Introduction
When foreign companies establish operations in Japan, dealing with withholding tax and information returns often presents a significant practical burden, alongside corporate and consumption taxes. The information return system is unique to Japan and can be challenging for overseas headquarters' accounting and tax departments to comprehend. Meanwhile, the Japanese side places strong emphasis on strict adherence to deadlines and accuracy.
Particularly within the Japanese branches of foreign-affiliated companies, year-end preparation and submission of information returns frequently encounter issues. This is often due to an incomplete grasp of payment transactions and contract details managed by the headquarters. This article outlines the fundamentals of Japan's information return system for foreign-affiliated companies and explains key practical considerations from an international taxation perspective.
1. Overview of the Information Return System in Japan
Information returns are documents that a payer must submit to the tax office, based on the Income Tax Act and the Special Taxation Measures Act, to report specific payments made to a payee and the amount paid. Common examples include payment statements for remuneration and fees, real estate usage fees, dividends, as well as withholding tax certificates for employment income.
The system's purpose is to enable tax authorities to capture payment information and verify the accuracy of income declarations by the recipient. A distinctive feature of the Japanese system is that certain returns must be submitted regardless of whether withholding tax was applicable.
The submission deadline is generally January 31 of the year following the payment. Returns must be filed with the tax office having jurisdiction over the taxpayer's place of taxation. It is crucial to note that late or failed submissions are common points of contention during tax audits and may, in some cases, lead to penalties.
2.Issues Unique to Foreign-Affiliated Companies' Bases in Japan
In foreign-affiliated companies' Japan offices, there are specific challenges regarding compliance with information returns. The main factor is that decision-making for payments and contract management is conducted at the overseas headquarters.
For example, in cases where the Japan office is receiving substantial services but the payments are made directly from the overseas headquarters, the Japan side may not be able to track these payments, leading to the omission of transactions that should be reported in information returns. Additionally, payments unique to international transactions, such as royalties, consulting fees, and expenses related to dispatched employees, can also pose a problem as they may not easily connect to information returns from an accounting perspective.
Furthermore, there is often a misunderstanding regarding payments to non-residents and foreign corporations that "since it is a foreign transaction, Japanese information returns are not required." However, for payments that fall under domestic source income, even non-residents may be required to submit information returns.
3. Main Payment Items Subject to Information Return Reporting
There are several typical examples of payments subject to information return reporting that are likely to become problematic for foreign-affiliated companies based in Japan.
First, it refers to the fees and charges for lawyers, tax accountants, consultants, and others. These are often subject to withholding tax, and the preparation of payment statements (as part of information returns) is mandatory.
Secondly, it refers to payments related to the use of real estate, such as rental fees for real estate and parking fees. Office rent is often overlooked as it is a transaction between corporations, but if certain requirements are met, the submission of information returns is necessary.
Thirdly, it pertains to payments to overseas headquarters and overseas affiliated companies. Fees for technical support, brand usage, and outsourcing costs may qualify as domestic source income depending on the contract terms, necessitating consideration from both withholding tax and information return reporting perspectives.
4. Year-End Adjustment and Relationship with Withholding Tax
The information return is not a standalone task; it is closely related to year-end adjustments and withholding tax practices. The withholding tax statement for employment income is a type of information return and is created and submitted based on the results of the year-end adjustment.
In the Japanese branches of foreign companies, it is common to outsource payroll processing and year-end adjustments to external vendors; however, outsourcing does not exempt them from the final responsibility regarding information returns. It is essential for the companies themselves to have a system in place to manage and verify the comprehensiveness of payment details and submission status.
5. My Number Compliance and Practical Considerations
When preparing information returns, it is required to include the payee's My Number or corporate number. Particularly for payments to individuals, strict management based on the Number Law is necessary regarding the acquisition, storage, and disposal of My Numbers.
In foreign-affiliated companies, a lack of understanding of the My Number system can lead to delays in the acquisition process, resulting in situations where the necessary returns are not completed just before the submission deadline. In practice, it is important to establish internal processes that incorporate the acquisition of My Number at the time of contract signing or when payments begin.
6. Position of Information Returns in Tax Audits
In a tax audit, information returns are one of the materials that are always checked in the initial stages. Omissions in the submission of these returns or inconsistencies in their content are often treated as indicators of withholding tax omissions or declaration omissions.
In the case of foreign-affiliated companies, there tends to be a focus on reconciling information returns with accounting records and contracts due to the high volume of overseas remittances and related party transactions. It is important to position information returns not merely as an annual task, but as part of international tax risk management.
7. Key Points for Building a Practical Response System
To ensure stable compliance with information return reporting at the Japan branch of a foreign-affiliated company, several practical measures are effective.
First, it is important to clearly organize the payment information that needs to be understood on the Japan side and the information that should be provided by the headquarters. Next, it is necessary to organize the correspondence between account titles and information return classifications, and to devise ways to reduce the work of reviewing everything from scratch at the end of the year.
Additionally, involving experts who can understand international taxation, withholding tax, and information returns as a whole is also effective in moving away from a personalized approach.
Summary
The information return system in Japan is difficult for foreign companies to understand, yet it is extremely important in practice. Particularly at Japanese branches, a lack of information coordination with overseas headquarters can lead to missed responses.
Rather than treating information returns as a formal year-end task, positioning them as a risk management process linked to withholding tax and international taxation will lead to the enhancement of practical responses in foreign-affiliated companies.
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