually made in four installments per year, so there are not infrequent cases where individuals forget to pay even though the payment slips have arrived.
Especially for foreigners, it is common to be required to submit a resident tax payment certificate and a tax payment certificate in various procedures related to residency status such as permanent residency, highly skilled professionals, management, and spouses. Therefore, it is important to ensure that not only income tax but also resident tax is paid on time.
Additionally, in cases of overseas assignments, return to home country, or departure from Japan, issues may arise regarding the taxation relationship of resident tax and the necessity of a tax payment manager. Even if one moves abroad during the year, the taxation relationship for resident tax differs depending on whether they had an address in Japan on January 1 of that year, so it is important to confirm not only income tax but also local taxes.
5. Tax Compliance in International Tax Practice That Is Often Overlooked
In international tax matters, there are many issues that do not arise when assuming only domestic transactions. For example, when applying for foreign tax credits, the method of calculating the estimated tax payment base amount may differ from the norm, and there are cases where the previous year's final tax return amount alone cannot determine the estimated tax payment obligation.
Additionally, for payments for services provided to foreign corporations, royalties, dividends, interest, etc., it is necessary to properly confirm the existence of withholding tax obligations and the applicability of tax treaties. If there is a failure to withhold tax, issues will arise not only with the main tax but also with additional taxes for non-payment and late payment, so it is important to conduct tax considerations from the time of contract conclusion.
When a foreign corporation conducts business in Japan, it is also necessary to confirm the existence of a permanent establishment (PE), the corporate tax and consumption tax filing obligations of the Japan branch, the appointment of a tax payment manager, and the taxation relationship of local taxes. Furthermore, since the start of the invoice system, there are increasing cases where even foreign corporations must register as qualified invoice issuers and file consumption tax returns if they have domestic taxable sales.
For individuals with overseas income, it is also necessary to consider the relationship with foreign asset reporting, asset and liability reporting, foreign tax credits, and the taxation system upon moving abroad (so-called Exit Tax). The perspective that tax compliance is not just about calculating tax amounts, but includes proper filing, timely payment, and submission of necessary documents as part of comprehensive management is important.
6. Checkpoints to Confirm by the End of August
Organizing the items to be confirmed by the end of August by tax item makes it easier to understand.
Regarding income tax, it is important to confirm whether the first installment of estimated tax has been properly paid or transferred, whether any e-Tax notifications have been overlooked, and whether there is a possibility that a reduction application for the second installment will be necessary based on the estimated income for the current year.
For corporations, it is desirable to confirm whether they are subject to interim reporting for corporate tax and local corporate tax, which method of planned reporting or provisional settlement is appropriate, and whether there are any issues with the electronic filing and electronic payment system.
Regarding consumption tax, it is important to reconfirm the existence of interim reporting obligations, the status of compliance with the invoice system, the handling of export tax exemptions and foreign transactions, and the applicability of the tax payment management system.
For resident tax, it is advisable to check the due dates for regular collection, the status of special collection, and whether there are any issues in obtaining tax payment certificates for foreigners.
For international tax matters, it can be said that August is a very suitable time to start organizing foreign tax credits, withholding income tax, tax treaty notifications, foreign income, PE certification, transaction prices with overseas subsidiaries, and tax payment management in preparation for year-end.
Conclusion
The term tax compliance often conjures up the image of "responding to tax audits" for many. However, in recent years, its meaning has changed significantly.
The situations in which tax filing and payment status are checked, such as foreign resident status management, loan screening by financial institutions, governance reviews by overseas parent companies, IPO preparations, and M&A due diligence, are increasing year by year. Therefore, it is important to manage not only whether filings were made on time but also whether payments were made appropriately within the deadline.
Especially in the field of international taxation, since foreign tax credits, tax treaties, taxation of foreign corporations, consumption tax, and withholding income tax are intricately related, it is not sufficient to check just one tax item. Cross-checking income tax, corporate tax, local corporate tax, consumption tax, and resident tax, and managing them systematically within the annual schedule will ultimately lead to a reduction in tax risks, stabilization of cash flow, and improvement of corporate governance.
August is not a time to reflect on the previous year's performance, but rather the first opportunity to review tax management in preparation for year-end and the following year's final tax return. It can be said that positioning tax compliance not as "filing work" but as part of "ongoing management" is the practical response required of companies and individuals going forward.
For those who need to manage tax payments in Japan, please contact us.