JAPANESE BUSINESS TAXES

By Joseph H. Barkmeier, Division of Commercial Laws

Japanese business taxes consist principally of several forms of taxation on income, namely the income tax proper, special excess profit tax, the business profits tax, the capital interest tax, and the land tax based on the annual rental value. The tax laws in general apply only to Japan proper and not to Japanese colonies such as Chosen, Taiwan, Karafuto, Kwantung and certain islands in the North Pacific. In many instances the tax laws enacted by the colonies are very similar to the Japanese laws.

INCOME TAX

The Income Tax Law at present in force is the Act of July 31, 1920, as amended. Persons having their domicile in Japan or residence in Japan for more than one year are liable to tax on their total income from all sources. Resident aliens are given some relief from double taxation by exemption on certain types of income which will be noted under the heading of Income Exempted from Tax. Companies which have their domicile in Japan are subject to tax on their total income from all sources, whereas companies having a foreign domicile are liable to tax only on their income from Japanese sources. The domicile of a company is determined by the place where its head office or real center of control and management is situated. The income tax rates have been increased during the past two years by the Temporary Tax Increase Law of March 30, 1937, and the North China Affair Special Tax Law of August 12, 1937, the former law being modified and the latter being superseded by the China Incident Special Tax Law of March 31, 1938.

LIABILITY OF NON-RESIDENTS

Persons who have no domicile in Japan or who have resided in Japan less than one year are liable to income tax in the following cases: 1. Income from property owned in Japan, whether real or personal property. Intangible property, such as patents, trade marks, copyrights, et cetera, is regarded as situated where the persons enjoying the income therefrom are resident; such income would not be taxable unless the non-resident has a permanent establishment in Japan which receives the income and it constitutes a part of the business income of the establishment.

2. Income from business carried on in Japan. The Income Tax Law merely states that a non-resident is liable to tax if a business is owned in Japan, but this provision has been interpreted to mean that a foreign enterprise carrying on business in Japan is not liable to tax unless it has a permanent establishment there through which it does business. Where sales result from dealing through a broker, commission agent, or local distributor buying and selling on his own account, or a traveling salesman, the foreign firm ordinarily is not considered to have a permanent establishment in Japan, and therefore is not liable to tax on profits from such business. As long as the agent transacts business in his own establishment and in general acts as an independent business man, even though he has power to sell the

goods of the foreign firm, tax liability for the foreign enterprise will not result. If a foreign enterprise has an agent in Japan who receives a salary and who can be considered as its employee, or if it opens an office of its own, it would be regarded as having a permanent establishment. Each particular case, however, is determined on the basis of all the circumstances as to whether or not a permanent establishment is maintained in Japan.

3. Interest payable in Japan on corporation, government or municipal bonds, bank deposits or profit on trusts for deposit or loan purposes. Tax on this type of income is deducted at source by the payer of interest whether the foreign recipient is an individual or company.

4. A non-resident is also liable to tax when he receives from a resident company dividends of profit or interest, distribution of surplus, or bonus that is a disposal of profit or surplus, or any allowance partaking of the nature of a bonus. The tax on dividends paid by a resident company to foreign individuals, partnerships or companies is withheld at the source. A resident company paying a share of the profits to its non-resident directors must deduct the tax on such percentages.

INCOME EXEMPTED FROM TAX

The income derived by resident aliens from property, a business or occupation in foreign countries are exempt from tax, but this exemption does not extend to dividends, interest on non-business obligations, annuities, et cetera. The income from foreign ships belonging to countries which accord exemption to Japanese ships is exempt; the United States and Japan are on a reciprocal basis in this respect.

Under regulations issued on May 18, 1938, income arising in the business of manufacturing the following products may, upon application, be exempted from tax for the year in which the business has been started and for the following three years:

1. Gold, silver, lead, zinc, tin, nickel, chrome, cobalt, iron, and aluminum.

2. Iron bars, rods, joists, angles, rails, plates, sheets, wire and tubes (not including cast iron tubes).

3. Copper alloy bars, rods, plates, sheets, and tubes.

4.

Aluminum alloys and magnesium alloys.

5. Boilers, prime movers (including locomotives), and iron machinery operated by motive power.

6. Alumina, cryolite, titanium, carbon black, nitrogenous lime, sulphate of potash, phosphate of ammonium, sulphate of ammonium, nitric acid, carbolic acid, glycol, glycerine, methanol, acetone, butanol, acetylcellulose, synthetic rubber, and tanning extracts.

Special laws such as the Machine Tool Manufacturing Law and the Aircraft Industry Law (see COMPARATIVE LAW SERIES, July, 1938) grant an exemption from income and business profit taxes in relation to new or increased facilities for a certain period where the majority control of the business is in Japanese Nationals.

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CLASSES OF INCOME

For purposes of assessment, the Income Tax Law divides income into three classes as follows:

Income of juridical persons (including Class II income). Interest from public bonds, company debentures, bank deposits, and dividends paid by resident companies to non-residents.

Income of individuals not coming within Class II.

The Income of Companies is divided into (a) ordinary income, (b) excess income, and (c) liquidation income.

(a) Ordinary Income. The ordinary income of a corporation is the balance remaining in each accounting period after deducting the gross losses from the gross profits for the said period. The ordinary income of non-resident companies is assessed only in respect of the assets possessed or business done within Japan. Profit and loss brought forward from the preceding fiscal year is not included in computing the taxable income of the current fiscal year. Reserves are not deductible regardless of the purpose for which they are set aside. Allowance is made for depreciation or wear and tear of buildings, machinery, et cetera, based on the estimated life thereof. Under the original income tax law, the ordinary income tax on companies was levied on the full amount of the net profit at the rate of 5 percent for Japanese companies, and 10 percent for Japanese branches of foreign companies; the Temporary Tax Increase Law of March 30, 1937, increased these rates to 10 and 20 percent respectively, to which the North China Affair Special Tax Law of August 12, 1937, added a 10 percent surtax.

The China Incident Special Tax Law of March 31, 1938, effective on April 1, 1938, and to continue in force up to the end of the year following the close of the China Incident, superseded the North China Affair Apecial Tax Law of 1937, and modified some of the provisions of the Temporary Tax Increase Law of 1937.

Article 2 of the China Incident Special Tax Law of 1938 provides as follows:

With respect to the income tax, an additional tax corresponding to the increased margin in the case of an increase from 5 percent as stipulated in article 21 of the Income Tax Law to 12.25 percent or an increase from 10 percent (as stipulated in the said article) to 22.5 percent, as the case may be, shall be imposed in regard to the income tax on the ordinary income and liquidation income of juridical persons, in spite of the provisions of article 2 of the Temporary Tax Increase Law.

The effect of article 2 is that Japanese companies now pay a tax on ordinary income at the rate 12.25 percent and branches of foreign companies at the rate of 22.5 percent. These rates apply as from the business year ending after April 1, 1938.

The reason given for imposing a higher rate on foreign companies is that their distributed profits are not subject to Japanese taxation,

whereas when profits are distributed by a Japanese company they are taxable income under Class II if the recipient is a non-resident and under Class III if the recipient is a resident. In case a Japanese company is dissolved, it is also subject to a liquidation tax to which a branch is not liable.

(b) Excess Income. When the ordinary income of a corporation for any accounting period exceeds 10 percent of the average paid-up capital and reserves, the excess is subject to an excess profits tax. The amount of capital which constitutes the basis of computation of the excess income of a non-resident company is obtained by allocating its entire paid-up capital and reserves according to the ratio of the assets in Japan to the total assets of the company. When the preceding method is considered unreasonable, calculation may be made on the basis of the receipts or income. When the total capital of the non-resident company cannot be ascertained, the aggregate of fixed capital and working capital (not including borrowed capital) in Japan is used to determine excess profits.

The excess profits of a company are subject to the following rates:

On the amount exceeding 10 percent,

but not exceeding 20 percent of the capital.... 4 percent On the amount exceeding 20 percent,

but not exceeding 30 percent of the capital.... 10 percent On the amount exceeding 30 percent of capital.... 20 percent

An additional tax corresponding to 10 percent of the amount of tax computed at the above excess profits rates is levied by the 1938 China Incident Special Tax Law. (The same surtax rate applied under the 1937 China Affairs Special Tax Law.)

The additional income tax imposed on ordinary income (that is, the difference between 5 and 12.25 percent or between 10 and 22.5 percent, as the case may be) and on excess income (that is, the 10 percent surtax) may not exceed the amount left after the total of the income tax on ordinary income and excess income, and the special excess profit tax has been deducted from a sum corresponding to 50 percent of the ordinary income.

(c) Tax on Net Assets of a Liquidated Company. In case of a dissolution of a company, the excess of net assets over the paid-up capital is taxable. Where a company is terminaged by absorption by another, the amount by which the sum of the fully paid-up shares and other amounts received from the absorbing company exceeds the paidup capital of the absorbed company at the time of the amalgamation constitutes the taxable liquidation income of the absorbed company. Net assets of a liquidated company are assessed at the following rates:

On the net assets which correspond to reserves and items of income exempted from tax, including interest on Japanese National bonds especially exempted from tax........

On the rest of net assets (appreciation of properties, et cetera).

.....

The above rates were established by the 1938 China Incident Special Tax Law. The original rates were 5 and 10 percent respectively,