Introduction
日The depreciation system in this tax context is a fundamental mechanism for reasonably allocating the acquisition costs of a company's assets over time. However, for foreign companies operating internationally, differences with accounting standards (IFRS and US GAAP) and Japan's unique tax rules often become practical burdens.
In particular, in Japan, the methods of depreciation and useful lives recognized for tax purposes are strictly defined by laws and notifications, leading to frequent cases where accounting treatments cannot be directly reflected in tax matters.
This article organizes the basic structure of depreciation under Japanese tax law and systematically explains the key points that foreign companies should keep in mind when conducting practical operations at their Japanese bases.
1. The Basic Structure of the Depreciation System in Japanese Taxation
In Japanese taxation, depreciation is regulated under the Corporation Tax Act and the Enforcement Order of the Corporation Tax Act. The assets subject to depreciation are tangible fixed assets and intangible fixed assets used for business purposes, while inventory assets and land are generally excluded.
Tax depreciation is a system that solely establishes the "eligibility for expense deduction and the limit amount," and it must be considered independently from accounting depreciation. In other words, regardless of any depreciation recognized in accounting, any portion that exceeds the allowable depreciation limit for tax purposes will not be deductible as an expense.
This point is one of the characteristics of Japanese taxation, where discrepancies between accounting and tax are likely to occur, and foreign companies that are accustomed to international accounting standards need to be particularly cautious.
2. Depreciation Methods and the Concept of Statutory Useful Life
In Japanese tax law, a "statutory useful life" is established for each type of asset as a general rule. These are determined based on the useful life tables published by the National Tax Agency, and companies are not allowed to set their own useful lives.
Regarding depreciation methods, the available options differ depending on the acquisition date. For tangible fixed assets, the straight-line method is generally applied; however, it is also possible to choose the declining balance method by following certain procedures. However, for buildings and building-related facilities, only the straight-line method is permitted.
Intangible fixed assets are generally depreciated using the straight-line method, and for software, the useful life is classified according to its intended use.
In the case of foreign-affiliated companies, it is common to manage based on the useful life and depreciation methods used in their home country, and it is important to be aware that differences from the useful life according to Japanese tax law can result in temporary differences.
3. Tax Treatment of Small Assets and Lump-Sum Depreciation Assets
In Japanese tax law, there is a special provision regarding small assets as an exception to reduce the practical burden.
For assets with an acquisition cost of less than 100,000 yen, it is possible to deduct the full amount as an expense at the time of acquisition. Additionally, for assets with an acquisition cost of 100,000 yen or more but less than 200,000 yen, it is possible to choose a method of equal depreciation over three years as "lump-sum depreciable assets."
Furthermore, for corporations that qualify as small and medium-sized enterprises, there is a special provision that allows for the full deduction of low-value depreciable assets under 300,000 yen at the time of acquisition. However, it is important to note that many foreign-affiliated companies are not eligible for this system.
These systems are prone to discrepancies with accounting practices, making adjustments during tax filings and the maintenance of fixed asset management ledgers important.
4. Differences from Accounting Standards and Practical Tax Adjustments
Under IFRS and US GAAP, it is common to set the useful life of an asset based on its economic useful life and to depreciate it by component. In contrast, Japanese tax law prioritizes statutory useful life, and component breakdown is only permitted to a limited extent.
As a result, a discrepancy arises between the depreciation expense for accounting purposes and the deductible amount for tax purposes, necessitating an adjustment on the tax return. Specifically, depreciation expenses that exceed the tax-deductible limit will require an addition adjustment on the tax return.
In foreign-affiliated companies, it is required to adjust the financial results of the Japan office for group consolidation purposes, while also conducting separate tax adjustments for Japanese corporate tax filings.
5. Checkpoints for Depreciation in Tax Audits
In tax audits, depreciation is one of the frequently examined issues. In particular, errors in asset classification, incorrect application of useful life, and mistakes in determining the start date of depreciation carry a high risk of denial.
Additionally, when assets purchased in bulk by the overseas headquarters are used at the Japan location, there is a requirement for the rationale behind the acquisition cost calculation and allocation method to be reasonable. Simply reusing the headquarters' accounting data may raise concerns from a tax perspective.
It is important to manage fixed asset ledgers, contracts, invoices, and internal approval documents in a consistent manner and to maintain a state that is explainable during tax audits.
6. Key Points for Practical Response in Foreign-affiliated Companies
In order for foreign-affiliated companies to properly manage depreciation for Japanese tax purposes, it is essential to clearly separate accounting and taxation operations. It is desirable to establish fixed asset management rules specifically for Japanese tax purposes and to conduct depreciation management based on the statutory useful life.
Additionally, establishing internal processes based on adjustments with group accounting and creating a system that prevents Japan-specific tax adjustments from becoming personalized will lead to long-term compliance assurance.
7. Summary
Depreciation for tax purposes in Japan is a clearly defined system; however, due to differences with accounting standards and the abundance of unique rules, it is a field that poses a significant practical burden for foreign companies.
It is important to systematically understand the statutory useful life, depreciation methods, treatment of small assets, and the concept of tax adjustments, and to establish an appropriate operational system as a base in Japan.
Depreciation is not just an accounting process; it can be said that it is a theme that should be strategically addressed from the perspective of tax risk management.
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